When do they add value to a property?
Appraisers use a measure referred to as the “land to building ratio” to determine if a property has additional land which could contribute value to a commercial real estate parcel. The land to building ratio is determined by dividing the land area by the building area. For example. If a parcel of land is 100,000 sf, and the building is 25,000 sf, the land to building ratio is 4:1 (100,000 sf/25,000 sf).
Once the land to building ratio is determined, the appraiser next compares the land to building ratios of similar properties which have sold. If the ratio of the property being appraised (the subject), is similar to competing properties (comparable sales), then the property has enough land to functionally support the building improvements.
An appraiser can also walk the property, check the survey and/or plat maps, aerial maps and observe if the building improvements utilize the site area adequately. Is there enough room for parking, access roads, green space requirements, distance between off site influences and so forth.
If all of these conditions are normal for the type of property being appraised, then excess or surplus land should not be an issue in the valuation of the property. Whenever the land to building ratio exceeds the market range, then excess or surplus land may need to be considered. Let’s first examine the attributes of surplus land.
Surplus Land The definition of surplus land is: land that is not currently needed to support the existing improvements, but cannot be divided from the property to be sold off separately. This type of land does not have a separate and independent highest and best use. It may or may not contribute to the value of the improved property.”
Examples of this type of land would be acreage at the rear of the site which can only be accessed from the front of the site. There are no adjacent parcels which could provide reasonable access to this isolated part of the site. Perhaps a vacant, irregular shaped part of the parcel, would provide sufficient area for another building. If the placement of those improvements could not meet building setbacks, it may not be feasible to improve.
If similar property owners require additional land for parking or storage, such as industrial properties, then the surplus land may contribute value to the site. Surplus land is never valued separately from the developed portion of the site.
Excess Land is valued separately from the developed part of the site. By definition:
“Excess land is land that is not needed to serve or support the existing improvement. The highest and best used of the excess land may or may not be the same as the highest and best use of the improved parcel. Excess land may have the potential to be sold separately and is valued separately”.
There are three tests to determine if the unused portion of the site is excess land:
- It has sufficient size, shape, and accessibility to be partitioned into a marketable parcel.
- There are no legal or governmental barriers to such partitioning.
- There must be market demand for the unused land if separately partitioned.
Determining if the market will recognize the value of the excess land is the most important step. Is there market demand for excess land? Will the market pay for excess land which is separate from the remainder of the parcel? If not, then the excess land will have no greater impact on the value of the parcel than does surplus land.