Criteria for best use analysis. Stage I development of alternative options for using the land plot Analysis of the most effective use of the land plot
Procedure for analyzing the best and most efficient use of land
Stage I development of alternative options for using the land plot
Stage II analysis of alternative options for using the land plot
Income Costs
Net operating income
Income attributable to buildings and structures
D building = Construction cost (C)*Capitalization coefficient (K )
building
Income attributable to land
D z.u. = CHOD - D building.
Cost of land: With z.u. = D z.u. / TO
land
MAX cost of land
The best and most efficient use of land
The most effective use of real estate is that which, among other reasonable, possible and legal alternatives, turns out to be physically possible, sufficiently justified (from a legal, technological and financial point of view), financially feasible and leading to the maximum value of the property or the maximum rate of return on the capital invested.
If there are improvements to the site, the best use may differ from the existing one. However, the existing use will continue until the value of the land at its best use exceeds the value of the entire property in its current use plus the cost of destroying (moving) the improvements.
The factors that determine the most effective use of real estate include: legal validity, location potential, market demand, resource quality of the site, technological feasibility, financial feasibility. Legal validity.
In the process of analyzing this factor, the rights and legal restrictions associated with a given land plot are considered: zoning rules, environmental laws, building codes, tax policies, etc. Location potential
How does the site relate to the prevailing land use type in the area;
What is the accessibility (transport and pedestrian) of the site;
What is the visual openness of the site based on the intended purposes of its use;
Are there various inconveniences and dangers, including hidden ones, that may affect the use and, consequently, the price of the site.
Market demand– should be analyzed in order to determine to what extent the planned land use option is of interest to the investor, taking into account the nature of supply and demand in a given market. To do this, you should: a) determine the factors on the supply and demand side that affect the price of land; b) determine the “target” market, that is, those users who will be able to rent or buy this property; c) determine the advantages of this object, ensuring its competitiveness and advantages.
When analyzing Rresource quality of the site, the physical suitability of the site for various development options is considered: size, shape, topography, bearing capacity of the soil, and other natural features.
In the process of studying such a factor as technological feasibility the possibility of constructing the facility planned on this site within the established time frame is established and upon achieving compliance with the cost and quality of construction and installation work.
Finally, factor analysis financial feasibility allows you to assess the ability of the facility being built on the site to provide a cash flow of sufficient quantity and duration to repay capital and obtain the expected rate of return.
Remainder method for land - a variant of the income capitalization method based on the principle of excess productivity. Used in cases where improvements are relatively new or have not yet been built. Their value can be determined with a high degree of accuracy, as can their useful life.
where V L is the cost of the land plot; V b - cost of improvements; R L - capitalization ratio for a land plot; R b - capitalization ratio for improvements.
Example: The cost of newly constructed buildings and structures is CU450,000 and their economic life is 50 years. The rate of return on investment Y of 12% is determined to be in line with other investment options with a similar degree of risk. Annual net operating income for the first year is estimated at CU65,000.
When calculating the recovery of investments in buildings using the Ring method (straight-line return on capital), it is assumed that the income from the building and structures gradually decreases over time.
The annual rate of return on capital is 100%: 50 years = 2%.
The capitalization rate for improvements will be equal to: 0.12 + 0.02 = 0.14.
Let's determine the amount of income related to improvements:
CU 450,000 0.14 = CU63,000
Therefore, the remaining income is CU 65,000. - CU 63,000 = CU 2,000 assigned to the land plot.
Capitalization CU 2,000 at a 12% rate of return on investment with an unlimited period of income (since the land does not wear out) allows you to evaluate the land plot:
2,000 / 0.12 = CU 16,667
From here, the total value of the property is estimated at:
CU 450,000 + CU 16,667 = CU 466,667
If it was predicted to receive equal income from improvements over 50 years, then the uniform annuity method of capital replacement (Inwood method) should be applied.
In this case, the income attributable to improvements will be:
CU 450,000 0.120417 (contribution factor for depreciation of a unit at n=50, i=12%.) = CU 54,188
Residual income attributable to land:
CU 65,000 - CU 54,188 = CU 10,812
The cost of land is estimated by capitalization:
CU 10,812 / 0.12 = CU 90,102
And the total cost of the property is estimated at:
CU 450,000 + 90 102 cu. = CU 540,102
The residual method can be applied when determining the optimal (most efficient) use of land. At the same time, for each of the options, the costs (replacement cost) of improvements are estimated, the amount of net operating income (NOI) is predicted, and the capitalization ratio for improvements is determined. The capitalization ratio is multiplied by estimated costs and the result is subtracted from projected net operating income. In this way, the projected income from the land is determined. The option in which the residual income from the land will be the greatest is its optimal (best and most effective) use, taking into account existing legal and physical restrictions.
Residual method for buildings - used to estimate the value of long-term and obsolete improvements, provided that the land can be valued with a high degree of accuracy, for example, using comparative methods, that is, there is extensive data on recent comparable sales.
The following calculation formula is used:
where V L is the cost of land; V b - cost of improvements; R L - capitalization ratio for land; R b - capitalization ratio for improvements.
Example: A plot of land is valued at CU50,000 based on recent comparable sales of vacant lots.
Discount rate Y = 12%. The annual net operating income is CU 65,000. The economically useful life of the building is 50 years. Let's calculate the cost of the building using the methods of straight-line and uniform-annuity return of capital.
We calculate income related to land as follows:
CU 50,000 0.12 = CU 6,000 (investments in land are non-refundable as they last forever).
The income from the building will be received as residual income:
CU 65,000 - CU 6,000 = CU59,000
The cost of the building with a straight-line return on investment over an economic life of 50 years will be:
CU 59,000 / 0.14 = CU 421,429
The cost of the building with a uniform annuity return on investment:
CU 59,000 / 0.120417 = CU 489,965
Applying the residual method for buildings and for land may result in a negative value.
