Introduction
One of the majorities of questionable areas of assessment hypothesis narrates to the use and utilization of the subdivision development method (SDM) as resources of approximation for market price of unripe land. A lack of success to understand under what conditions to apply to the SDM, how to correctly evaluate the kinds and stages of risk connected with the subdivision procedure in the perspective of highest and best use, and the condition for developer’s income are the most difficult features of the method.
Frequently, the SDM has been a picture of uncertainty. Deficiency in reliability of the function of the SDM and the various names given to the method has failed to create an integrated body of valuation theory. The various names set to the method have caused a huge deal of uncertainty and misinterpretation. A critical report of Canadian and American case law exposed the subsequent list of names used to distinguish the SDM: anticipated use method, cost development method, developer’s residual approach, development approach, development cost or contractor’s approach, development method, development value approach, land development method, lot method, residual approach, subdivision approach, subdivision method, subdivision residual approach.
Regularly, land value estimation originating from the SDM is considerably higher than those in the same way resulting from the sales comparison approach (SCA) (direct comparison approach). Not astonishingly, the courts have display a preference for the SCA. In hypothesis, if both the SDM and the SCA are used properly, the value approximation should be the same. It is the deviation in worth that has confronts the dependability and significance of the SDM, particularly in the area of expropriation and disapproval.
Overview of the SDM
The measure concerned in the implementation of the SDM is listed as follows (Appraisal Institute, 2001):
- Precisely decide on the highest and best use of the property,
- Generate or confirm a manageable subdivision development plan,
- Establish the point in time and expenditure for endorsement and progress (as well as lessening needs and costs of obtaining advance entitlements),
- Predict a sensible pricing timetable over time,
- Predict exactly the lot interest rate and price mix (as well as the accurately supported projection of area or market expansion over the absorption stage),
- Correct approximation of the process or aspects of land development and correlated costs,
- Estimate marketing and related investment operating cost above the absorption period,
- Estimation of the yearly real estate taxes,
- Incorporate fixed cost and a capitalist income payment in the discount rate and/or inline of item share for capitalist earnings,
- Approximation of the suitable reduction rate that is reliable with the selection of the line item allotment for capitalist revenue.
The SDM, adding up to being extremely multifaceted, time-consuming, and expensive to prepare, when applied on its own without an abundance of dependable market information, can be the least precise raw land valuation method (Boykin, 2001). A lot of bases has been advanced as to why the SDM fall short to meet the criteria as an adequate valuation model in the approximation of the market value of the raw property:
There is no agreement in the assessment or development community as to how the valuation model should be carried out (Brueggeman, 1989), or whether the standard has any suitability in the valuation of raw land. There is no agreement among the assessment and development communities as to how developer’s income should be calculated (Duvall, 2000). The many measures, together with absorption estimation, in the valuation model are vulnerable to an undesirable margin of mistake that can direct to an undependable indication of value. The evaluation of raw land as if subdivided into completed lots is an imaginary exercise that regards the causal value of non-existent development and the outlook of non-existent lots at retail prices. The estimate of value produced by the SDM, when applied as the lone formula to value, is not vulnerable to confirmation, as it cannot be considered for its sensibleness by way of contrast to transactional data.
The valuation model presumes a developer as the potential buyer of the raw area and building of a subdivision although a genuine developer would have no concern in raw land not zoned to authorize subdivision. even if the raw area were obtained according to rezoning, the building of infrastructure development would not likely begin until there is enough number of provisional builder presales of finished lots had been accomplishing to justify subdivision construction of the area in total or infraction (Eaton, 1995).
The standpoint on market value
Market value is not established on an ‘as if’ or ‘assumptive’ basis. An ‘as if’ or ‘assumptive’ principle entails a dependent and potential value, which is not in agreement with an ‘as is’ market value at the effective date of assessment. An argument arises as to the sense of ‘market value’ Fanning, 1994 in Jabbour v. Bassatne, 673 A.2d 201 (D.C. App. 1996) over the valuation of raw land. The appeals court ruled that (a) sensible person would presume land to be equal to particular cash only in its present ( ‘as is’) state on the competitive market, not after the expensive change as yet unmade had curved it from raw land into a ‘developable’ state…(and made reference to the trial court’s observation that) “the wise, well-informed buyer would know the existing situation of the land and pay a rational price for the land, not a value that assumed the land to be in a ‘different’ or ‘more developed’ state.”
Applicability of the SDM
Application of the SDM is mainly suitable and practical in the following situations:
It is mainly applicable when the property is not in raw estate and an actual subdivision of officially profitable individual completed lots is present on the ground under an executed subdivision or improvement agreement, and subdivision is the highest and best use (Anglyn, et al, 1988).
It is practical as a means of trying the economic possibility of purchasing a raw area at a particular price under circumstances of assumed confidence where all of the results of the subdivision method is to base on the affirmed cost and income inputs and economic objective of the developer (Kimball et al, 1986).
It is significant for use in advance the guarantee of development funding, where it is serious to plan mortgage advances to match up to the development stages of a subdivision and link loan reimbursement, with a limited release, to lot sales (absorption), thus making sure that the lender has sufficient security at all times (Munson, 1994).
In a lot of criticism and expropriation cases, the SDM has been at random applied under the wrong situations or in the wrong way: If all of the lands that have been assessed by the development approach were subdivided, there would be sufficient subdivision lots on the market to last hundreds of years and little, if any, farmland left in the United States (Guntermann, 1994).
As a tract of land advances lawfully and physically from a condition of raw acreage to a finished subdivision, with every infrastructure enhancement in place and a verified market for new housing (finished lots), the SDM also advances from non-recognition to recognition by the courts. These two limits of the subdivision procedure were discussed in the United States v. 147.47 Acres of Land, 352 f. Supp. 1055, 1060 (M.D. Pa. 1972).
