Legal and Zoning Considerations in Sales Comparison

Chapter: Legal and Zoning Considerations in Sales Comparison

This chapter delves into the crucial aspects of legal and zoning regulations that significantly impact the sales comparison approach in real estate appraisal. Understanding these considerations is paramount for accurate and reliable valuation, especially when comparing properties with varying legal constraints and development possibilities.

1. Introduction to Legal and Zoning Impact

Legal and zoning regulations dictate how land can be used, developed, and transferred. These rules create a framework that shapes the value of real estate by influencing its potential uses, development costs, and associated risks. Ignoring these aspects can lead to inaccurate adjustments and ultimately, a flawed appraisal.

2. Scientific Principles Governing Land Value

Several economic and legal principles underpin the influence of legal and zoning factors on land value:

• Principle of Conformity: Properties tend to achieve maximum value when they conform to the surrounding land uses and zoning regulations. Deviations from the norm can negatively impact value.
• Principle of Anticipation: Real estate values are based on the anticipated future benefits derived from the property. Changes in zoning or legal restrictions can alter these expectations, affecting present value.
• Principle of Supply and Demand: Zoning regulations directly impact the supply of land available for specific uses. Restrictive zoning can decrease supply, potentially increasing demand and value for permitted uses.

3. Key Legal Considerations

Legal considerations extend beyond basic property rights and encompass various regulations that impact value.

• 3.1. Environmental Regulations: Environmental laws can significantly affect property values.

  • Contamination: Properties with known or suspected contamination require remediation, increasing development costs and potentially diminishing value. The cost can be estimated based on environmental site assessments.
  • Wetlands Protection: Regulations protecting wetlands limit development potential, affecting the area usable for construction and the overall value.
  • Environmental Impact Assessments (EIAs): Development projects may require EIAs, adding time and expense to the process.
  • Relevant Laws: Regulations like the Clean Air Act, Clean Water Act, and Endangered Species Act may affect property value.

  Example:
  Suppose two comparable parcels are similar in all aspects except one is situated in a protected wetland area while the other is not.
  Let:

  • $V_1$: Value of the parcel outside the wetland.
  • $V_2$: Value of the parcel within the wetland.
  • $C_r$: Cost of compliance with wetland regulations, including permits, mitigation, and construction restrictions.

  Then, a simplified valuation could be:
  $V_2 = V_1 - C_r$

• 3.2. water rights❓❓: Water rights are particularly relevant in arid regions. Limitations on water usage can drastically reduce the value of agricultural land or properties reliant on water resources.

  • Riparian Rights: Rights granted to landowners whose property borders a water source.
  • Prior Appropriation: Rights allocated based on the “first in time, first in right” principle.

• 3.3. Access Rights and Easements: Access to a property and the presence of easements (rights granted to others to use the property) can influence its value.

  • Easement Appurtenant: Benefits a specific parcel of land.
  • Easement in Gross: Benefits an individual or entity, not a specific parcel.
  • Lack of Access: Landlocked parcels without legal access have significantly reduced value.

  Example:
  A comparable property sold for $500,000, and it has direct road access. The subject property lacks direct road access and requires an easement, which reduces its value by $50,000.
  Adjustment for access = -$50,000

• 3.4. Restrictive Covenants: These are private agreements that limit the use of land. They can affect property values by restricting the types of buildings allowed, minimum lot sizes, or architectural styles.

  Example:
  If two identical houses exist with only one having restrictive covenants prohibiting future construction of any kind that obstructs the view of other residents in the community, it is expected that the house with restrictive convenants may sell for a premium since buyers are looking for long-term protection of their views.

• 3.5. Flood Zones: Properties located in flood zones are subject to increased insurance costs and potential restrictions on development, which can negatively impact value.

  • FEMA Flood Maps: Indicate areas at risk of flooding.
  • Base Flood Elevation (BFE): The elevation to which floodwaters are expected to rise during a base flood.

4. Zoning Regulations and Their Impact

Zoning regulations are local laws that control land use, building density, and development standards. They are a primary driver of land value.

• 4.1. Types of Zoning Districts:

  • Residential: Single-family, multi-family, apartments.
  • Commercial: Retail, office, industrial.
  • Industrial: Light manufacturing, heavy manufacturing, warehousing.
  • Agricultural: Farming, ranching.
  • Mixed-Use: Combinations of residential, commercial, and industrial uses.

• 4.2. Floor Area Ratio (FAR): FAR is a critical zoning metric that dictates the maximum building area allowed on a site.

