Stuart
Graduate School of Business
EM-515
Critical Asset Mapping &
Management
14 APR 2005
Land Valuation
Law & Engineering
Sheldon L. Epstein
Epstein Associates – K9APE
Law Office of S.L. Epstein
©2004- 2005
LOUISIANA PURCHASE
1803
800,000 Square Miles - 47% Bigger Than France
$15 Million or ~ 3¢ per acre
Doubled Size of the United States of America
COMPARISON CHART
Organization
Title
Role
Starting
Ending
Maximize
Value / Time
Stakeholders
Decision Maker
EPA
Corporation
RPM
Buyer
Public $$$$
Land
Acres/$
President
Seller
Land
Private $$$$
Decrease
Gov’t & Nbhd
Government
$$/Acre
Decrease
Same + S & B
Board of Directors
OUTLINE
Myth
Land Valuation Postulates
Epstein’s Rules of Money
Culture & History
Boundary Definitions
Paradigm Shifts Over Time
Buyer v. Seller
Impact of Government
Trends
Example – A Work In Progress
MYTH
Real Estate Professionals Are Fond Of Saying:
The Three Most Important Attributes
Affecting Property Values Are:
1. Location
2. Location
3. Location
Land Valuation Postulates
Land Is NOT Fungible
All Site Attributes Being Equal, Valuation Is
An Inverse Function of Risk
Risk Comprises Two Components
- Market Risk – Will They Buy?
- Financing Risk – Can You Build?
– Cash Flow?
Children And Money Do Not Come With
Instructions
EPSTEIN’S RULES OF MONEY
1. The Property Is Worth What The Tenant Is
Worth (Morris L. Epstein, 1947)
2. Never Finance Long-Term Commitments With
Short-Term Money
3. Time/Risk Value of Money
– Net Present Value (Exponential)
4.
5.
6.
7.
Subsidies Don’t Benefit Intended Beneficiaries
Always Keep A Cushion (Aunt Fanny Kaplan)
First Rule of Holes – Stop Digging (Rumsfeld)
When Using OPM – Always Candor
Culture & History - 1
Cultural & Religious Impact On Land Valuation
Talmud (Jewish) – Restrictions on Use
Torah, Leviticus 25:1-34, 27:14-25
Canon Law (Catholic) – Fair Profit / Usury
Shari`ah and Fiqh (Islam) – No Interest
Buddhism, Hinduism, Shintoism - ?
Governments – Ethnic Prohibitions
How Do You Reach Agreement On Valuation Across
Cultures?
Culture & History - 2
MARKET DISTORTIONS
Feudalism – King Owns Everything
Communism – State Owns Everything
Socialism – We Collectively Own Everything
Fascism – They Stole It, We Own Nothing
European Civil Law – Prohibited Unless Permitted
English Common Law – It’s Your Castle
U.S.A. Private Ownership – Ordinance of 1785
Some Combination In Every Country
PARADIGM SHIFTS
Ancient
Mercantilism (18th C. Britain)
Today – U.S.A.
ANCIENT
Boundary – F(x,y)
Definition – Monuments & Landmarks (Trees, Streams)
Measurement - Imprecise – Yards to Miles
Z-Axis - Center of Earth to Heaven
Transfer – Crown Grant, Inheritance, Military Conquest
Money – Precious Metals (Coined & Uncoined)
Valuation – Number of Persons Supported & Military Costs
Ownership – Less Than 1% of Population - Citizenship
Farm Families - ~95% of Population
Travel Speed - ~3 M.P.H.
MERCANTILISM (18th C. Britain)
Boundary – F(x,y,z)
Definition – Metes and Bounds
Measurement – Chains, Theodolites – Inches to Feet
Z-Axis – Mineral Rights
Transfer – Inheritance, Sales
Money – Bank Notes, Mortgages, Shares, Trusts
Valuation – Yield or Productivity, Water, Trade, Location
Ownership - ~5% of Population in Great Britain
Farm Families - ~80% of Population
Travel Speed - ~10 M.P.H.
TODAY – U.S.A.
Boundary – F(x,y,z,t)
Definition – Precision Survey
Measurement – GPS Receiver – Millimeters
Z-Axis – Mineral & Air Rights, Condominiums
Transfer – Sale, Ground Lease, Time Share
Money – EFT, Mortgages, Shares, Trusts
Valuation – Location, Development Risk, Environmental /
Government Restrictions
Ownership - ~60% of Households in U.S.A.
Farm Families - ~4% of Population
Travel Speed - ~40 M.P.H.
When Did Your Family
First Own Real Estate?
