Valuing the land component of improved investment property

Abstract

PurposeMany taxing authorities use unimproved land (site) values as a tax base. In highly developed urban areas this may require the use of indirect valuation methods, such as an extraction technique to arrive at the land value. The purpose of this paper is to propose that the land extraction (residual) valuation calculation of an investment property should incorporate productivity variables, rather than cost based figures, in order to simulate market value principles.Design/methodology/approachThis paper examines the assessment of the land component of investment property as an ad valorem tax base. It justifies a valuation methodology using the market comparison approach before developing a model to meet specified criteria. The model incorporates productivity based benchmarks and differentials appropriate for shopping centre properties. The model is then tested on an Australian shopping centre.FindingsThis paper found that the land value component of a major shopping centre in Australia could be derived from comparable vacant and improved sales using the variables of moving annual turnover (MAT) and gross lettable area (GLA) as key value determinants.Research limitations/implicationsThis exploratory research identified a model that is appropriate for major shopping centres in Queensland, Australia. The model could form the framework for other types of investment property but the key productivity determinants would require re‐examination.Practical implicationsThis study provides a practical solution to an ongoing valuation problem arising from the rating legislation in Australia, which requires the determination of site value for all property types.Originality/valueThis paper uses productivity variables to assess the site value of investment property. This innovative methodology can provide a more accurate appraisal of site values.

Improving US real estate returns with cost segregation

“…Ozdilek (2016) defended the separability thesis for residential properties and suggested methods to improve reliability. Boyd and Boyd (2012) supported the market comparison approach for land valuation and recommended improvements. Given that classifying property into its components is common in the USA and allowed for tax purposes, investors should examine how property classification, or cost segregation, can increase returns.…”

Practice briefing – Automated valuation models (AVMs): their role, their advantages and their limitations

“…For example, concerning the land valuation of remote locations, AVMs should rely on income potential rather than on sales data (IAAO, 2003b). Since Gwartney (1970), many authors have reported on AVMs for land (Baldi, 2013;Boyd and Boyd, 2012;Burrough, 1989;Clapp, 2003;Demetriou, 2016), and patents have also been filed.…”

Goodwill hunting

“…While a property’s sale price is not necessarily the same as its value, significantly, if a house is desirable to buyers (it has goodwill), this will positively impact a buyer’s decision to purchase it, together with its price, as well as influencing how long it takes to sell that property. In this way, a residential property, similar to that of many businesses or shopping centres (Boyd and Boyd, 2012), has its goodwill value incorporated within its market value. In the context of this research, a property’s goodwill cannot be quantified from trading accounts but is connected with the (ab)normal relationships of that property’s owner with the neighbours, which may either positively or negatively affect that property’s value and saleability.…”