If, when using the residual method for land, there is a negative residual income attributed to the land plot, then it is necessary to check whether all the assumptions made in calculating the capitalization rate and income are correct.
If no errors are identified in the calculation, then the following conclusions can be drawn:
1) the building is an “excessive improvement” for a given piece of land, that is, the income attributed to the building is not capable of providing the required return on investment and return on the capital invested in the building;
2) a different approach to property management is required to make it more attractive, say, for tenants by adjusting the rates and payment schedule of rental payments, changing the composition of tenants or the level of services provided.
If, when using the residual method for a building, the value of the building is negative, then you should:
1) make changes to the management of the facility;
2) demolish the building and replace it with another that will correspond to the optimal (most efficient) use of the land.
Scheme for calculating net operating income
1. Potential gross income is estimated, i.e. all the income that the facility is capable of generating provided the space is fully occupied. Calculated as the annual maximum income amount.
2. An adjustment for the level of load and losses during collection of payments is deducted.
3. Other income is added (meaning income from a business located on the territory or inside the property).
4. The actual (effective) gross income is formed - this is the expected income from real estate, taking into account the level of occupancy of the premises and non-receipt of payments, as well as other income.
5. Operating expenses are deducted.
Operating expenses are periodic expenses necessary to maintain the functional suitability of the facility, ensuring the receipt of gross income. There are two main groups of operating expenses:
Fixed (fixed) - expenses that are independent in magnitude from the degree of operation of the facility. These include, first of all, property taxes and insurance premiums;
Variables are costs that vary depending on the level of load of the facility. Includes fees for utilities, cleaning, security, garbage removal, and costs for landscaping.
6. The replacement reserve is deducted - the cost of replacing, during the economic life of the object, its individual elements that are subject to faster wear and tear than the main structure (roofing, carpeting, plumbing, elevator equipment).
7. Net operating income is formed - the income remaining after subtracting from the actual gross income all operating expenses and the replacement reserve (before payment of loan servicing amounts and depreciation charges).
The best and most effective use of a real estate property is the option of using a free or developed plot of land, which is legally possible and properly formalized, physically feasible, provided with appropriate financial resources and gives the maximum value.
Typically, the analysis of the most effective use is carried out according to several alternative options and includes the following areas:
Market analysis;
Analysis of the feasibility of the option;
Analysis of the most effective use.
Market analysis involves determining the demand for alternative use options to the existing one in order to study supply and demand, market capacity, dynamics of rental rates, etc. for each option.
Feasibility analysis involves calculating the basic components of cost: income stream and capitalization rates to determine the cost, taking into account the variables of each legally sound and physically feasible option.
Analysis of the most effective use involves the development of a detailed plan for the implementation of each option, considering specific market participants, timing of the project, and sources of financing to select an option that ensures maximum productivity of the assessed object.
Criteria for best use analysis:
Legal admissibility;
Physical feasibility;
Financial security;
Maximum productivity.
The legal admissibility of each considered use case is checked first in all cases. The choice of the most efficient use of real estate may be influenced by the presence of long-term lease agreements. During the remainder of the lease term, use of the property is subject to the terms of the lease agreement. If the most efficient use of the property is constrained by the existence of a lease, this should be reflected in the assessment report.
Example. If the property is limited by a ground lease that expires in more than 12 years, then it may not be economically feasible to construct a new building that has an economic life of 40 years.
Example. Construction of buildings of a certain number of storeys, fire breaks, insolation requirements.
Physical feasibility. Physical feasibility criteria—size, shape, area, design, ground conditions and access roads to the site, and the risk of natural disasters (such as flood or earthquake)—influence the proposed use of the land.
Financial security. An option is considered financially viable if it provides operating income equal to or greater than operating costs, financing costs and the required return on capital scheme. If the type of use does not involve the receipt of regular income from operation, then the analysis selects those options that create real estate at a cost equal to or exceeding the costs of constructing or reconstructing the facility for this new type of use. The appraiser must compare the capital gains or income from the use of the property with the capital expenditure incurred. If income is lower than expenses or exceeds them only slightly, this type of use is considered financially unfeasible.
To evaluate uses that generate regular income from operation, for each of them the appraiser calculates the total net operating income, the individual rate of return on invested capital, and the amount of income attributable to the land. If the net income corresponds to the required return on investment and provides the required return on the land, this type of use is financially feasible.
Maximum productivity is the highest value of the land plot as such, regardless of whether it is vacant (actually or conditionally) or built up. Thus, the implementation of this criterion presupposes, from all legally permitted, physically implementable and providing a positive amount of income options, the choice of the type of use that provides the maximum value of the basis of real estate - the land plot.
The maximum productivity of a land plot is determined by correlating the amount of its income with the capitalization rate required by the market for this type of use. The type of use that provides the greatest profitability of the land is the most effective. The basis of all methods used for determining the value of a land plot in order to select the most effective option is the so-called residual technique.
Income from land is considered as the balance between the total income generated by real estate and those amounts of income that are provided by attracting labor, capital, fixed assets (functioning buildings and structures). The cost of a land plot, in turn, represents the difference between the total cost of the entire property and the residual cost of buildings or the costs of their construction.
The best use of real estate can either be achieved on the basis of existing buildings, or involve the construction of fundamentally new improvements, which requires consideration of the land plot as vacant.
Based on this, appraisers use two techniques when analyzing the best use of real estate:
- the most effective use of the site as an undeveloped one;
- the most effective use of the site as a built-up area.
The method of determining the best and most effective use of the assessed property as an undeveloped land plot is based on the assumption that it does not have buildings or can be cleared of buildings as a result of their demolition. As a result, the cost of land is determined based on the choice of possible use options that ensure the profitability of real estate, and underselection of parameters of real estate objects in accordance with a specific purpose.
The option of using a plot of land as undeveloped has two main varieties:
The use of a plot of land for speculation, i.e. for selling it without improvements to an investor who will subsequently develop it in accordance with market requirements or his own preferences. This option is applicable in
when real estate markets are oversaturated.
