Land: Characteristics, Use, and Value

Land: Characteristics, Use, and Value

This chapter explores the fundamental characteristics of land, its various uses, and the factors that contribute to its value. A thorough understanding of these aspects is crucial for effective land appraisal and development. We will delve into the scientific principles that underpin land analysis, incorporating relevant theories, practical applications, and mathematical tools.

1. Land Characteristics: A Scientific Perspective

Land possesses inherent physical, legal, and economic characteristics that significantly influence its use and value.

1.1 Physical Characteristics

These are the immutable attributes of land, dictating its suitability for various purposes.

• 1.1.1 Location: Land’s position is paramount. Consider accessibility to transportation networks, proximity to amenities (schools, hospitals, retail), and neighborhood characteristics. Location is often described using Geographic Information Systems (GIS) data, including latitude, longitude, and elevation.
  • Theory: Location theory, as developed by Von Thunen and others, posits that land use patterns are determined by transportation costs and market access. Land closest to the market will be used for intensive agriculture or high-density development, while land further away will be used for less intensive purposes.
  • Example: A parcel adjacent to a highway interchange will typically command a higher value than a similar parcel several miles away due to enhanced accessibility.
• 1.1.2 Size and Shape: Dimensions impact development potential. Larger parcels may accommodate larger structures or multiple uses. Shape affects buildability and layout efficiency.
  • Formula: Parcel Area (A) can be calculated using surveying data. For a rectangular parcel, A = length (l) * width (w). For irregular shapes, more advanced techniques like triangulation or planimetry are employed.
  • Experiment: Design a hypothetical residential development on two parcels: one rectangular (100m x 50m) and one irregularly shaped with the same area. Compare the number of dwelling units achievable, considering setbacks, easements, and common areas.
• 1.1.3 Topography: Contour, grade, and drainage influence construction costs and usability. Steep slopes may require extensive grading, increasing development expenses. Poor drainage can lead to flooding and soil instability.
  • Principle: The angle of repose is the steepest angle at which a material (soil, sand, etc.) can remain stable. Exceeding this angle necessitates retaining walls or other stabilization measures.
  • Application: Civil engineers use topographic maps and digital elevation models (DEMs) to analyze slope stability and design effective drainage systems.
• 1.1.4 Soil Conditions: Soil composition (sand, silt, clay) affects load-bearing capacity, drainage, and suitability for agriculture. Contamination can severely limit land use and require costly remediation.
  • Theory: Soil mechanics principles dictate the bearing capacity of different soil types. The Terzaghi bearing capacity equation provides an estimate of the maximum pressure a soil can withstand: qult = cNc + qNq + 0.5γBNγ, where qult is the ultimate bearing capacity, c is soil cohesion, q is overburden pressure, γ is soil unit weight, B is foundation width, and Nc, Nq, Nγ are bearing capacity factors.
  • Practical Test: Conduct a simple soil permeability test by measuring the time it takes for a fixed volume of water to drain through a soil sample. Compare the results for different soil types.
• 1.1.5 Frontage: The length of a parcel bordering a road or other accessible area. Important for retail and commercial properties, where visibility and access are crucial.
  • Analysis: Determine the optimal frontage-to-depth ratio for different property types based on market data and development regulations.
• 1.1.6 View: Scenic views enhance property value, especially for residential developments. The quality and extent of the view contribute to the overall desirability of the site.

1.2 Legal Characteristics

These are the rights and restrictions associated with land ownership.

• 1.2.1 Property Rights: The “bundle of rights” includes the right to possess, use, exclude, dispose of, and enjoy the land. These rights can be limited by easements, liens, and other encumbrances.
  • Concept: Fee simple ownership grants the most comprehensive bundle of rights.
• 1.2.2 Easements: Rights granted to others to use the land for a specific purpose (e.g., access, utility lines). Easements can impact development potential and value. Appraisers consult title reports and land survey information to identify easements, rights of way, and private or public restrictions that affect the subject property.
• 1.2.3 Zoning Regulations: Government regulations that dictate permitted land uses, building height, density, and other development standards. Zoning influences land value❓ by restricting or enabling certain uses. Most municipalities and counties have some form of land use regulations that specify how a parcel of land can be developed.
• 1.2.4 Master Plans: Comprehensive land use plans that outline long-term development goals for a jurisdiction. These plans influence infrastructure investment and future zoning decisions.
• 1.2.5 Building Codes: Regulations that ensure the safety and structural integrity of buildings. Building codes affect construction costs and design options.
• 1.2.6 Eminent Domain: The government’s power to acquire private land for public use, with just compensation paid to the owner.
• 1.2.7 Transferable Development Rights (TDRs): Allow landowners in designated areas to sell development rights to developers in other areas, promoting preservation and planned growth.
• 1.2.8 Conservation Easements: Permanent restrictions on land use that protect natural resources or open space. These easements can significantly reduce land value. The potential uses of land subject to perpetual open space or conservation easements are usually restricted, as specified in the deed of easement, and thus the value of the land is affected.
• 1.2.9 Water, Mineral, and Air Rights: Separate ownership rights associated with land. Water rights cover the flow of water, usually for stated times and in stated quantities, for irrigation and hydroelectric power generation. Water rights also can take the form of riparian rights which, under common law, grant a landowner the ownership of waters that share a border with the owner’s parcel of land. Mineral rights cover the underground portion of the land and usually refer to the right to extract underground minerals or to use underground caverns or reefs for storage. Real estate developments established on air rights, often over railways, can be found in older urban areas, particularly where the density of the built environment is already high and little land is available for new construction.

