Land Value Analysis Factors Affecting a Buyer s Value Opinion 2017 Lake Tahoe Conference Sacramento Sierra Chapter Appraisal Institute October 19, 2017 Guy Spitzer, CCIM, ALC
At the foundation of all real estate transactions you ll find land. It all starts with a land deal.
What is a Land Appraisal? An informed opinion of value. Whose opinion matters most? The willing and able Buyer.
A Journey into the Mind of the Buyer Factors Affecting a Buyer s Value Opinion 1. Land Acquisition: The 3 Step Process of Evaluation Site Selection Site Development Preferred Deal Structure 2. Land Residual Valuation, Single-Family Residential 3. Terminology Used in Land Acquisitions 4. Answer Your Questions
1. MARKET ANALYSIS SITE SELECTION Determine Market Value & Viability of a proposed Land Use development Retail GAP Analysis; Is there room in the market for one more? Commercial (Office & Industrial) Occupancy Rates; Lease Rates, Power Multi-Family Residential Rental Rates Per Foot; Per Bedroom; Vacancy Single-Family Residential Home Values; Affordability; Absorption Rates Agriculture Income; Soil Conditions; Water Rights; Govt. Subsidies 2. ZONING / ENTITLEMENT REVIEW Allowable Use Will they allow my proposed development? Conditional Use Will my use require additional approval, time to obtain? General Plan Goals & Objectives Municipality Vision / Study The pathway and roadblocks to obtaining Entitlements and permits. What, if any, additional Entitlements will I need? What could be the RISK, COST and TIME needed to obtain? 3. SITE EVALUATION $$$ Establish Value $$$ $$$ Create Value $$$ $$$ ( Take Away Value ) $$$ Feasibility to Develop Will it fit the needs of the intended development? Preliminary COST to Develop Factors adding to development Availability of Urban Services RISK, COST and TIME to obtain
1. GRADING PERMIT SITE DEVELOPMENT Tell me when I can flush my first toilet, and how much it will cost me to do it, and I will tell you what your land is worth. Determine Pathway (roadblocks) to Grading Permit & Additional Permits Environmental Permits Wetlands & Endangered Species Permitting Agencies City, County, State & Federal 2. INFRASTRUCTURE Source and Supply Roads, Water, Sewer, Power Cost and Time to Obtain Offsite Factors Affecting Supply Can I go alone or am I dependent on others? 3. ENGINEER S COST ESTIMATE Permits & Fees Cost to Design Site Improvements Onsite Costs to Construct Site Improvements Offsite Costs Required to Develop Site (COA) Tentative Map approvals carry with them the Conditions of Approval COA. Your COA s will spell-out what you must do and pay to develop. $$$
PREFERRED DEAL STRUCTURE 1. ALL CASH at CLOSING Desire to close transaction with or without Entitlement approvals Ability to close transaction with or without Entitlement approvals Time Value Money Holding time prior to development adds cost 2. INSTITUTIONAL FINANCING Requires / Allows title transfer to Buyer at close of transaction Typically difficult to obtain for land purchases Low Loan to Value, strict Lending Requirements, Loan Availability 3. SELLER FINANCING Requires / Allows title transfer to Buyer at close of transaction Typically used as a Bridge / Alternative to Institutional Financing Allows time to gain Entitlement approvals that increase value 4. OPTION to PURCHASE = Title Transfer, YES = Title Transfer, YES = Title Transfer, YES = Title Transfer, NO Prevents title transfer to Buyer, delayed closing increases value Simplifies legal documentation such as loan covenants Option Payments Failure to make payment terminates Option Allows time to gain Entitlement approvals that increase value
LAND RESIDUAL VALUE PRO-FORMA Arriving at the Land s Residual Value for development purposes is established through a process whereby the known COSTS are subtracted from the projected MARKET VALUE of the development. Simple right? Unfortunately, most times the COSTS are estimated and the MARKET VALUES are subject to change.
LAND RESIDUAL VALUE PRO-FORMA Land Residual Valuation: The 3 Step Process working backwards. STEP ONE: Establish your $MARKET VALUE for the completed Development STEP TWO: Establish the amount of money and time $(COSTS) needed to get you to the point where you can SELL your completed Development STEP THREE: Calculate your $RESIDUAL LAND VALUE MARKET VALUE COSTS = RESIDUAL LAND VALUE
LAND RESIDUAL VALUE PRO-FORMA Single-Family Residential back of the Napkin pro-forma Assumptions: 1. Market Value for a 2,000 square foot home is? (Key Factor Price per square foot = $220.) 2. Gross Profit Margin = 30% of Market Value ($132,000.) 3. Lot Finishing Costs (On-site Per Lot) ($55,000.) 4. Brick & Mortar $70 sq.ft. ($140,000.) (Key Factor B&M per square foot = $70 x 2,000 sq.ft.) 5. Building Permits & Fees to build a home ($60,000.) Residual Land Value Paper Lot Value $53,000. $440,000. $308,000. $253,000. $113,000. $53,000. Static Value Static Value = A value that does not factor in Holding Costs and Time.