Development of a land plot with new buildings and structures, including:
- development without intermediate use, if a new use option is being considered, accepted by the market at the date of analysis;
- development with intermediate use involves the temporary preservation of the existing use option until the new option is in demand by the market, based on the forecast of the market situation;
- division or consolidation of a land plot to achieve the most efficient use;
- development of the site with new buildings similar in purpose and physical parameters to the existing facility.
The most effective use of a land plot as a built-up one presupposes the preservation of existing buildings on the analyzed site.
The option of using a plot of land as a built-up one has two main types:
- maintaining the existing purpose of the property being assessed;
- changing the existing purpose of the property being assessed.
The assessment of maximum productivity, depending on the assessment of the capitalization ratio, is carried out using the following methods.
First method: The land plot is considered as undeveloped, capitalization ratios for land and buildings are different.
1. Determining the cost of developing a conditionally vacant land plot with buildings and structures for a specific purpose, taking into account market demand and supply.
Making adjustments to account for load factor and collection losses.
Determining the possibility of receiving and the amount of other income.
6. Calculation of operating costs.
7. Calculation of capital cost reserves.
8. Calculation of net operating income.
9. Calculation of capitalization ratio for buildings.
10. Assessment of income generated by constructed buildings and structures.
11. Calculation of income attributable to land.
12. Calculation of the capitalization ratio for a land plot.
13. Assessment of the value of a land plot by the method of capitalization of income generated by the land.
Second method: The land plot is considered as undeveloped, capitalization rates for buildings and land are the same.
Determining the cost of developing a conditionally vacant land plot with buildings and structures for a specific purpose, taking into account market demand and supply.
Calculation of potential gross income.
Making adjustments to take into account the load factor and losses in collecting payments and the amount of other income.
Estimation of actual gross income.
Calculation of operating costs and capital cost reserves.
Calculation of total net operating income.
Calculation of the overall capitalization rate for the property being assessed.
Valuation of real estate by the method of capitalization of net operating income generated by real estate.
Estimation of the value of a plot of income as the difference between the estimated value of the property and the cost of improvements.
Third method: The land plot is considered undeveloped, and the market selling price of the property for its intended purpose is known:
1. The market value of a finished property for a specific purpose that can be built on the analyzed land plot is determined.
2. The cost of construction is calculated, including the developer’s profit.
3. The value of a land plot is estimated as the difference between
the sale price of the property and total costs.
Fourth method: The land plot is considered as built-up, the buildings require some improvements:
Determination of the overall capitalization ratio.
Calculation of costs for facility improvement.
Calculation of the increase in the value of real estate taking into account the improvements made.
Fifth method: The land plot is considered as built-up and does not require reconstruction:
Calculation of net operating income generated by real estate.
1. Determination of the overall capitalization ratio.
Valuation of real estate using the method of capitalization of net operating income.
The identified features of real estate objects and the development of the market situation may require non-standard types of use.
Separate uses
As a rule, the most effective options for using the analyzed real estate do not differ from the use of similar objects. However, due to the unusual or unique nature of the property being valued, its most effective use may differ.
Intermediate uses
If the option for the most effective use of real estate is based on changes in the market situation in the future and, therefore, may be feasible after some time, the use option existing on the valuation date is considered as an intermediate one. An intermediate use, which may change after some time, can also be identified as the most effective option for a given period.
Legally controversial uses
If the actual use of the object, permitted by law, does not comply with the standards in force in the area of its location. This is usually a consequence of changes or new zoning regulations.
Non-Best Uses
In practice, actual development may not correspond to the most efficient use of the sites on which it is located. A change in the situation may require both a change in the existing purpose of real estate and its preservation, but on a qualitatively different basis, requiring certain capital expenditures.
Multi-Use
Thus, a large building may include residential premises, offices, shops, service centers, etc. Similarly, housing, shopping and entertainment centers and other infrastructure facilities can be built on a plot of land.
Special Purpose Uses
For example, the most effective use of a plant producing heavy machinery equipment will likely be to continue producing that equipment, and the most effective use of a grain elevator will likely be to continue to use it as an elevator.
Speculative uses
Owned land intended for sale in the future is considered a speculative investment instrument.
Excess and surplus site area
Built-up areas may have excess area not required by the current use of the buildings. Undeveloped lots may have an area that is not required for the primary highest-impact use. The most effective way to use excess site space may be to develop additional buildings or keep them undeveloped.
In certain cases, additional space that is not needed for existing buildings and cannot be separated from the property and sold is considered excess space.
Valuation of real estate using the income approach
Basic Concepts
The Waiting Principle
Estimating market value using the income approach is based on converting the income that the subject asset is expected to generate over the remainder of its economic life into value. From a theoretical point of view, the source of income can be anything: rent, sale, dividends, profit. The main thing is that it is a product of the asset being valued. Using this approach, it is possible and appropriate to evaluate those assets that are used or can be used in the interests of generating income (real estate, shares, bonds, bills, intangible assets, etc.).
The basic principles for assessing an income-generating asset are the principle of expectation and the principle of substitution. The principle of expectation for this approach is the main method-forming principle. It states that the value K of an asset is determined by its present (today’s, current) value (PV - from English present value) of all his future income I: , where To - asset holding period.
The higher the income potential of the asset being valued, the higher its value. In this case, the analysis of income should be carried out throughout the remaining economic life of the asset, provided that it is used during this period in the most effective way.
According to the principle of substitution, the maximum value of an asset should not exceed the lowest price Va, for which another similar asset with an equivalent yield can be purchased: 
, Where T - number of analogues. This principle is an analogue of the economic principle of investment alternatives.
Within the framework of the income approach, a distinction is made between the method of direct capitalization and the method of capitalization of income according to the rate of return on capital (Fig. 3.1). These methods are based on the analysis and assessment of net operating income and capitalization or discounting rates.