1.3 Economic Characteristics

These are the factors that influence the demand for and supply of land.

• 1.3.1 Scarcity: Land is a finite resource. The limited supply, especially in desirable locations, drives up prices.
• 1.3.2 Demand: Demand for land is influenced by population growth, economic activity, and consumer preferences.
• 1.3.3 Improvements: Investments in infrastructure, buildings, and landscaping enhance land value. In the common parlance of valuation, land becomes a site when the parcel of land is improved and ready to be used for a specific purpose.
• 1.3.4 Investment: Land can be a valuable investment, offering potential for appreciation and income generation.
• 1.3.5 Linkages: Relationship with other properties and uses which impact value.

2. Land Use: Transforming the Landscape

Land use refers to the human activities that occur on land, including agriculture, residential development, commercial activities, and industrial operations.

2.1 Types of Land Use

• 2.1.1 Agriculture: Farming the land for crop production and livestock raising.
• 2.1.2 Mining: Extracting minerals and other resources from the earth.
• 2.1.3 Residential: Constructing houses, apartments, and other dwellings.
• 2.1.4 Commercial: Building retail stores, offices, and other businesses.
• 2.1.5 Industrial: Establishing factories, warehouses, and other industrial facilities.
• 2.1.6 Recreational: Creating parks, golf courses, and other recreational areas.
• 2.1.7 Public/Institutional: Government buildings, schools, hospitals.
• 2.1.8 Mixed Use: Combining multiple land uses in a single development.

2.2 Land Use Change

Land use is dynamic, constantly evolving in response to changing economic, social, and environmental conditions. Land can be altered for topography, Subdivided, assembled with other parcels, held for future use, have building improvements constructed or altered, and be reserved in perpetuity via an easement, donation, or sale to a nonprofit or government entity.

• 2.2.1 Urbanization: The conversion of rural land to urban uses, driven by population growth and economic development.
• 2.2.2 Suburbanization: The expansion of residential areas into the suburbs, often characterized by lower density development.
• 2.2.3 Gentrification: The revitalization of urban neighborhoods, often leading to displacement of existing residents.
• 2.2.4 Redevelopment: The demolition and reconstruction of existing buildings, often to accommodate higher density or different uses.

2.3 Land Use Regulation

Governments regulate land use to promote planned growth, compatibility among different land uses, and environmental protection. Most municipalities and counties have some form of land use regulations that specify how a parcel of land can be developed.

• 2.3.1 Zoning: The primary tool for land use regulation, dividing land into districts with specific permitted uses and development standards.
• 2.3.2 Subdivision Regulations: Control the division of land into smaller parcels, ensuring adequate infrastructure and access.
• 2.3.3 Environmental Regulations: Protect natural resources and prevent pollution, often impacting land use decisions.
• 2.3.4 Historic Preservation: Regulations that protect historic buildings and districts from demolition or alteration.

3. Land Value: Measuring the Intrinsic Worth

Land value represents the economic worth of a parcel of land, reflecting its potential for use and development. The value of land increases after formal site plan approval has been achieved and permits have been obtained for a development. At that point, the site has full entitlements and is ready for development.

3.1 Factors Influencing Land Value

• 3.1.1 Location: As previously discussed, location is a primary driver of land value.
• 3.1.2 Size and Shape: Larger, more easily developable parcels command higher prices.
• 3.1.3 Zoning: Permitted uses and development standards significantly impact value.
• 3.1.4 Market Conditions: Supply and demand dynamics in the real estate market influence land prices.
• 3.1.5 Economic Conditions: Overall economic growth and interest rates affect land values.
• 3.1.6 Environmental Factors: Soil contamination, floodplains, and other environmental issues can negatively impact value.

3.2 Land Valuation Techniques

Appraisers use various methods to estimate land value. Applicability and limitations of valuation techniques must be considered.