LAND RESIDUAL VALUE PRO-FORMA Sunset Manor Townhomes Total Acres 1.05 Total Lots 15 REVENUE Average (Home) Sq.Ft. 2,005 Base Price Value Per Sq.Ft. $220.00 Average Base Price $ 441,100 Cost of Upgrades $ 22,055 5% Homesite Premiums $ - Discounts $ (5,000) Total Sales Revenue Per Unit $ 458,155 Project Information Buyer purchased an approved Tentative Map residential project from a Bank REO Department. Tentative Map Conditions of Approval allow for the building of 15 Townhomes as commonwall attached product on individual lots with approved architecture. Market value assumptions are current. Total Sales Revenue Per Unit assumes Buyer will add builderupgrades equal to 5% of the Average Base Price. EXPENSE 404 Permit Mitigation $ - Affordable Housing Requirement $ - Building Permits Fees $ (54,600) Offsite Development $ - Lot Finishing $ (45,890) Bricks & Mortar (Sq.Ft.) $ (170,425) $85.00 Upgrade Costs $ (14,336) 65% Commissions & Marketing $ (22,908) 5% Overhead & Financing $ (68,723) 15% Net Profit $ (45,816) 10% Total Homebuilding Costs Per Unit $ (422,697) PAPER LOT VALUE PER UNIT $ 35,458 TOTAL LAND VALUE $ 531,866 Site required an Army Corps 404 Wetland Fill Permit, but it was perfected by the previous owner prior to bank repo. No Offsite Development is required. Lot Finishing Costs are taken from current engineer estimates. Brick & Mortar indicates the current estimated costs to build each individual townhome unit. Commissions & Marketing, Overhead & Financing and Net Profit = Gross Profit of 30%. The Paper Lot Value Per Unit indicates the Net Value of an individual lot prior to construction. Total Paper Lot Value is the same as Total Land Value.
TERMANOLOGY USED IN LAND ACQUISITION Raw Land.. Un-entitled Land... Zoning Conditional Use Permit Entitlements..... Large Lot Map Small Lot Map Paper Lots.. Tentative Map Approval Final Map Lots Final Map Approval Blue-Top Lots. Finished Lots.. General Plan.. Specific Plan.. EIR.. EIR Project Level.. Development Agreement.. Finance Plan... Fiscal Plan.. In-tract Construction.. Offsite Construction... 404 Permit... Section 7 Consultation.. Biological Opinion.. Mitigating Measures.. Fee Credits. Undeveloped Land, No improvements. No specific approvals obtained for development of intended use. General Plan Designation for land-uses pre-studied and allowed. Applied to Zoning may be allowed under certain conditions. Any governmental approvals needed to develop intended use. Area that surrounds a group of small lots, typically NO development rights. Area indicating individual lots, includes development rights. Lots on-paper that have received Tentative Map Approval. Lots that have received approval with COA s to proceed to Final Map. The recordation of the tentative map creating individual legal parcels. Government action required to file and record Final Map Lots. Large Lot Final Map graded not improved, No small lot Final Map. Lots finished with curb, gutter, sidewalk, streets and working utilities. Municipality future growth-plan with impact studies as approved. A growth area within a General Plan seeking specific development. Environmental Impact Report Studies Impacts of Development. Studies the Impacts of a smaller development within a plan area. Development rights based upon certain required development criteria. Established fee-structure to pay for Development Agreement rights. Annual costs to pay for police, fire and parks to service development. The construction of the project site into finished lots, no Off-sites. The construction of required improvements outside the In-tract area. Federal Permit issued by the US Army Corps to grade-over a wetland. Fish & Wildlife Service habitat study for endangered plants and animals. The findings of a Section 7 Consultation that sets Mitigation Measures. The measures to be followed in order to satisfy the Biological Opinion. Credits applied against building fees created by exceeding pro-rata share.
Questions Please.
GUY SPITZER, CCIM, ALC Managing Director CA RE License # 01095648 gspitzer@newmarkccarey.com D 916 367 7000 C 916 768 4520 N E W M A R K C O R N I S H & C A R E Y Get on the email distribution list.