With direct capitalization, an assessment is made of the net operating income of the first year of use of the asset, provided that it is in the stage of generating typical income, and an assessment of the capitalization ratio for converting income into current value, and in the capitalization method based on the rate of return on capital, a forecast of the net operating income in the process of using the asset, including net income from reversion at the end of the forecast period, assessment of the discount factor and determination of the amount of the current values of these incomes.
Figure 3.1 - Classification of valuation methods by income.
These methods differ in the way they analyze and construct the income stream and the coefficients of their conversion into current value. In the direct capitalization method for estimating market value, the net income of the first year from the use of the asset is divided by the capitalization ratio obtained based on the analysis of data on the capitalization ratios of income of assets similar to the asset being valued. In this case, there is no need to assess the trend of changes in income over time, and when assessing the capitalization ratio, there is no need to take into account its components separately: the rate of return on capital and the rate of return.
It is assumed that the accounting of trends in all components of the asset being valued is embedded in market data. It should be noted that the direct capitalization method is applicable to evaluate existing assets that are used in the most efficient way and do not require large capital investments in repairs or reconstruction at the valuation date. When assessed by the capitalization method based on the rate of return on capital, the trend of changes in net income over time is separately taken into account and all components of the capitalization ratio are analyzed separately.
The direct capitalization method is a method for estimating the market value of an income-generating asset, based on the direct conversion of the most typical first-year income into value by dividing it by the capitalization coefficient obtained based on the analysis of market data on the ratio of income to the value of assets similar to the one being valued.
Capitalization method based on the rate of return on capital is a method of estimating the market value of an income-generating asset based on converting all the cash flows that it generates during the remaining economic life into value by discounting them to the valuation date using the rate of return on capital. extracted from the market of investments with alternative risk levels.
The method of capitalization based on the rate of return on capital, in turn, can have two varieties from a formal (mathematical) point of view: the method of discounted cash flow analysis (DCF analysis) and the method of capitalization using calculation models.
The discounted cash flow analysis method is a capitalization method based on the rate of return on capital, in which, to estimate the market value using the rate of return on capital as a discount rate, the cash flows of each year of operation of the asset being valued are separately discounted and then summed up. , including cash flow from its resale at the end of the ownership period.
The method of capitalization by calculation models is a method of capitalization based on the rate of return on capital, in which, to estimate the market value, the most typical income of the first year is converted into value using formalized calculation models of income and value, obtained based on an analysis of trends in their change in the future .
The net operating income that an asset generates is the difference between actual gross income and operating expenses.
In general, in accordance with the expectation principle, the mathematical expression for assessing the market value of an asset using the income approach has the following form:
(3.1)
Where V o - market value assessment, q — current period number, I q — net operating income q something period, Y— rate of return on capital (income discount rate), V P— cash flow from reversion, To— number of the last ownership period (When assessing a property, the forecast period is considered as the ownership period.)
In a real estate property, the non-depreciable part is the land plot, and the depreciable part is the improvement of the land plot. The land plot, as part of the Earth's surface, is not subject to wear and tear, i.e. from an economic point of view, a land plot should be considered as an endless (inexhaustible) source of income, the value of which can only increase over time. Improvements have a finite economic life - a period of time during which the amount of income that the object generates exceeds the amount of expenses for its operation A depreciable asset should also include investments aimed at acquiring the right to lease an asset over a finite period of time.
Thus, income I q (from the English word - Income) of some q-year can be divided into two components:
where is the return on investment (return on capital) and is the return on the initial investment (return on capital).
Income on investment in year q, in turn, can also be divided into two components: income on investment equal to the market value of improvements at the beginning of year q, and income on investment equal to the market value of the land plot in the same year : 
The rate of return on capital invested in land is equal to the rate of return on capital invested in improvements: Y L = Y B = Y.
Consequently, income on capital can be represented as the product of the cost of this capital by a single rate of return:
- from improvements
From (6.1.2) it follows that the income on capital attributable to improvements and the current market value are directly proportional to each other 1. In this case, income is positioned at the end of the year, and the cost of improvements is positioned at the end of the previous year or at the beginning of the current one. Improvements lose value due to normal wear and tear. Consequently, the income associated with improvements is also a decreasing function of time.
For objects that require certain capital investments for their improvement (vacant land plot, “unfinished”, reconstructed object, etc.), the initial investment from an economic point of view should be determined as the amount of unreimbursed investments V HU i.e. . the future value of the flow of capital investments (expenses) for the creation of an object as a source of income or, what is the same, accumulated by the date of operation of the income-generating asset at a certain percentage rate, the amount of costs for its creation
When assessing a land plot, it is necessary to determine the option for its best and most effective use, which is determined by the interaction of a number of factors.
Best use analysis includes studying alternative uses (development, development) of a land plot and selecting the optimal one. This takes into account the prospects of the location, the state of market demand, the cost of development, the stability of expected income, etc.
When assessing the value of a property consisting of a land plot and buildings, great importance is attached to the analysis of the best use, firstly, of the presumably vacant land plot and, secondly, of the land plot with existing improvements.
Analysis of a supposed vacant land plot is a necessary step in determining its value, and it is based on establishing the most profitable option for using the land.
Analysis of a land plot with existing improvements involves making a decision on the demolition, modernization or preservation of existing improvements on the land plot in order to ensure maximum profitability of the property.
The likely and most profitable use of the site ensures its highest value. Use cases must be legal, physically feasible, and cost-effective.
