Site Valuation: From Raw Land to Development Ready

Chapter Title: Site Valuation: From Raw Land to Development Ready

Training Course: Unlocking Land Value: From Appraisal to Development

Introduction

Site valuation is a critical component of real estate appraisal and development. It involves determining the value of land in its current state and forecasting its potential value as it progresses through various stages of development. This chapter focuses on the scientific principles, methodologies, and practical considerations involved in valuing land, starting from its raw state and culminating in a development-ready site.

1. Defining the Stages of Land Development

Land transitions through distinct stages as it moves from raw land to a development-ready site. Understanding these stages is essential for accurate valuation:

• Raw Land: Undeveloped land with minimal or no infrastructure. Its value is primarily based on its potential for future development.
• Entitled Land: Land for which the necessary zoning approvals, permits, and other entitlements have been secured. This stage significantly increases its value.
• Development-Ready Site: Land that is fully prepared for construction, including completed infrastructure, site improvements, and all required approvals.

2. Factors Influencing Land Value

Numerous factors affect land value at each stage of development. These can be broadly classified into:

• Physical Characteristics:
  • Size: Larger parcels may have different unit values than smaller parcels.
  • Shape: Regular shapes are generally more valuable than irregular ones.
  • Frontage: Road frontage is often a valuable asset, especially for commercial properties.
  • Soils: Soil composition affects the suitability for different types of development.
  • Topography: Slope, grade, and drainage influence construction costs.
  • Location: Proximity to amenities, transportation, and other desirable features is critical.
  • View: Scenic views can significantly enhance property value.
• Legal and Regulatory Factors:
  • Zoning: zoning regulations❓❓ dictate permitted land uses and development density.
  • Easements and Restrictions: Easements grant specific rights to others, while restrictions limit land use.
  • Environmental Regulations: Environmental regulations can impose significant costs and restrictions on development.
  • Eminent Domain: The government’s power to acquire land for public use can impact value.
  • Transferable Development Rights: Rights can be traded in urban areas and affect the land value.
• Economic Factors:
  • Market Demand: Demand for different types of development influences land prices.
  • Interest Rates❓❓: Interest rates affect the cost of financing development projects.
  • Inflation: Inflation can impact construction costs and future property values.
  • Economic Growth: Economic growth in the area drives demand for real estate.
  • Ad Valorem Taxes: Lower taxes on agricultural land can extend the duration of agricultural uses.
• Infrastructure and Utilities:
  • Water and Sewer: Availability of water and sewer services is essential for most developments.
  • Electricity: Adequate electrical capacity is required for residential and commercial uses.
  • Natural Gas: Access to natural gas can be an important amenity.
  • Telecommunications: Availability of high-speed internet and other telecommunications services is increasingly important.
• Title Reports: Easements, rights of way, and private or public restrictions.
• Master Plans: Long-term development goals.

3. Valuation Methodologies

Several valuation methodologies can be used to estimate land value. The most appropriate method depends on the availability of data and the characteristics of the property.

