Land Value: Part 2 of a Series on the Components of Purchase Price Allocation
Land value can be one of the more challenging components for most real estate purchasers when preparing a purchase price allocation analysis since they are not typically in the business of purchasing land. For many companies, figuring out how much value to apply to land is generally an exercise that only exists in the accounting realm, whether it be for tax purposes or for financial reporting.
The only reliable way to evidence land value is comparable sales. Here are some ideas to keep in mind:
How to obtain land comps
Most real estate professionals (brokers and appraisers) subscribe to Costar or a similar service that provides access to information regarding past sales of real property. As these database subscriptions are quite expensive, many companies rely on their brokerage relationships to obtain land comps when needed. Historical land sales information can also be researched via the recorder's office or county assessor's office if you know what properties to look up on their online systems. When selecting comps it is important to identify properties that are as similar as possible to your property. At times, a phone call to one of the parties involved in the transaction is required to sort out all of the details.
Make adjustments
Land is notoriously difficult to compare from one site to another since many factors can affect the amount of utility to be gained from the land. Calculate the price per square foot (or whatever unit measure makes the most sense in your case) and adjust for anything that can affect value:
Location: Consider the locational differences between your property and each comp. Is the comp closer to the central business district, or on a more visible street corner, or a major thoroughfare with significantly higher traffic counts? If the comp is superior, adjust the price down to make it more similar to your property.
Zoning: Does the comp allow more or less development density (floor area ratio or FAR is a common density measure for office and industrial while dwelling units per acre du/ac is common for residential)? How about use restrictions or height restrictions? Maybe the comp is in an overlay district that offers substantial incentives for development and needs to be adjusted to be comparable to your property.
Size/configuration: All else being equal, a larger property will have a lower sales price per square foot due to economies of scale. You want to compare like sized properties whenever possible, but when good comps are scarce, it is necessary to make some adjustment for significant differences in parcel size.
Usable vs. unusable land area: In some parts of the U.S., such as Florida, it is common to have a lot of acreage lost to non-developable areas due to swamp, drainage basin, or flood zone elements. Study aerial photos for any obvious obstructions and then research further through whatever documents are available to you.
Estimate the value of your land
Once you have located a few land comps and adjusted the indicated sales price for each one as discussed above, you should have a range of sales pricing guidance to consider. The straight average is rarely the right answer. Consider which comps are most applicable and required the least amount of adjustment. Also exclude any significant outliers or give them less weight in your decision process.
For a general rule of thumb, land generally represents 15 to 25 percent of any property value in most markets. Highly dense markets like San Francisco and Manhattan can have much higher allocations to land; upwards of 50 percent in some cases. Conversely, rural markets where land is plentiful, can have land allocations below 10 percent. The trick with any rule of thumb is to consider how all the puzzle pieces fit together and decide whether the result you are getting makes sense conceptually. If your concluded land pricing results in an unexpected percentage allocation, go back and see if a few additional data points would swing the results or if there is some other fact pattern to be considered.