Let us name the main factors that determine the optimal use of land:
location is a factor that has a major impact on the cost of a land plot (the prospects of the location, transport accessibility, and the nature of the environment are taken into account);
market demand - a factor reflecting the relationship between supply and demand in the market;
financial feasibility - the ability of the project to provide income from the use of the land plot, which would be sufficient to reimburse investors’ expenses and ensure the expected profit;
physical suitability of the site - prospects for creating improvements - size, topography, soil quality, climate, engineering-geological and hydrogeological characteristics of the site, existing zoning, environmental parameters, etc.;
technological feasibility and physical feasibility - analysis of the relationship between quality, costs and timing of the project, the likelihood of natural disasters, accessibility of transport, the ability to connect to utilities, taking into account the size and shape of the site, for example, the size may be small for the construction of an industrial facility;
legislative (legal) admissibility - compliance of the option for using a land plot with current legislation. Identified as a result of an analysis of construction and environmental standards, restrictions on the number of floors, the presence of temporary bans on construction in a given location, difficulties in the area of historical urban development, possible changes in regulations, compliance with zoning rules, negative sentiments of the local population;
the maximum return (maximum property income and site value), which is determined by discounting the future income of alternative uses, taking into account the risk of the investment.
2.1.4 Increasing the efficiency of urban land use
Urban lands represent a special category. Their value is influenced by the size of the city and its production and economic potential, the level of development of engineering and social infrastructure, regional natural, environmental and other factors. In addition, there are specific legislation for this category of land.
The same factors can have opposite influences on the value of a particular site:
- - heavy traffic is undesirable for a residential area, but increases the cost of the site for trade purposes;
- - location relative to educational institutions and shopping centers, aesthetic advantages and amenities, taken into account when assessing land for housing construction, have virtually no effect on the value of areas oriented towards industrial development; Transport infrastructure and economic zoning are important to them.
In the previously functioning planned economy with the priorities of industrial development, the command-administrative distribution of “free” land led to serious disproportions in the development of the city and wasteful, unnecessary and even harmful for the city use of the most valuable urban land (including by enterprises and organizations), often leading to severe environmental problems. Once distributed, land is practically not redistributed, which leads to further aggravation of negative trends.
The main units used for comparison of land plots:
- - price per 1 hectare - for large areas of agricultural, industrial or residential construction;
- - price per 1 m2 - in business centers of cities, for offices, shops;
- - price per 1 frontal meter - for commercial use of land in cities. In this case, the cost of the site is proportional to the length of its border along the street or highway, with the standard depth of the site accounting for a small part of the cost;
- - price per lot - used to compare standard plots in shape and size in residential and dacha development areas;
- - price per unit of density - ratio of the building area to the area of the land plot, etc.
Most land resources are currently in state and municipal ownership. Practice shows that in market conditions, urban land is a valuable resource and can serve as a stable source of local budget income. City authorities determine the amount of land tax, the rental rate for land and the standard price of a land plot upon purchase, so the issue of increasing the efficiency of land use is relevant for them. So that land property is used more efficiently, i.e. brought maximum income from use and contributed to improving the overall investment climate, further development of market relations in the land market, orientation to the current market situation and market requirements are necessary.
So that land property is used more efficiently, i.e. brought maximum income from use and contributed to improving the overall investment climate, first of all, it is necessary to implement the processes of taxation, rental and purchase of urban land based on its market value. At the same time, a fair distribution of the tax burden is achieved, stimulation of efficient use and activation of investments in reconstruction and development in the process of restructuring the territory.
The results of the assessment of the urban area serve as initial information for solving the following problems:
* development of urban development policy and social planning;
ѕ formation of proposals for types of functional use of the territory, taking into account its quality;
ѕ formation of economic mechanisms for the placement of various land use options and investment and construction policies;
ѕ analysis of the consequences of options for the development and restructuring of the urban environment, optimization of municipal investments in the maintenance and development of the urban environment;
ѕ determination of the investment attractiveness of the territory as a function of the cost of urban land.
There are two views on the value of urban land:
urban designer in the process of functional zoning of the territory as a section of the city master plan;
appraiser in the process of developing a cadastral valuation of land.
The basis for the formation of cadastral valuation of land and functional zoning of the territory should be a comprehensive urban planning assessment of market value.
2.1.5 Land valuation methods
Normative method is to determine the standard price of land. It is used when transferring, purchasing land into ownership, establishing common joint (shared) ownership in excess of the free norm, transferring by inheritance or donation, obtaining a secured loan, withdrawal for state or public needs.
Urban lands are assessed taking into account the density of development, the prestige of the area, the nature of the surrounding land use, ecological condition, engineering and transport facilities, etc. The lands are divided into zones differentiated by the basic rates of land tax and the standard price of land (Law of the Russian Federation "On Payment for Land") . The standard price of land is fixed in the Land Cadastre.
The basis for determining the standard price of land: land tax rates and increasing coefficients, land tax benefits are not taken into account.
It is often necessary to evaluate an object consisting of a building and a land plot, when the latter has only lease rights. In this case, the cost of allocating a land plot for construction can be taken into account as the cost of land.
In market conditions, if the necessary information is available, it is advisable to use methods based on the analysis of market data. Order No. 568-r of the Ministry of Property of Russia dated 03/07/2002 approved methodological recommendations for determining the market value of land plots. As a rule, when assessing the market value of land plots, the sales comparison method, the allocation method, the land rent capitalization method, the distribution method, the residual method, and the method of dividing into plots are used.
Sales comparison method is the simplest and most effective valuation method, can be used to evaluate both actually vacant and supposedly vacant land; allows you to determine the specific price of a land plot by making percentage adjustments to the sales prices of analogues. In the absence of information on the prices of transactions with land plots, it is allowed to use supply (demand) prices.
Commonly accepted comparison elements for land plots: ownership, financing conditions, special conditions of sale, market conditions (change over time), location (distance from the city and roads, environmental characteristics), zoning conditions, physical characteristics (size, shape and depth of the plot, angular location, soil type, topography), available utilities, economic characteristics, best and most efficient use. When valuing land, you can use multiple units of comparison, adjusting the price of each and ending up with multiple values that define a range of values. Urban lands represent a special category; their value is influenced by the size of the city and its production and economic potential, the level of development of engineering and social infrastructure, regional natural, environmental and other factors.
The method gives fairly accurate results only in a developed information-open competitive market. The Russian land market does not meet these requirements; the value of a land plot cannot be determined based on information about sales transactions of analogue plots. Therefore, the assessment must collect all available information to apply all site assessment methods.