• Sales Comparison Approach: This is the most commonly used method, involving comparing the subject property to similar properties that have recently sold.
  • Procedure: Collect data on sales of comparable properties, analyze their characteristics, and adjust their prices to account for differences with the subject property.
  • Formula: Adjusted Sale Price = Sale Price +/- Adjustments for Differences
  • Applicability: Preferred when comparable sales data is available.
  • Limitations: Requires sufficient comparable sales data and accurate adjustment factors.
• Market Extraction (Abstraction): Involves deducting the estimated value of improvements from the total sale price of a comparable property to arrive at an indicated land value.
  • Formula: Land Value = Total Property Value - Improvement Value
  • Applicability: Most useful when the contribution of improvements to total property value is small and relatively easy to identify.
  • Limitations: Accurate estimation of improvement value is critical.
• Allocation Method: This method extracts a ratio of site value to property value from comparable sales in competitive locations and applies it to the value of the improved subject property or comparable properties to develop the site value.
  • Formula: Site Value = Ratio of Site Value to Property Value * Improved Property Value
  • Applicability: Valuing one-unit residential lots where ample sales of improved properties are available.
  • Limitations: Does not produce conclusive value indications unless ample sales data is available.
• Land Residual Technique: This method isolates the portion of Net Operating Income❓❓ (NOI) attributable to the land and capitalizes it to estimate land value.
  • Formula: Land Value = Land NOI / Land Capitalization Rate
  • Applicability: Useful for income-producing properties when building value is known or can be accurately estimated, and both building and land capitalization rates are available from the market.
  • Limitations: Requires accurate estimation of NOI and capitalization rates.
• Ground Rent Capitalization: Applies a market-derived capitalization rate to the ground rent of the subject property.
  • Formula: Land Value = Ground Rent / Capitalization Rate
  • Applicability: Useful when comparable rents, rates, and factors can be developed from an analysis of sales of leased land or sales of unleased land for which the market rent can be credibly determined.
  • Limitations: Adjustment to the value indication for property rights may be necessary.
• Subdivision Development Analysis (Discounted Cash Flow Analysis): This method estimates the present value of future cash flows from a proposed subdivision development.
  • Procedure: Project future revenues from lot sales, deduct development costs, and discount the resulting cash flows back to present value.
  • Formula: PV = Σ (CFt / (1 + r)^t) where PV = Present Value, CFt = Cash Flow in period t, r = Discount Rate, t = Time period
  • Applicability: Used when subdivision development is the highest and best use of the land and there is market support for immediate absorption.
  • Limitations: Requires significant amounts of data such as development costs, profit margins, sales projections, and the pricing of developed lots or units, together with a supportable forecast of market absorption.
  • Important: entrepreneurial incentive must be taken into consideration.

4. Highest and Best Use Analysis

The valuation of land draws directly from the conclusions of highest and best use analysis. The highest and best use of a site is the most probable and legal use of that land, which is physically possible, appropriately supported, financially feasible, and results in the highest value.

• Steps in Highest and Best Use Analysis:
  1. Identify potential uses: Determine all possible uses for the site.
  2. test❓ for physical possibility: Assess whether the site is physically suitable for each use.
  3. Test for legal permissibility: Determine whether each use is allowed under current zoning and regulations.
  4. Test for financial feasibility: Analyze whether each use would be financially viable.
  5. Determine maximum productivity: Identify the use that would generate the highest value for the site.

5. Site Improvements and Development Costs

The transition from raw land to a development-ready site involves significant investments in site improvements and infrastructure. These costs must be considered when valuing land.

• On-Site Improvements: Clearing, grading, utilities, landscaping, etc.
• Off-Site Improvements: Roads, sewers, water lines, etc.
• Development Costs: Engineering, permitting, construction, financing, marketing, etc.

6. Case Studies and Practical Applications

• Case Study 1: Valuing a Raw Land Parcel for Residential Development
  • Description: A 10-acre parcel of raw land located in a growing suburban area. The highest and best use is determined to be single-family residential development.
  • Valuation: Sales comparison approach is used, with adjustments made for size, location, and zoning.
  • Experiment: Test several variables of the land, such as the slope, location and soil quality. Make a comparison table and evaluate the cost-benefit relation for the variables.
• Case Study 2: Valuing an Entitled Site for Commercial Development
  • Description: A 5-acre site with approved entitlements for a retail shopping center.
  • Valuation: Land residual technique is used, with NOI projected based on market rents and occupancy rates.

7. The Role of Technology in Site Valuation

• Geographic Information Systems (GIS): GIS software can be used to analyze land characteristics, identify comparable properties, and create visual presentations.
• Online Databases: Online databases provide access to sales data, zoning information, and other relevant information.
• Valuation Software: Specialized software can streamline the valuation process and improve accuracy.

8. Excess and Surplus Land

• Excess Land: 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.
• Surplus Land: Land that does not have a separate value from the rest of the site because it cannot be sold separately.

9. Legal Considerations

• Eminent Domain: The government’s power to take private property for public use.
• Inverse Condemnation: A situation where a government action effectively deprives a landowner of the use of their property.
• Regulatory Takings: Regulations that restrict land use to the point where they constitute a taking of property.
• Water Rights: The legal rights to use water from a specific source.

10. Conclusion

Site valuation is a complex process that requires a thorough understanding of the factors that influence land value and the appropriate valuation methodologies. By carefully analyzing these factors and applying sound valuation principles, appraisers and developers can accurately estimate the value of land and make informed investment decisions.