Chapter 13:
Site Valuation
Approaches to Site
Valuation
 Direct sales comparison approach
 Extraction method
 Development approach
 Capitalization of ground rent
 Allocation
 Land residual
Sales Comparison Approach
 Most common method used to estimate the value of a site.
 Land value derived by comparison to recent sales of similar
properties
 Sales adjustment grid (see Chapter 12)
 Adjustments can be made on either a qualitative or quantitative
basis. The appraiser must, however, justify the validity of the
adjustments.
Sales Comparison Approach
Sale
Subject
Comp 1
Comp 2
Comp 3
N/A
$285,000
$250,000
$300,000
Date of sale
1/1/91
6/1/90
10/1/90
1/1/90
Size (sqft)
38,000
40,312
35,400
44,840
Sales price
Sales Comparison Approach
Sale
Price/sqft
Financing adjustment
Cash equivalent price
Market conditions
Adjusted price/sqft
Location
Size
Utilities
Topography
Total adjustments
Adjusted price/sqft
Comp 1
$7.07
0
$7.07
2%
$7.21
10%
0
0
-5%
5%
$7.57
Comp 2
$7.06
0
$7.06
1%
$7.13
$0.00
-5%
0
10%
5%
$7.48
Comp 3
$6.69
0
$6.69
4%
$6.96
10%
5%
0
-5%
10%
$7.65
Sales Comparison Approach
 Paired Sales Analysis – the best method for arriving at and
supporting a level of adjustment between comparable
properties.
 For example: An appraiser could justify a correction of 10% for
rolling topography as opposed to level topography using
paired sales analysis of otherwise very similar properties.
Sales Comparison
Approach: Paired Sales
Analysis
Comparable
Sales price
Date of sale
Size (acres)
Location
Topography
Utilities
Price/acre
1
$74,250
Mar-10
2.25
Good
Level
All city
$33,000
2
$60,000
Apr-10
2
Good
Rolling
All city
$30,000
Pr ice /acre comparable1 $33,000

 .10
Pr ice /acre comparable2 $30,000
Sales Comparison Approach
 Finally, using the adjusted price per square foot for
comparables, the appraiser can estimate an appropriate
market rate of $7.50 per square foot and value the subject
property as:
Land value estimate=$7.50/sqft x 38,000 sqft = $285,000
Extraction Method
 Most often used when there is an absence of recent
comparable land sales
 Land value = Value of total property minus contributing value of
improvements
 May not accurately reflect the value of the site as if it were
vacant and ready for its highest and best use.
 Highly speculative when improvements are old and/or do not
represent the highest and best use of the site
Extraction Method
Total property value
$1,200,000
Less contributing value of improvements
$900,000
Land value estimate
$300,000
Development Approach
 Often used to estimate the value of a large tract of land that
has the potential of being subdivided and sold separately as
smaller lots
 Land value = present value of future cash flows to land
Development Approach:
Cash Flow Forecasting
 Unit sales income
 Involves creating a detailed market study of the are,
neighborhood, and market segment (See Chapter 3).
 Lot prices are determined using the sales comparison approach.
 Absorption rates are determined by looking at past absorption
rates for similar developments and accurately forecasting future
demand.
 Forecasted unit sales income can be derived from the expected
number of units sold each month and the expected sales price of
the lots.
Development Approach:
Cash Flow Forecasting
 Other income
 Some developments contain amenities that may serve as an
additional source of income (pools, tennis facilities, clubhouses,
parking facilities, etc.).
 Lot owners may pay for a portion of the expenses in maintaining the
facilities, but often the cost of the facilities is more than the income
earned on them.
 Site development costs
 Expenses for grading the land and installation of roads, utilities, and
amenities.
 These costs can be enormous, which is why development is often
done in phases.
Development Approach:
Cash Flow Forecasting
 Sales and marketing expenses
 Developers incur costs for advertising and promotional materials
as well as commissions for the sale of lots.
 Administrative, overhead and operating expenses
 Developers incur costs for the daily operation of the business
through the development and sellout of the lots.