Ground rent capitalization method is based on the fact that if there is sufficient information on rental rates for land plots, it is possible to determine the value of these plots as the current value of future income in the form of rent for the land plot being assessed. Within the framework of this method, the value of land rent can be calculated as income from leasing a land plot under the conditions prevailing in the land market. As a regular income stream, land rents can be capitalized into value by dividing by the land capitalization rate determined from market analysis. The initial data for capitalization is obtained from a comparison of sales of leased land and rental values.
Based on the rental rate received, the market value of the site is determined using the income approach, usually using the direct capitalization method.
The capitalization rate is determined by dividing the value of ground rent for similar land plots by their sale price or by increasing the risk-free rate of return on capital by the amount of the risk premium associated with investing capital in the land plot being valued.
The main factors influencing the rental rate of a land plot: location characteristics, size, shape, surrounding type of land use, transport accessibility, engineering equipment.
However, in Russia, state and municipal lands are mainly leased, and the rent is calculated in accordance with the standard price of land, which is not equivalent to its market value. Currently, attempts are being made to lease land at its market value, but it is too early to talk about the objectivity of the results of the practical application of the land rent capitalization method.
Distribution method ( method of correlation, correlation, allocation) - determination of the component of the cost of a land plot based on the known ratio of the cost of land and improvements in the property complex. The method is based on the principle of contribution and the assertion that for each type of property there is a normal relationship between the value of land and buildings. This ratio is most reliable for new buildings; they are close to the best and most efficient use option. The older the buildings, the greater the ratio of land value to total property value.
To apply the method, reliable statistical data is required on the relationship between the values of land and all property of a particular type of real estate in a given market. However, the method is rarely used even in developed markets, as it has low reliability. The use of the method is justified in conditions of insufficient information on land sales. The resulting values are considered approximate.
Isolation (extraction) method is used to evaluate built-up land plots if there is information on transaction prices for similar real estate objects. Improvements to the land are commensurate with its most efficient use. The method involves the following sequence of actions:
- - definition of elements for comparison of objects;
- - determination of differences between each analogue and the object of evaluation;
- - calculation and making adjustments for each of the comparison elements;
- - calculation of the market value of a single property, including the land plot being assessed, by means of a reasonable generalization of the adjusted prices of analogues;
- - calculation of the cost of replacement or the cost of reproduction of improvements to the assessed land plot;
- - calculation of the market value of the assessed land plot by subtracting from the market value of a single real estate object, including the assessed land plot, the cost of replacement or the cost of reproduction of improvements to the land plot.
The allocation method is used when the contribution of improvements to the total price of the plot is small, it is recommended for evaluating suburban areas (for which the contribution of improvements is small and is quite easily determined), and is used in the absence of data on sales of land in the surrounding area.
The method is most effective in a passive market (there is no data on the sale of vacant land plots), taking into account the characteristics of the initial information and the model for obtaining the desired value. The cost of a land plot in general is determined by the formula:
WITH 3 = C - C U ,
Where Сз is the cost of the land plot;
C - cost of the object;
Su - cost of improvements.
Remainder method is based on the investment group's technique for physical components. The method is used to evaluate built-up and undeveloped plots, if it is possible to develop the assessed land plot with income-generating improvements. The value of land is determined by capitalizing the portion of income attributable to the land.
To determine the value of a plot of land, it is necessary to know the cost of the building, the net operating income of the entire property, and the capitalization rates for the land and for the buildings.
The main steps of the residual method for land:
the net operating income of the entire property is determined based on market rent and estimated operating expenses;
the net operating income related to the structure (building) is determined;
The net operating income attributable to the land plot is capitalized into the value indicator through the capitalization rate for the land.
It is difficult to predict income in conditions of insufficient economic stability.
Method of dividing into sections ( development approach) is used in assessing land suitable for subdivision into individual plots. Consists of the following steps:
- - determination of the size and number of individual plots;
- - calculation of the cost of developed plots using the comparable sales comparison method;
- - calculation of costs and development schedule for the expected period of sale and reasonable business profit;
- - deduction of all development costs and business profits from the estimated total sale price of the plots to determine the net proceeds from the sale of real estate after completion of development and sale of individual plots;
- - selection of a discount rate reflecting the risk associated with the period of expected development and sale.
Land development costs usually include:
- - expenses for laying out, clearing and grading sites;
- - expenses for the construction of roads, sidewalks, utility networks, drainage;
- - taxes, insurance, engineering fees;
- - marketing expenses;
- - profit and overhead costs of the contractor, etc.
In general, modeling the market value of land plots is carried out within the framework of the assumption that dynamic equilibrium has been achieved in the competition of various “rational” land users for the right to occupy a certain plot. With the balance of effective demand and supply on the simulated land market and limited supply, the issue of the most effective use of the site as free and taking into account the existing development is resolved. Modeling of potential rental income for various types of land use is based on the patterns of formation of rental effects of location and prevailing prices (sales and rentals). Considering the significant difference in cost indicators for plots located along the front of the city’s road network and located in intra-block areas, these plots are subject to mandatory division during assessment. The implementation of the principle of the most effective use occurs in conditions of competition for the use of real estate between various functional segments of the market, taking into account real restrictions on the volume of demand and the possible multifunctionality of the territory, as a result of which a set of land users is formed on each site.
However, if the competitive level of demand is higher for industrial use, then it is likely that the most effective use of the property may be to maintain the existing use while carrying out the necessary environmental works at associated costs. The theory of real estate valuation requires the analysis of a piece of land, assuming there are no buildings on it, even if the site is developed, to determine whether the current use is in demand and whether it should be continued or replaced. The method of determining the best and most effective use of the assessed property as an undeveloped land plot is based on the assumption that it does not have buildings or can be cleared of buildings as a result of their demolition.
