Current Issues With Land Valuations

Posted on December 16th, 2010 by John Reeder

Land is worth whatever you are going to build on it, less the cost of improvements. So in a down market, when the values of vertically constructed properties have taken major hits, and when construction costs are still essentially the same as they were in the peak (minus the “Eff you, we’re busy, we’re going to charge a premium” side of construction costs), land is the primary place where value is subtracted.

Land Value Formula

Land Value = (Value of Fully Improved Asset – Cost of Improvements)

But there is a problem with the formula I mention above. What if the value of the fully improved asset is worth less than its construction cost? Is the underlying land worthless?

I recently closed a small retail land deal that had $9/sf in site improvements in place (water, sewer, curb, paving, etc.) for a purchase price of $9/sf. I’m currently negotiating with a lender on another site in the same sub-market and the lender wants $8/sf for the site raw, with no horizontal improvements in place. I find that to be problematic, and perhaps as problematic is to get the lender to understand how you might actually arrive at the land value. Just because the first site was $9/sf with $9/sf in improvements in place doesn’t make the other site worthless.

There is more here than I can get to in one post, so stay tuned.