Chapter 10
Site Valuation

Reasons for Site Appraisals

u   Income taxation

u   Sale of part rather than whole

u   Excess land valuation

u   Cost-depreciation approach

Classical Theory of Land Value

u   Adam Smith, David Richardo, Thomas Malthus--factors of production

u   Land residual analysis

Modern Theory of Land Value--Land as "Manufactured product"

Methods of Site Valuation

u   Comparable sales analysis--see example from sales comparison analysis

u   Income capitalization

u   Development cost

Income Capitalization

u   A site earns an expected annual income of $12,000 per year after subtracting property taxes and rent collection costs. Research has indicated that 10% is the appropriate capitalization rate.

u   $12,000 10% = $120,000

Steps in the Development Cost Method

u   Estimate the appropriate development costs

u   Estimate the expected sales price of the lots

u   Determine the periodic cash flow revenues and expenses

u   Determine the appropriate discount rate

u   Compute the net present value of the cash flows

Development Cost Method Problem

u   You are appraising a 50 acre tract of land zoned for single family residential. Your research indicates that the cost of subdividing the property into 200 residential lots include: $10,000 for legal fees, $8,000 for surveying, $30,000 for engineering fees, $25,000 for road clearing and preparation, $800,000 for paving and guttering, $110,000 for water and sewer lines, $500,000 for sewer hookup fees, and 10% of the expected lot sales price for marketing and sales fees. Absorption analysis indicates that 80 lots are expected to sell by the end of the first year, 50 lots the second year, 40 lots the third year, and the final 30 the forth year. Research indicates that a 12% discount rate is appropriate.

Solution to the Problem:
Calculation of Periodic Cash Flows

u   Year 1 cash flows:

u   Income = $20,000 * 80 = $1,600,000

u   Expenses = $1,600,000 * .12 + $10,000 + $8,000 + $30,000 + 25,000 + $800,000 + $110,000 + $500,000 = $1,633,000

u   Net Income = $1,600,000 - $1,633,000 = - $33,000

u   Year 2 cash flow: $20,000 * 50 * (1-.1) = $900,000

u   Year 3 cash flow: $20,000 * 40 * (1-.1) = $720,000

u   Year 4 cash flow: $20,000 * 30 * (1-.1) = $540,000

Solution to the Problem:
Calculation of Net Present Value

u   HP 10C Keystrokes

u   CLEAR ALL, 1 P/YR

u   12 I/YR

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u       33000 +/- CFj [Display shows CF 1]

u   900000 CFj [Display shows CF 2]

u   720000 CFj [Display shows CF 3]

u   540000 CFj [Display shows CF 4]

u   NPV [Display shows 1,543,672]