The most efficient use of improved land
When analyzing the most effective use of an improved parcel of land, a legal authorization study is aimed at examining whether the real estate in question complies with existing regulations for development or other land use and how such compliance or nonconformity affects the value of the property. At the same time, many of those public and private restrictions that were considered when checking the legal permission to use the land as free, but from the point of view of existing improvements, are examined.
Generally, an existing use is legally permitted because it was carried out in accordance with applicable rules, regulations and restrictions.
Efficiency of land use
Market Analysis by a Leading U.S. Food Retail Company Market analysis can be divided into four functional tasks: field analysis, quantitative analysis, qualitative analysis, synthesis (see Figure 16-2). Within the framework of each of these tasks, certain goals are realized.
The first goal is to identify those supply and demand factors that influence the cost of a particular land use option. The “target market” must be defined. The latter involves identifying those users who are most likely to buy or rent this property.
Attention
For example, the target market for two-bedroom apartments might be young professionals and married couples without children. Once the target market is identified, amenities that can provide a “competitive differential between the property being assessed and all other properties are analyzed.
20. land valuation: analysis of the best and most efficient use of land.
The title to this property may suffer from certain defects. A neighboring landowner may own a building encroaching on the property.
Info
There may be burial grounds or historic buildings on the site that are not subject to demolition. If the analyst believes that there may be legal restrictions that will affect the use of the land, then he should obtain an opinion from a qualified, licensed lawyer. Resource quality of a site Resource quality of a site is functionally related to its capacity and efficiency in combination with other production factors.
Capacitance is a measure of how many factors can be applied to a site. An example would be deciding how many storeys a building should be built on a site: five-story or ten-story.
Analysis of the best and most efficient use of real estate
Important
These factors are usually considered in testing for maximum productivity. Very often, tests of legal authorization, physical feasibility and financial feasibility lead to the conclusion that the existing use can be continued.
However, each of these tests could also consider alternative uses or certain actions in relation to existing uses, and therefore the corresponding costs, in order to make the real estate being valued more valuable. It is these costs that become the subject of analysis when studying maximum productivity. If changes to real property increase or maintain existing value, then those costs will contribute to the highest productive use and this should be reflected in the highest productive use determination.
Best use analysis
In this case, there will be costs for demolition and disposal of the existing facility. In practice, a potential property owner will only redevelop a site if the residual value of the buildings is low.
Depending on how close in time the selected use requiring new construction is to the valuation date, the existing use may be considered an intermediate use. Thus, if, according to the plan for the expansion of urban land, cottage construction will reach the analyzed land plot in five years, and the period required for the demolition of existing buildings and the construction of a new cottage is one year, the four-year operation of the existing industrial property is considered as an intermediate use.
Best Use Analysis Criteria
Maximum efficiency: consideration of which of the financially feasible uses will produce the maximum net income or maximum present value. In order to correctly use assessment approaches, as well as give an answer about the feasibility of the continued existence of improvements available on the site, determining the method of best and most effective use is carried out in 2 stages: 1.
For the land plot as free; 2. For a land plot with existing improvements As a general rule, the turnover of land plots is regulated by civil legislation, unless otherwise established by land, forestry, water legislation, legislation on subsoil, on environmental protection, and special federal laws.
Analysis of the best and most efficient use of land
The topography of the site is measured, slopes that are not subject to development, and differences in the levels of the site are noted. Soil and subsoil samples taken at various points are analyzed. The developer needs to know the load-bearing quality of the soil and its drainage properties. Load-bearing quality determines what types of buildings can be placed on the site and what kind of foundation should be placed under them.
It is necessary to determine whether there are rock formations on the site that would require expensive blasting to remove. The drainage properties (permeability) of the soil determine its ability to absorb water.
Any drainage problems are identified. The availability of utility networks and the level of provided utilities are checked. It is necessary to identify any external objects whose existence may create inconvenience and harm the planned development.
2. real estate valuation
Architectural expressiveness is achieved by the correspondence of the shapes and volumes of the building to its purpose, the general appearance of the building, the proportionality of its parts, the use of appropriate finishing materials and high quality work. At the same time, the aesthetic qualities of the building can be raised to the level of art. The requirement for efficiency is imposed on all buildings and is that if all technical requirements are met, its cost, calculated per 1 m2 of area or per 1 m3 of volume, does not exceed the established limit. Reducing construction costs is one of the most important national economic tasks.
Thus, if a municipality has adopted the Land Use and Development Rules (hereinafter referred to as the Rules), then the land plots falling within the same territorial zone (subzone) and the residential buildings located on them fall under the same legal regime of use, construction and reconstruction (it doesn’t matter if they are dachas). , garden, for private household plots or individual housing construction). Where the Rules have not yet been adopted, the specified parameters for individual housing construction and private household plots are determined by the relevant municipal officials issuing construction permits, guided by dozens of disparate regulatory legal acts of varying legal force and industry affiliation, as well as considerations not related to law .
2 most effective ways to use land
Reducing the cost of a building can be achieved by rational planning and avoiding excesses when establishing the areas and volumes of premises, as well as in interior and exterior decoration; selection of optimal structures taking into account the type of building and its operating conditions; the use of modern methods and techniques for the production of construction work, taking into account the achievements of construction science and technology. To select economically feasible solutions, it has been established to divide buildings by capital into four classes, depending on their purpose and significance. At the same time, Class I includes buildings for which increased requirements are imposed, and Class IV includes buildings for which minimum requirements are acceptable.
The choice of method depends on the degree of reorientation of the actual purpose of the property being valued, the level of risk of the option under consideration, the required rate of return and capital recovery period, and the timing of the implementation of the proposed option for using the property. The type of use that provides the greatest profitability of the land is the most effective.
The basis of all methods used for determining the value of a land plot in order to select the most effective option is the so-called residual technique. Income from land is considered as the balance between the total income generated by real estate and those amounts of income that are provided by attracting labor, capital, fixed assets (functioning buildings and structures).
Since the appraisal activity involves determining the market value, the analysis of the most effective use identifies the most profitable and competitive use of a particular property.