Development Approach:
Cash Flow Forecasting
 Entrepreneurial profit
 The job of the developer is time-consuming, risky, and managementintensive. Thus, he seeks to a profit high enough to account for that
level of effort. This profit is referred to as entrepreneurial profit and
can be included in the cash flow forecast in a variety of ways:
 Deduct a line item expense based on a percentage of sales
income
 Make no line item deduction and assume a higher discount rate
 Deduct expenses periodically from cash flows that are calculated
by means other than a percentage of sales income
Development Approach:
Cash Flow Forecasting
 Discount rate selection
 Unleveraged basis — use land yield rate
 Leveraged basis — use before-tax required rate on equity
Development Approach
Example: Assumptions
 Analysis period length: semiannual
 Total periods: 5
 Construction period: 6 months
 Sellout period: 2 years
 Number of lots: 86
 Typical lot price: $45,000, increasing by 2% per semiannual
period
Development Approach
Example: Development Costs
 Engineering: Period 1=$25,000/Period 2=$10,000/Period 3=$15,000
 Clearing/grading: Period 1=$50,000/Period 3=$10,000
 Roads: Period 1=$300,000/Period 3=$175,000
 Utilities: $4,000 per unit built, increasing by 2% per period
 Sales costs: 8% of sales income
 Overhead: 2% of sales income
 Real estate taxes: $250 per remaining lot
 Developer profit: 12% of sales income
 Land discount rate: 15%
Development Approach
Example: Sales and
Construction Schedule
Semiannual period
1
2
3
4
5
Beginning balance
Construction
0
46
46
0
16
40
36
0
16
0
Semiannual period
1
2
3
4
5
Sales
Ending balance
Cumulative sales
Unsold developable sites at
year's end
Average unsold during year
0
46
0
30
16
30
20
36
50
20
16
70
16
0
86
86
86
56
71
36
46
16
26
0
8
Development Approach
Example: Lot Sales Prices
Semiannual period
Sales price per lot
1
2
3
4
5
$45,000 $45,900 $46,818 $47,754 $48,709
Development Approach
Example: Net Cash Flows
Semiannual period
Source of Cash
Sales income typical lot
Total cash
Use of cash
Development cost:
Engineering
Clearing/grading
Roads
Utilities
Total
Selling costs
Total
Administration and overhead
Overhead
Real estate tax
Total
Developer's profit
Total uses
Net cash flow
Present value cash flow
Value
1
2
$0 $1,377,000
$0 $1,377,000
3
4
$936,360
$936,360
$955,087
$955,087
$10,000
$0
$0
$0
$10,000
$110,160
$110,160
$15,000
$10,000
$175,000
$166,480
$366,480
$74,909
$74,909
$0
$0
$0
$0
$0
$76,407
$76,407
$0
$27,540
$21,500
$17,750
$21,500
$45,290
$0
$165,240
$580,500
$330,690
-$580,500 $1,046,310
-$540,000
$905,406
$18,727
$11,500
$30,227
$112,363
$583,979
$352,381
$283,653
$19,102
$6,500
$25,602
$114,610
$216,619
$738,468
$552,965
$25,000
$50,000
$300,000
$184,000
$559,000
$0
$0
5
Totals
$779,351 $4,047,798
$779,351 $4,047,798
$0
$0
$0
$0
$0
$62,348
$62,348
$50,000
$60,000
$475,000
$350,480
$935,480
$323,824
$323,824
$15,587
$80,956
$2,000
$59,250
$17,587
$140,206
$93,522
$485,736
$173,457 $1,885,246
$605,894 $2,162,552
$422,040 $1,624,064
$1,624,064
Capitalization of Ground Rent
 In some markets land is leased rather than sold for
development. In those cases, capitalization of ground rent is
a useful valuation tool.
 Estimate the expected rent over the lease term and translate
into a present value using a land capitalization rate or
discount rate.
 Capitalization of the first year’s rent is reliable if land lease
terms are consistent in the marketplace and if tracts of land
subject to leases are being sold in the market unimproved.
 If this is not the case, discounting the forecasted rental
payments is more reliable.
Capitalization of Ground Rent
 Estimated Market Rent Land Lease Payments:
 Years 1-10: $45,000
 Years 11-20: $60,000
 Years 21-30: $95,000
 Years 31-40: $140,000
 Projected Resale Value in 40 Years=$1,500,000
 Discount Rate=12%
 Land Value Estimate=$461,581
Allocation
 Used when land sales are not directly available
 Is seldom used because it does not specifically address the highest and
best use of the site.
 Land value = estimate of value of property multiplied by the typical land
ratio observed in the market.
Land Residual
 See Example in Chapter 8 on income capitalization
Excess Land
 Additional land that is not necessary to support
the improvements
 Two ways to value:
 Assume it can be split from improved portion and
sold separately
 Assume it has value for future expansion