• 3.2.1 Sales Comparison Approach: The preferred method, comparing the subject property to similar vacant land sales. Sales comparison is the most common technique for valuing land, and it is the preferred method when comparable sales are available. To apply this method, data on sales of similar parcels of land is collected, analyzed, compared, and adjusted to provide a value indication for the site being appraised.
  • Process:
    1. Identify the highest and best use and other characteristics of each potential comparable sale and then choose the appropriate properties for analysis.
    2. Gather data on actual sales as well as listings, offers, and options.
    3. Identify the similarities and differences in the data.
    4. Identify units of comparison that explain market behavior.
    5. Adjust the appropriate unit prices of the comparable sales to account for the dissimilar characteristics of the land being appraised.
    6. Form a conclusion as to the value of the subject site.
• 3.2.2 Market Extraction: Deducting the value of improvements from the total property value to isolate the land value. An estimate of the contributory value of improvements is deducted from the total sale price of a property to arrive at an indicated land value for the comparable. The indicated land values of the comparables are then compared to provide a value indication for the land being appraised.
• 3.2.3 Allocation: Applying a ratio of land value to total property value, derived from comparable sales, to the subject property. A ratio of site value to property value is extracted from comparable sales in competitive locations and applied to the value of the improved subject property or comparable properties to develop the site value.
• 3.2.4 Land Residual Analysis: Determining the land value based on the income it can generate. The net operating income attributable to the land is capitalized or the cost to construct an improvement is deducted from the value as if completed to produce an indication of the land’s contribution to the total property.
• 3.2.5 Ground Rent Capitalization: Capitalizing the ground rent of the property to estimate land value. A market-derived capitalization rate is applied to the ground rent of the subject property.
• 3.2.6 Subdivision Development Analysis (Discounted Cash Flow Analysis): Projecting future cash flows from a proposed subdivision development and discounting them to present value. Direct and indirect costs and entrepreneurial incentive are deducted from an estimate of the anticipated gross sales price of the finished lots or units, and the net sales proceeds are discounted to present value at a market-derived rate over the development and absorption period. If entrepreneurial incentive is not deducted as a line-item expense, then the discount rate must reflect the full effect of any profit.
  • Formula: PV = ∑ (CFt / (1 + r)^t), where PV is the present value, CFt is the cash flow in period t, r is the discount rate, and t is the time period.

3.3 Highest and Best Use

The most probable and legal use of a property that is physically possible, appropriately supported, financially feasible, and results in the highest value. Even if a site is already improved, the site is valued as though vacant and available for development to its highest and best use. Consideration of the site as though vacant facilitates the orderly analysis and solution of appraisal problems that require land to be valued separately. The highest and best use of a competitive site on the date of sale is the basis of the comparability of that site to the property being appraised. Regardless of how physically similar a potentially comparable site is to the subject site, the most comparable sales would have the same or a similar highest and best use. Markets without recent sales of comparable sites are problematic and may require analysis of competing sites where sufficient data are available or alternative land valuation methods may be considered. The highest and best use of the property as improved is affected by how much the existing improvements contribute to the value of the property as a whole. The value contribution of the improvements can be estimated by subtracting the market value of the site from the market value of the property as improved. Site value may be equal to or greater than the value of the property as improved even when substantial improvements are located on the site. Any penalty for the misuse of the site is applied to the improvements. Demolition of existing improvements is usually appropriate when those improvements do not contribute to the overall property value. In that situation, the cost of converting the property into vacant land is deducted from the value indication for the site. Sometimes the highest and best use of a property is to keep the land vacant until land values rise to support new development. In that situation, the most appropriate comparable properties would be other vacant sites being held for future development for similar uses.

• 3.3.1 Four Tests:
  1. Legally Permissible: Complies with zoning regulations and other legal restrictions.
  2. Physically Possible: The site can accommodate the proposed use.
  3. Financially Feasible: The use can generate sufficient income to justify the investment.
  4. Maximally Productive: The use produces the highest value for the property.

3.4 Excess and Surplus Land

Excess land is land that is not needed to support the improvements and may be sold off separately from the rest of the property at its own highest and best use. An area of excess land may have a different highest and best use from the rest of the site, which must be addressed in the highest and best use analysis by testing alternate uses of the excess land for physical possibility, legal permissibility, financial feasibility, and maximum productivity in the market. Furthermore, excess land has to be treated separately in the valuation process. An entirely different set of comparable data may be required to analyze the value influences on the excess land, and the appraiser must consider and report the contributory value of the excess land to the value of the whole. Adding the value indication of the excess land to the value indication of the rest of the property may or may not be appropriate because the sum of the parts may or may not equal the value of the whole. In contrast, surplus land does not have a separate value from the rest of the site because it cannot be sold separately. It is extra land that may or may not contribute value to the overall property. Both surplus and excess land are extra meaning they are not needed to support the improvements. However, excess can be sold off with its own highest and best use whereas surplus land cannot. Surplus land may or may not have the same value per unit of comparison (e.g., value per square foot, value per acre) as the rest of the site.

Conclusion

Understanding the characteristics, uses, and valuation principles of land is essential for informed decision-making in real estate development and investment. By applying scientific principles and valuation techniques, professionals can unlock the full potential of land and create sustainable and valuable communities.