The cost basis of any real estate property is the cost of the land plot. The buildings and structures located on it may be changed, but the basic characteristics of the site usually remain the same. At the same time, the income of a particular site depends on the efficiency of its use. An investor, when choosing a land plot on a specific market, understands that the difference in the cost of various plots is explained by their quality characteristics.
Analysis of the most effective use of a property involves conducting a detailed study of the market situation, the characteristics of the property being valued, identifying options in demand by the market that are compatible with the parameters of the property being valued, calculating the profitability of each option and estimating the value of the property for each use option. Thus, the final conclusion about the most effective use can only be made after calculating the cost.
The best and most efficient use of a property is the use of a vacant or developed plot of land that is legally possible and properly designed, physically feasible, provided with appropriate financial resources and provides maximum value.
The optimal use of a piece of land is determined by the competing factors of the particular market to which the property being valued belongs, and is not the result of the subjective speculation of the owner, developer or appraiser. Therefore, the analysis and selection of the most effective use is, in fact, an economic study of market factors that are significant for the object being valued.
The type of use that provides the greatest profitability of the land is the most effective. The basis of all methods used for determining the value of a land plot in order to select the most effective option is the so-called residual technique. Income from land is considered as the balance between the total income generated by real estate and those amounts of income that are provided by attracting labor, capital, fixed assets (functioning buildings and structures). The cost of a land plot, in turn, represents the difference between the total cost of the entire property and the residual value of buildings or the costs of their construction.
The best use of real estate can either be achieved on the basis of existing buildings, or involve the construction of fundamentally new improvements, which requires consideration of the land plot as vacant. Based on this, appraisers use two techniques when analyzing the best use of real estate:
The most effective use of the site as an undeveloped one;
The most effective use of the site as a built-up area.
There are the following main reasons for determining the most effective use of land as undeveloped:
1. Isolation in the value of real estate the value of only the land plot.
2. Using the comparable sales method to value developed land.
3. Calculation of loss in value due to external obsolescence.
4. Assessment of the real value of land as part of a real estate property that is suboptimal for a given site
The analysis of the most effective use of a built-up area is done for two reasons:
1. Identification of the type of use of the property that provides the highest total return on invested capital.
2. Identification of real estate objects on the market of the same purpose with a comparable level of efficiency of use.
Let's consider the difference between the most efficient use of a site without buildings and a property with buildings using the example of industrial real estate that has toxic emissions. The area in which the analyzed object is located, due to its natural characteristics, is being developed as a suburban residential area.
The maximum efficiency of using a site without buildings will most likely be based on its use as a residential cottage. In this case, there will be costs for demolition and disposal of the existing facility. In practice, a potential property owner will only redevelop a site if the residual value of the buildings is low.
The method of determining the best and most effective use of the assessed property as an undeveloped land plot is based on the assumption that it does not have buildings or can be cleared of buildings as a result of their demolition. As a result, the value of the land is determined based on the selection of possible use options that ensure the profitability of real estate, and
selection of parameters of real estate objects in accordance with a specific purpose.
The option of using a plot of land as undeveloped has two main varieties:
1. Using a plot of land for speculation, that is, for selling it without improvements to an investor who will subsequently develop it in accordance with market requirements or his own preferences. This option is applicable when real estate markets are oversaturated.
2. Development of the land plot with new buildings and structures, including:
" development without intermediate use, if a new use is being considered and accepted by the market at the date of analysis;
"development with intermediate use involves the temporary preservation of an existing use option until a new option is in demand by the market, based on the forecast of the market situation; "dividing or combining a land plot to achieve the most effective use; "development of a site with new buildings, similar in purpose and physical parameters to the existing object. The most common situation for assessing real estate on the basis of an undeveloped site is its conditional undevelopment. This is due to the fact that on the analyzed site there is a building that affects the value of the object. In In this case, the choice of the option for the most effective use of the site as undeveloped takes the form of investment design at the decision-making stage.
In this case, the appraiser needs to answer a number of questions:
1. How can a plot of land be used if it is not actually developed or can be cleared of existing buildings?
2. What type of building or other structures supporting the selected use can be constructed on this land, based on its physical and other characteristics, and in what time frame?
3. Should the existing use be considered as an interim use?
For example, if construction work is required to achieve the most efficient use of land, the appraiser should determine:
Costs of demolition of existing buildings;
The type of the most effective use of the property (office, hotel, warehouse, etc.), corresponding to current market standards and including elements at the most reasonable prices;
Characteristics of optimal buildings that should be erected to maximize the use of the potential characteristics of the site (number of floors, optimal area of functional units, number of these units, etc.);
Level of rent and operating costs;
The cost of buildings being constructed, taking into account financing costs.
The most effective use of a land plot as a built-up one presupposes the preservation of existing buildings on the analyzed site. The option of using a plot of land as a built-up one has two main types:
1. maintaining the existing purpose of the property being assessed;
2. changing the existing purpose of the property being assessed.
In both cases, the need and possibility are considered:
Maintaining the existing volume and quality of services provided by real estate;
Carrying out construction work on the reconstruction of buildings to improve their class and change rental rates;
Carrying out construction work to expand the area through additional extensions or the construction of additional floors;
Reducing existing space through partial demolition.
The appraiser, comparing the existing use option for buildings located on the land plot with the optimal building option, must receive an answer to the following questions:
1. Is it advisable to continue to operate the building in its current condition?
2. Which building reconstruction option should I choose: reconstruction, expansion, partial demolition?
3. How and in what time frame will the costs be recouped?
The most optimal option for using buildings will ensure the maximum cost of investment-attractive real estate, taking into account the rate of return determined in accordance with the risk of the chosen option. It is clear that the risks of maintaining the existing use of the property and different redevelopment options will not be the same.
The assessment report must separate the best use of the site as undeveloped from the best use of the site as developed. The assessment report must clearly identify, explain and justify the purpose and conclusion for each use.