  • Formula: $FAR = \frac{Total\, Building\, Area}{Land\, Area}$

  Example:
  A 10,000 sq ft lot with an FAR of 1.0 allows a building with a maximum total area of 10,000 sq ft.
  A 10,000 sq ft lot with an FAR of 0.5 allows a building with a maximum total area of 5,000 sq ft.
  Comparing two identical properties with the same building footprint and all other elements being the same, the first can have an FAR of 1.0 while the second has an FAR of 0.5. A developer will be paying a premium for the land of the first property since they are able to build a larger building on the same sized lot.

• 4.3. Setback Requirements: Zoning regulations specify minimum distances that buildings must be set back from property lines. These requirements impact the buildable area of a site.

• 4.4. Height Restrictions: Limits on building height can affect the number of stories that can be constructed, influencing the development potential and value.

• 4.5. Parking Requirements: Zoning codes often dictate the number of parking spaces required for different land uses. Insufficient parking can reduce the attractiveness of a property to tenants or customers.

  • The PDF shows an example of open-space parking and states “The open-space parking provided is both adequate and in compliance with the zoning code (6.0 spaces per 1,000 gross square feet).”

• 4.6. Landscaping Requirements: Landscaping regulations may specify minimum amounts of green space, tree planting, and other landscaping features, influencing the aesthetics and value of a property.

• 4.7. Density Restrictions: Zoning can limit the number of dwelling units per acre, influencing the density of residential development and the value.

5. Highest and Best Use Analysis

Zoning regulations are integral to determining the highest and best use of a property. The highest and best use is the reasonably probable and legal use of a property that is physically possible, appropriately supported, financially feasible, and results in the highest value.
* Legally Permissible: The use must be permitted under current zoning regulations. A property cannot be developed for uses that are prohibited by zoning.

6. Adjustments for Legal and Zoning Differences in Sales Comparison

When using the sales comparison approach, adjustments must be made to comparable sales to account for differences in legal and zoning factors.

• 6.1. Quantitative Adjustments: When market data is available, quantitative adjustments can be made for specific features impacted by legal or zoning regulations.

  • Paired Data Analysis: Analyze sales of similar properties with and without a specific feature (e.g., properties in different flood zones) to estimate the value difference.

  Example:
  If sales of similar properties within a flood zone average 10% lower than properties outside the flood zone, a 10% adjustment can be applied.

• 6.2. Qualitative Adjustments: In many cases, direct quantitative data is unavailable. Qualitative analysis involves comparing the relative desirability of properties based on legal and zoning factors.

  • Relative Comparison Analysis: Compare the subject property to the comparables and categorize them as superior, similar, or inferior with respect to legal and zoning aspects.
  • Bracketing: Select comparable sales that bracket the subject property in terms of value, based on qualitative analysis. The final value opinion should fall within this range.
  • The PDF provides an example of a Relative Comparison Analysis for an office building with respect to size. Size can also be another example for non-realty items.

• 6.3. Practical Challenges: It may be difficult to precisely quantify the impact of legal and zoning differences. In such cases, it is crucial to provide clear and well-supported rationale for qualitative adjustments.

7. Case Studies and Practical Applications

• Case Study 1: Land Development with Varying FARs: Two vacant parcels are being compared. One has an FAR of 1.0, while the other has an FAR of 0.5. Developers are willing to pay $50 per square foot of buildable area.

  • Parcel 1 (FAR 1.0): 10,000 sq ft lot, potential building area = 10,000 sq ft, value = $500,000.
  • Parcel 2 (FAR 0.5): 10,000 sq ft lot, potential building area = 5,000 sq ft, value = $250,000.
  • Adjustment for FAR = $250,000.

• Case Study 2: Impact of Setback Requirements: Two residential lots are being compared. One has a standard setback requirement, while the other has a more restrictive setback due to environmental concerns. The reduced buildable area decreases the potential size of the house, diminishing the value by $20,000.

  • Adjustment for setback = -$20,000

8. Experiments to Assess Market Reaction to Zoning Changes

While not always feasible, controlled experiments can provide insights into how the market responds to zoning changes.

• Tracking Sales Data Before and After Zoning Changes: Analyze sales data in areas where zoning regulations have recently been modified to determine the impact on property values.
• Surveying Developers and Investors: Gather information from developers and investors about their perceptions of different zoning regulations and their willingness to pay for properties with varying zoning entitlements.

9. Conclusion

Legal and zoning considerations are essential components of the sales comparison approach. Understanding these factors and applying appropriate adjustments is crucial for accurate and reliable real estate appraisal. By incorporating these considerations, appraisers can provide credible value opinions that reflect the true market value of properties.