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Value of Improved Land vs. Vacant
Land
By M. Robert Goldstein and Michael J. Goldstein
In the fixing of values of improved property in both condemnation
and tax certiorari proceedings courts usually fix separate
values for land and buildings. Most of the time the value
of the property is fixed as a whole either by direct comparison
to sales or by capitalization. The division is then made by
fixing a land value independently, deducting it from the total
and applying the residual value to the building. The higher
the land the lower the building and visa versa. Most appraisers
use this building residual format to the appraisal.
Concept of Valuation
Where the issue really is only the total value the accuracy
of the breakdown is only of academic interest. Where, however,
the total is a summation of the value of the land and building
independently fixed, the manner of fixing these independent
units is of great moment. It is then that an interesting,
but not totally accepted, concept of land valuation must be
considered. That is whether the value of vacant land available
for its highest and best use is the same as land which has
been improved to its highest and best use, and further, whether
land under utilized is as valuable as land which is being
fully utilized.
It is in the framework of this concept that lies what we
believe is the true explanation of such cases as Levine
v. State (13 N.Y. 2d, B7, 242 N.Y.S. 2d 193); Arlen
of Nanuet v. State (26 N.Y. 2d 346, 310 N.Y.S. 2d 465);
Matter of City of New York [Atlantic Improvement Corp.]
(28 N.Y. 2d 465); Matter of City of N.Y. [North Central
Brooklyn High School; Chestnut Properties Co.] (39 A.D.
2d 573, 332 N.Y.S. 2d 19), where land in various stages in
the process of development was being valued.
Value of ‘New Acreage'
It is also consistent with the rationale of such cases as
Hewitt v. State (18 A.D. 2d 1128, 239 N.Y.S. 2d 522);
Clearwater v. State (30 A.D. 2d 883, 291 N.Y.S. 2d
989 aff'd 23 N.Y. 2d 1006, 299 N.Y.S. 2d 448); Valley
Stream Lawns, Inc., v. State (9 A.D. 2d 149, 192
N.Y.S. 2d 805); Waldenmaier v. State 33 A.D. 24 75,
305 N.Y.S. 2d 381) which deal with the value of "raw
acreage" with a potential for subdivision into building
lots. It helps to explain cases as In re Park Row Slum
Clearance Project (17 A.D. 2d 534, 236 N.Y.S. 2d 683),
and Matter of City of New York [Fairfield Trust] (19
A.D. 2d 44, 241 N.Y.S. 2d 44) which gives the greater value
to land in use as a parking lot than adjacent vacant land
and Matter of City of New York [Park Row Slum Clearance]
(N.Y.L.J., June 29, 1965, page 13, Sup. Ct. N.Y.C., Sp. Term
Part XII, Carney, J.), which treats land under inadequate
buildings as "detrimented" and less valuable than
land freed of that detriment and put to a better use.
The subject was illustrated by a recent series of transactions
and appraisals which came to our attention. In 1966, a parcel
of vacant land was purchased to build a motel at a price of
$7 per square foot. The motel was finished by 1968. That same
year and appraisal was made for the purpose of permanent financing.
The appraiser, having actual construction costs as a guide
to fixing building value, used a land residual technique to
get land value. He was able to fix total value based upon
the motel operation and comparison to sales of similar motels.
The land value in the appraisal was $22 per square foot, based
upon a land residual approach. Assuming the validity of the
total appraisal, and there was every reason to assume its
validity knowing the total cost of construction and recognizing
the validity of the concept that "with respect to new
buildings that cost of construction is a highly significant
indicator of value" (Joseph E. Seagram & Sons,
Inc., v. Tax Commissioners, 18 A.D. 2d 109, 238 N.Y.S.
2d 328, aff'd 14 N.Y. 2d 460) the land residual appraisal
appeared to be accurate. The question then is what happened
to increase land value from $7 to $22 in two years?
Basic Explanation
We think the explanation is really rather basic. Land is
bought for use, now or future. Its value is predicated upon
the income it produces (or its equivalent in terms of use),
the higher the income the greater its value. To the degree
that land is under utilized it produces less income and to
that degree it is worth less in use. To the degree it is utilized
to its greatest extent it realizes its greatest potential
value. To the degree that the use is only potential and requires
an investment in time and/or money and/or effort and/or ability
the land is worth less than if presently being utilized since
each of these elements has a value in terms of money. They
are in a sense further investments in the land to produce
a return and they must be compensated for. It appears obvious
that land with this further investment put into the land so
as to bring it to present productivity is more valuable than
land yet to be brought to that state. Buyers react that way.
They will pay more for subdivided land than raw land, they
will pay more for a "package" (with plans, financing,
etc.) than raw land.
This, of course, is the real message of Arlen of Nanuet,
Inc, v. State, supra, Levin v. State, supra. There
the courts point out that land brought to a certain point
of development may be more valuable but not merely measured
by the capitalized value of a projected income less cost to
complete. However, it is a misapplication of the principle
of these decisions to treat value in such cases merely as
equivalent to cost of land plus those out of pocket expenditures
to advance the land toward productivity which were expended
to the date of valuation. This understates the true value
of the property since it ignores what has been called "The
Entrepreneur — The Missing Factor" by Sanders A.
Kahn in The Appraisal Journal of October, 1963. Others
call it the profit of the land entrepreneur. While the full
profit is not yet realized which comes from a completed project,
certainly part of it is, as part of the project has been completed.
Very often the planning and financing carries the greatest
risk and work. Construction, particularly pursuant to approved
plans, by a general contractor, is often much less of a problem.
While one does not expect a purchaser to pay the full profit
of a partially completed venture, one does expect that part
of the profit is paid for a partially completed job.
Other Cases
It is also the rationale of cases such as Hewitt v. State
which refuse to equate the value of "raw acreage"
with finished plot value less only the cost to create these
finished plots. Using such a method would be to ignore the
expected profit of the entrepreneur and the time element and
cost holding the land.
Yet, despite the recognition of the validity of the principles
by most appraisers when they value improved property, they
persist finding their land value from sale of vacant land.
Where this really plays no part in the fixation total value,
as in the use of an overall capitalization rate, no harm is
done, for the lower the value of the land, the higher is that
of the building.
Yet, the use of such lower land sales to arrive at a land
value does compel a lower total value where capitalization
is by a divided capitalization rate (a rate applicable to
land with that rate plus a recapture of investment factor
for the depreciating asset, the building) and the result is
a lower overall value. The same lower result obtains where
the value is by summation as in a specialty building or where
a value per square foot is independently applied for the building
as often is done in industrial or garage type buildings. It
also results from an effort to fix the value of a parking
lot by adding the cost of parking lot improvements to the
cost of acquiring land which has been detrimented in value
by being under an inadequate improvement.
Vacant land just cannot be equated in terms of value to properly
improved land.
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