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Zoning, Legal, and Non-Realty Considerations in Sales Comparison
Chapter: Zoning, Legal, and Non-Realty Considerations in Sales Comparison
Introduction
In applying the sales comparison approach to real estate❓ appraisal, it is crucial to consider not only the physical characteristics of properties but also the impact of zoning regulations❓, legal encumbrances, and the presence of non-realty items. These factors can significantly influence property value and must be analyzed To ensure accurate appraisal results❓.❓ Ignoring these aspects can lead to flawed comparisons and incorrect value conclusions.
- Zoning Regulations and their Impact on Value
Zoning regulations are legally enacted restrictions imposed by local governments that dictate how land can be used and developed. These regulations govern various aspects, including permitted uses, building height, density, setback requirements, and parking provisions. Zoning directly affects the highest and best use of a property and, consequently, its market value.
1.1 Scientific Principles Underlying Zoning Impact
The impact of zoning on value is based on several key economic and real estate principles:
a. Supply and Demand: Zoning can restrict the supply of land available for certain uses, thereby increasing its value if demand remains constant or increases.
b. Opportunity Cost: Zoning dictates what a property can be used for. More restrictive zoning ordinances decrease the number of uses; hence, they increase the opportunity cost, impacting value.
c. Highest and Best Use: Zoning constraints determine legally permissible uses, which is one component of highest and best use analysis.
d. Development Potential: The intensity of use allowed by zoning (e.g., floor area ratio) directly influences a property’s development potential and, therefore, its value.
1.2 Key Zoning Considerations in Sales Comparison
a. Permitted Uses: Compare the range of permitted uses for the subject property and comparable sales. A property zoned for a wider range of uses generally holds a higher value, all other factors being equal.
b. Density and Intensity of Use: Floor Area Ratio (FAR) is a critical metric. It’s the ratio of a building’s total floor area to the size of the land upon which it is built. A higher FAR allows for more intensive development, potentially increasing value.
FAR = Total Building Floor Area / Land Area
c. Setback and Height Restrictions: These regulations dictate the buildable area of a site. More restrictive setbacks and height limits may reduce development potential.
d. Parking Requirements: Zoning codes specify minimum parking requirements based on land use. Higher parking demands can increase development costs and potentially reduce the net developable area.
e. Landscaping and Open Space Requirements: Mandated landscaping and open space impact the usable area of a site and can add to development expenses.
1.3 Practical Applications and Examples
Example 1: FAR Analysis
Consider two similar-sized land parcels in the same area. Parcel A is zoned with an FAR of 1.0, while Parcel B is zoned with an FAR of 0.5. If both parcels are suitable for office development, Parcel A allows twice the building area as Parcel B, making it more valuable. The mathematical implications is as follows:
- Parcel A: 33,541 sq.ft. Land, FAR of 1.0, Maximum Building Area: 33,541 sq.ft.
- Parcel B: 41,382 sq.ft. Land, FAR of 0.5, Maximum Building Area: 20,691 sq.ft.
Experiment 1: Market Analysis
- Data Collection: Gather sales data on land parcels with varying FARs in a specific market area.
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Regression Analysis: Conduct a regression analysis to quantify the relationship between FAR and land price per square foot. The regression model could be represented as:
Price per sq.ft. = a + b(FAR) + e
Where:
- a is the intercept (base price)
- b is the coefficient representing the impact of FAR on price
- e is the error term
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Interpretation: The coefficient ‘b’ indicates the incremental value associated with each unit increase in FAR.
1.4 Addressing Zoning Differences in Sales Comparison
a. Quantitative Adjustments: When sufficient data is available, use paired sales analysis to quantify the impact of specific zoning differences. For example, if comparable sales data indicates that parcels with an FAR of 1.0 consistently sell for $X more per square foot of potential building area than parcels with an FAR of 0.5, a quantitative adjustment can be made.
b. qualitative analysis❓❓: In many cases, it may be challenging to support quantitative adjustments due to a lack of sufficient data. Qualitative analysis involves making relative comparisons based on the overall impact of zoning differences. Properties with less restrictive zoning are rated as superior, while those with more restrictive zoning are considered inferior. Relative comparison analysis is illustrated in Table 21.6 of The Appraisal of Real Estate.
- Legal Considerations Affecting Value
Beyond zoning, other legal factors can significantly influence property value. These include environmental regulations, water rights, access easements, restrictive covenants, and flood zone designations.
2.1 Environmental Regulations
Environmental regulations, such as those pertaining to wetlands, endangered species, and hazardous waste, can significantly impact development costs and property value.
a. Wetlands: Restrictions on developing wetlands can reduce the buildable area of a site.
b. Endangered Species: The presence of endangered species may trigger mitigation requirements, increasing development costs.
c. Hazardous Waste: Contamination can lead to costly remediation expenses.
2.2 Water Rights
Water rights are especially important in arid regions. The right to use water from a specific source can significantly enhance the value of a property, particularly for agricultural or industrial uses.
2.3 Access Easements
Easements grant specific rights to use another person’s property. An easement providing access to a landlocked parcel is crucial for its development and value.
2.4 Restrictive Covenants
Restrictive covenants are private agreements that limit how a property can be used. Common examples include restrictions on building height, architectural style, or permitted uses within a subdivision.
2.5 Flood Zone Designations
Properties located in designated flood zones may require flood insurance and adherence to stricter building codes, increasing ownership costs and potentially reducing market value.
