**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
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