U.S.A – Probably 20th Century
U.S.A. – If A WWII Veteran, Then GI Bill, VA,FHA
& Other Veteran Programs
U.S.A. – Many Federal & State Incentives For Family
Home Ownership, Mortgage Tax Deduction
U.S.A. – Ground Leases, Co-operatives, Time –Share,
Condominiums
U.S.A. – Mortgages Offered By FNMA, Pension
Funds, Insurance Companies, Banks
U.S.A. – Goal To Make Home Ownership Affordable
BUYER v. SELLER
Allocation of Risks Between Buyer & Seller
Marketing Risk – Buyer’s Risk
Site Plan – Seller’s or Buyer’s Risk
Government Restrictions (zoning, density,
neighborhood) – Seller’s Risk
Environmental Restrictions (wetlands,
corridors) – Seller’s Risk
Lower Buyer’s Risk Means Higher Valuation
IMPACT of GOVERNMENT
Municipality Comprehensive Zoning Ordinance
Environmental Corridors, Wetlands, Open Land
Neighborhood Plans
Subdivision Plans
Sector Plans (Residence, Commerce, Industry)
Zoning Variances For Individual Sites
Building & Appearance Standards
Building Permits
Land & Premises Inspections
Taxes (Property / Income) & Special Assessments
Trade / Travel Barriers
TRENDS
Population Increases Slowing Worldwide
U.S.A. - Population Still Increasing & Aging
U.S.A. - City Center Migration Will Reverse With
Improved Communications & Family Wealth
U.S.A. - Population Becoming More Conservative
As Land Ownership Continues To Diversify
Better Data Bases & Data Mining Technology
(GIS & DSS) Enhance Some Property Values
U.S.A. - Declining Percentage of Sites Than Can
Be Developed
EM-515 PROTOCOL
1.
Ask - What Is The Full Market Value Of Our 58 Acres At What Time? F($,t)
2. Bound – The Neighborhood In General and Our 58 Acres In Particular
3.
Collect –
Engineering – Survey, Topography, Soil Bearing Tests, Sewer & Road Plans
Neighbors – Existing Structures, Plans, Connectivity
Village - Municipal Zoning Code, Neighborhood Plan, Suggestions
County Maps - Wetlands, Environmental Corridors, Municipal Improvements, Property
Polygons, Topography, Tax Assessments
DNR & SEWRPC - Maps of Wetlands, Environmental Corridors
Dept. of Transportation – Highway Access, Traffic Counts, Routes
Census Bureau - Family Income, Household Size, Demographics, Trends
Real Estate Sources - Property Sales Data, Advertisements, Subdivisions, Offers
Financing – Bank Market Areas & Concentrations
4.
Decide –
What We Now Know – Range of Estimated Values & Risk Issues To Be Examined
Actions Taken – Drew & Revised Site Plan, Conferred With Village, Received Offers
Plans – Collect Data, Prepare Formal Due Diligence Report & Contact Developers
DSS PROBLEM
How Can Valuation Be Maximized
(Sale Price – Improvement Cost) By Adjusting:
- Lot Sizes
(Max, Min, Mean, Median, Perimeters)
- Number of Lots
- Lot Locations (Lake View)
- Lot Orientations (Sunlight, Wind Direction)
How Do We Maximize
Capital Gain / Profit?
Minimize Risk – Due Diligence
1. Location Risk
2. Governmental Risk
3. Environmental Risk
Financing Easier & Less Expensive
Price Appreciates As Finance Costs
Decrease
LOCATION RISK
Want To Build
Candidate Occupant Demographic Data
Employment Reports
Neighborhood Facilities & Attributes
Traffic Analyses
Transportation Resources
Weather Data
Comparable Prices
GOVERNMENT RISK
Permitted To Build
Municipality Comprehensive Zoning Ordinance
Neighborhood Plans
Subdivision Plans
Highway Access Approval
Sector Plans (Residence, Commerce, Industry)
Zoning Variances For Individual Sites
Building & Appearance Standards
Building Permits
Inspections
TIME TO SITE PLAN APPROVAL = $$$$$
ENVIRONMENTAL RISK
Prevented From Building
Topography
Environmental Corridors
Public Easements (Highways, Waterways)
Private Easements ( Power Lines, Roads, Underground)
Wetlands
Open Land Requirements
Flood Plains
Retention Ponds & Runoff
Brownfields (Polluted Land)
Prevailing Winds
Waterways, Airports, Noxious Neighbors
CONCLUSIONS
Most Important Factors Affecting Value
1. Location Assessment
2. Governmental Risk Assessment
3. Environmental Risk Assessment
Critical Asset Mapping & Management
Is A Key Component of Due Diligence
Due Diligence Package Creates Value For
Your Clients and Value For You
The End
Written By
Sheldon L. Epstein
Shel@k9ape.com
Produced By
Epstein Associates – K9APE
PO Box 400
Wilmette, IL 60091-0400 U.S.A.
+1 630 564 9292
www.k9ape.com
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