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Estimating Land Values by Ted Gwartney, MAI
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Land Market Value | = | Land Rental Value - Land Taxes Capitalization Rate |
For example, assume that the land rent for a site is $1,800, the land taxes are $300 and the capitalization rate is 6%, what would the land market value be?
Land Market Value | = | Land Rental Value - Land Taxes Capitalization Rate |
Land Market Value | = | $1,800 - $300 6% |
= | $1,500 6% |
= | $25,000 |
What would result if a larger portion of the land rent were collected? Let's consider $1,650 rather than $300.
Land Market Value | = | $1,800 - $1,650 6% |
= | $150 6% |
= | $2500 |
If any three factors are known, the fourth can be calculated. The term land rental value can be used instead of market value, or vice versa, in the discussion of land assessment systems.
If only a small amount of land rent remained to be capitalized after land taxes were collected, land could have a lower market value. It would, however, continue to have the same rental or productive value to the community
Not only is land rent a potentially important source of public revenue, the tax on land is a means of limiting excessive speculation in land prices. This would ensure that the equal opportunity to be productive would be available to all citizens. With limited money to invest, people could invest in productive equipment and wages, rather than in high land prices which produce no additional tangible wealth.
The formula indicates how simple it would be to translate market value to rental value or vice versa, depending upon the policy of any nation. In the United States and most other countries, land values are estimated and assessed. Land taxes, however, are a portion of land rent. The balance of this paper will explain how land values are estimated.
PRINCIPLES OF LAND ASSESSMENT
An appraisal is essentially an expert opinion of the market value of a site; the assessor must present one that is supportable and comprehensible. The assessor must develop and use specific terminology suitable and pertinent to land appraisal.
Land is the entire non-reproducible, physical universe, including all natural resources. A land site includes everything within the earth, under its boundaries and over it, extending infinitely into space. In addition to a location for a house or building, a land site would include the minerals, water, trees, view, sunshine and air space. The shape of the site can be described as an inverted cone with its apex at the center of the earth and extending upward through the surface into space.
In appraisal, a land site is a parcel of land that is finished and ready for use under the standards prevailing in its area. It might have the necessary public utilities in place, like gas, electricity, water, telephone and sewer, with streets, sidewalks drainage and grading completed.
The assessment process is essentially the valuation of rights to use or possess land sites. Other kinds of rights include subsurface mineral rights, riparian (water) rights, grazing rights, timber rights, fishing rights, hunting rights, access rights and air rights.
The assessor bases his estimate of land market value upon basic economic principles which serve as the foundation of the valuation process. There are many economic principles which people and assessors must understand and use when implementing judgment to estimate land market values. It is necessary to discuss a few of the more important principles.
The principle of substitution maintains that the value of a property tends to be set by the price that a person would have to pay to acquire an equally desirable substitute property, assuming that no expensive delay is encountered in making the substitution. A person would pay no more for a site than would have to be paid for an equally desirable site.
The principle of supply and demand holds that the value of a site will increase if the demand increases and the supply remains the same. The value of the site would decrease if the demand decreased. Land is unique, since the supply is fixed; its value varies directly with demand.
The principle of anticipation contends that land value can go up or down in anticipation of a future event occurring, or a future benefit or detriment.
The principle of conformity contends that land will achieve its maximum value when it is used in a way that conforms to the existing economic and social standards within a neighborhood.
UTILITY, SCARCITY AND DESIRABILITY
Land value can be thought of as the relationship between a desired location and a potential user. The ingredients that constitute land value are utility, scarcity and desirability. These factors must all be present for land to have value.
Land that lacks utility and scarcity also lacks value, since utility arouses desire for use and has the power to give satisfaction. The air we breathe has utility and is generally considered important, since it sustains and nourishes life. However, in the economic sense, air is not valuable because it hasn't been appropriated and there is enough for everyone. Thus there is no scarcity -- at least at the moment. This may not be true in the future, however, as knowledge of air pollution and its effect on human health make people aware that clean and breathable air may become scarce and subsequently valuable.
By themselves, utility and scarcity confer no value on land. User desire backed up by the ability to pay value must also exist in order to constitute effective demand. The potential user must be able to participate in the market to satisfy their desire.
LIMITATIONS ON LAND OWNERSHIP AND USE
While land is the gift of nature, certain legal, political and social constraints have been imposed in most societies throughout the years. Every nation imposes certain public limitations on land ownership and use for the common good of all citizens. Four forms of governmental control include:
FACTORS THAT CONTRIBUTE TO LAND VALUE
The physical attributes of land include quality of location, fertility and climate; convenience to shopping, schools and parks; availability of water, sewers, utilities and public transportation; absence of bad smells, smoke and noise; and patterns of land use, frontage, depth, topography, streets and lot sizes.
The legal or governmental forces include the type and amount of taxation, zoning and building laws, planning and restrictions.
The social factors include population growth or decline, changes in family sizes, typical ages, attitudes toward law and order, prestige and education levels.
The economic forces include value and income levels, growth and new construction, vacancy and availability of land. It is the influences of these forces, expressed independently and in relationship to one another, that help the people and the assessor measure value.
HIGHEST AND BEST USE OF LAND
A land site should be made available to the users who can make the highest and best effective use of the site and maximize the site benefits for all people. The proper system of assessment and taxation of land can provide for the proper economic use of the land. A high land tax on an improperly improved site tends to cause the site holder to either better improve his site to obtain greater return with which to pay the land tax, or to look for someone else with the means to properly improve the site. A land tax can also provide the source of public revenue which the local governing body could use for the benefit of all people. Before an assessment can proceed, the highest and best use must be determined for each site.
The economics of production should provide the atmosphere for the most efficient use to be made of all land. The assessment process is based on the highest, best and most profitable use of land. The highest and best use considers only the uses that are legally permissible (meeting zoning, health, and public restrictions), physically possible (has adequate size, soil conditions, and accessibility), and is economically feasible (income is anticipated). The use that meets these criteria and produces the greatest net earnings (best returns) is the highest and best use.
PROCEDURES FOR LAND ASSESSMENT
An assessment (or an appraisal) is essentially an opinion of value made by an experienced knowledgeable person. Specialists are known as assessors who base their estimate of land market value, upon basic economic principles which serve as the foundation of the valuation process. Anyone can learn how to do this and learn to do it better.
The assessment or appraisal process is an organized procedural analysis of data. This procedure involves six specific phases, each of which contains numerous procedures.
1. Defining the Assignment
The goal is to estimate the market value of all land sites within a given district. This will include manufacturing enterprises, apartments, commercial enterprises, single family home sites, government land, farms and all other land and natural resources of various descriptions.
The assessor should be able to support his estimate of land market, both in discussion and in writing. The assessor must define and use specific terminology suitable and pertinent to land appraisal. Economic Land Rent was defined as the value paid or imputed for the exclusive right to use a land site location or natural resources for a period of time, generally one year.
2. Determining the Data Required and Its Source
A land market assessment system is based upon data related to land attributes. These data generally include maps; aerial photographs; descriptions of physical characteristics like size, shape, view and topography; permitted uses; economic usefulness; present uses; available utilities; proximity to town centers or employment; and site improvements like streets, curbs, gutters, sidewalks and street lights. Governments have much of this data available in the different agencies.
How are values or acquisition fees currently being determined and paid by land occupiers? Are records being maintained for the values or fees that are currently being paid by land occupiers? If land market values have been estimated in the past, attempts should be made to build upon the existing systems while making constant improvements to data collection.
3. Collecting and Recording the Data
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