2.6 Addressing Legal Considerations in Sales Comparison
a. Research: Thoroughly research all relevant legal documents, including environmental reports, title reports, and zoning ordinances.
b. Consultation: Consult with legal professionals and environmental specialists to fully understand the implications of any legal encumbrances.
c. Adjustments: Adjust comparable sales for differences in legal restrictions. If a comparable property benefits from superior water rights or is not subject to restrictive covenants, an upward adjustment may be warranted. Conversely, if a comparable property is located in a flood zone or requires environmental remediation, a downward adjustment may be necessary.
- Non-Realty Considerations
Non-realty items encompass business concerns and other assets that do not constitute real property but can be included in a sale. Examples include furniture, fixtures, and equipment (FF&E) in a hotel or restaurant, or a business’s goodwill. When analyzing comparable sales, it is crucial to identify and account for the inclusion of non-realty items.
3.1 Identifying Non-Realty Items
a. Review Sales Agreements: Carefully review sales agreements to identify any non-realty items included in the transaction.
b. Physical Inspection: Conduct a physical inspection to identify FF&E or other personal property items.
c. Interviews: Interview parties involved in the sale to determine whether non-realty items were considered.
3.2 Quantifying the Value of Non-Realty Items
a. Allocation: Determine the value assigned to non-realty items in the sales agreement, if available.
b. Cost Approach: Estimate the replacement cost new of the non-realty items, less depreciation.
c. Income Approach: Estimate the income attributable to the non-realty items and capitalize it to arrive at a value.
d. Market Extraction: Research sales of similar non-realty items to determine their market value.
3.3 Adjusting for Non-Realty Items in Sales Comparison
Once the value of non-realty items is determined, subtract that value from the sale price of the comparable property to arrive at an adjusted sale price that reflects only the value of the real estate. This ensures a more accurate comparison to the subject property.
Sale Price (Comparable) – Value of Non-Realty Items = Adjusted Sale Price
Example 2: Hotel Appraisal
A comparable hotel sale includes FF&E valued at $500,000. The sale price of the hotel was $10,000,000. To accurately compare this sale to the subject property, the appraiser would subtract $500,000 from the sale price, resulting in an adjusted sale price of $9,500,000.
- Combining Quantitative and Qualitative Analysis
In practical appraisal applications, both quantitative and qualitative analysis are often used in combination. When adjustments can be derived through quantitative techniques, such as paired sales analysis or regression analysis, they are typically applied first. Differences that elude precise mathematical adjustment are then considered in qualitative analysis.
Example 3: Applying Quantitative and Qualitative Adjustments
Consider a scenario where comparable sale A has a significantly higher FAR than the subject property. Using market data, a quantitative adjustment is made to account for this difference. However, the comparable sale also has superior views, which are difficult to quantify precisely. This aspect is then addressed through qualitative analysis, where the appraiser subjectively assesses the impact of the superior views on the comparable sale’s value.
- Conclusion
Zoning regulations, legal considerations, and non-realty items are critical factors that can significantly influence property value. A comprehensive analysis of these aspects is essential to ensure accurate appraisal results when using the sales comparison approach. By understanding the underlying scientific principles, employing appropriate analytical techniques, and integrating both quantitative and qualitative analysis, appraisers can develop reliable value opinions.
Chapter Summary
Zoning, Legal, and Non-Realty Considerations in Sales Comparison: A Scientific Summary
This chapter focuses on crucial considerations beyond simple physical characteristics when employing the sales comparison approach❓ to land and building valuation. These considerations are zoning regulations, legal encumbrances, and the presence of non-realty items in comparable sales. A failure to properly account for these factors can lead to inaccurate value❓ estimations.
Zoning significantly influences value by dictating permissible uses, density (Floor Area Ratio - FAR), and site development requirements (e.g., parking, landscaping). Even properties with the same highest and best use can have different development costs❓ due to zoning variations. Appraisers must analyze the impact of zoning on potential buyer behavior and adjust accordingly. When direct quantitative adjustments for different highest and best uses are not possible, qualitative analysis❓ based on market data can still be used to assess the impact of varying intensities of use permitted by different zoning regulations. The price per square foot of potential building area, rather than just site area, is often a more reliable unit of comparison when zoning differences exist, demonstrably leading to a lower standard deviation in pricing. The study suggests analyzing sales data to identify the most stable units of comparison between comparable properties and the subject property.
Other legal considerations, such as environmental requirements, water rights, access, restrictive covenants, easements, and flood zones, can also affect property value. Appraisers must identify and analyze these factors to ensure accurate comparisons.
Non-realty items (e.g., business concerns, furniture, fixtures, and equipment) included in comparable sales must be separately identified and analyzed, particularly in properties where the business operation is integral to the real estate use (e.g., hotels, restaurants). The economic lives, investment risks, and return criteria associated with non-realty items often differ from those of the real property, necessitating separate valuation or clear disclosure of their contribution to the overall value. The contributory value of these items, rather than their standalone market value, is key. If separation is impossible, the appraisal must clearly state that the value reflects both the real estate and the business operation.
The sales comparison approach combines quantitative and qualitative techniques. Quantitative adjustments are generally applied first, followed by qualitative analysis to address elements that elude precise mathematical adjustment. The examples in the content show that a data array identifying typical elements of comparison and those apparent from the problem statement helps appraisers determine which adjustments should and should not be made. The financing adjustments were based on cash equivalence calculations based on market data. Contributory value, not the cost of modernization, should be considered for features such as a modern kitchen. The depreciation of property components are also considered in adjustments. Qualitative analysis uses the attributes of comparable properties that cannot be quantified. The data is arrayed to bracket the subject property and determine comparability.
In conclusion, accurate sales comparison requires thorough due diligence concerning zoning, legal encumbrances, and non-realty items. Appraisers must utilize both quantitative and qualitative analysis to account for these factors and ensure reliable value estimations. Failure to do so will lead to potentially inaccurate appraisal results.