It might sound that even though the highest and best use of assets is for a housing subdivision if no consequential measure has been taken in that way, viz., building operating cost and actual lot sales, in that case, a ‘lot method’ appraisal or a ‘developer’s residual’ approach (Subdivision Development Method), as it is also recognized, would be unsuitable. The position of the subdivision and its accessibility for sale within the realistically predictable upcoming was an actual and real one, definitely not imaginary, isolated, or tentative. Someone about to buy the land on…the date of disapproval would have to consider it as having the highest and best use as a subdivision and, in deciding what purchase value he would be agreeable to pay, would have to think about all features, together with a sales price for individual lots and extra cost of development, in arriving at his decision…This is not a case where a property owner (or appraiser) dreamily consider the use to which his possessions may be placed at some vague future time but somewhat one where the assets are geographically right for improvement; is situated in a successful developmental vicinity; has been subdivided into lots according to a duly certified map; has been apparent and marked and enhanced with the formation of a spring-fed lake, the building of way inroads, and the digging of a deep well adequate to provide water to150 residence; and where definite sales of lots as recognized on the map have been in position, the actions of which surround building limitations well-matched only with a residential estate development. And, viewing subdivision as a dynamic process in the context of the weight that the ‘lot method’ should be given, the Supreme Court of Connecticut in Leona Robinson, Executrix (Estate of Walter Langer), et al v. Town of Westport, 14272-222 Conn. 402, 610 Al2d 611 [1992], stated: As the advocate of a theoretical highest and best use is capable to development beside the range from raw land with little or no improvements to, eventually, a completed subdivision, the weight to be dispensed such confirmation will be improved. And, as a measure for subdivision development, a fairly comparable outlook was expressed by the Supreme Court of New York in Investors Collateral Corp. v. State of New York, [1985] 494 n.YS.2d 352, 114 A.D.2d 437: Claimant was a real estate developer and subdivider and issue about the area had been the subject of continuing and sequential subdivisions in a high growth area. At least one year earlier than the de facto taking…The claimant had arranged and acquired from the Town of East Fishkill Planning Board preface authorization of the subject subdivision. The subdivision was almost at the end of and a pinnacle to a long continuing series of subdivisions of the property obtained by the claimant in 1969. Thus, the subdivision was not just a diagram arranged but never filed…or a subdivision plan filed but not acted upon, and in the perspective of this case was not hypothetical or tentative.
The combined necessities of ripeness and efficient demand are expressed in the expropriation case of Shindle v. Yorkton, City of involving 160 acres, by way of suggestion to the following two cases:
In Hulmann, the land that was previously zoned for single and semi-detached shelter developments was expropriated in October 1970. Hygienic sewers and other services were then accessible and there was a tough demand for semi-detached housing. In 1969, the applicant had prepared an outline preparation of the subdivision. This plan was presented to the municipal authorities but was not accepted on the basis that the land was going to be expropriated. The board takes on the position of the evaluator… “that the possessions were in such an intermediary process, having been ripe for development since June 1969, about one and one-half years previous to the expropriation,” at which time a plan had been filed, services were obtainable…and there was an increasing market for semi-detached lots- and accomplished that the development approach to value was the suitable one.
In Harris, 60 acres of farmland was expropriated on 10 November 1971, of which 17.2 acres had by now been sold to Kenman in 1970, under conformity for sale. In the summer of 1971, Kenman applied to the Nova Scotia Water Resources Commission and the Department of Public Health for 60 ‘hookups’ for contemporary drainage services. The request was approved 12 days after the assets were expropriated. A plan arranged on 10 December 1970 and amended on 26 July 1971, demonstrates the 63 lots (3 were added) in the area. MacKeigan, C.J.n.S., at p. 247, stated:
The Plan had no authorized endorsement and was simply lines on a piece of paper, except for the Kenman area. It is ordinary ground that the sketch of the Kenman area, as first drawn and again as modified, had acknowledged unauthorized ‘preliminary approval’ of the executive of the Halifax County Town Planning Board and that it must be treated as if it had received official provisional endorsement at the time of expropriation. By that time, review stakes had been placed marking streets and at least some lots in the Kenman area; production provision had been arranged for setting up of roads, water, and sewer (even if no physical work had been completed); estimate had been received for sewer pipe and other supplies; and, as noted, ‘hookup’ approvals were available a few days after expropriation.”
In Harris, the educated judge, from whose to grant the petition was taken to the Appeal Division of the Nova Scotia Supreme Court, found that the Kenman “lots were mature for development” and applied the development technique in arriving at their worth. This judgment was not bothered on appeal.
Admissibility of SDM
An evaluator preferring to depend on the SDM in valuing raw land in an expropriation or disapproval proceeding may come across major acceptability challenges. There are several unusual measures in implementing the SDM, and the court could interpret this need for consistency in methodology as a bar to universal acceptance within the appraisal community. In addition, the appraisal methodology as presently presented by the Appraisal Institute engages in measures, if the land being assessed is raw land lacking any sustaining infrastructure improvements. Of course, where no definite subdivision exists on the ground, the use of the SDM impress upon the land an imaginary subdivision of the land into serviced lots. For that cause alone, the court may bring to a close that the basis of subdivided lots underlying the technique of valuation is mistaken and of no bearing in determining the value of the land in the state that it exists at the time of expropriation or condemnation. Additionally, the SDM generates a false impression of accuracy, nonetheless makes no condition for the unanticipated in a process that is intrinsically burdened with risk.
Projecting finished lots on an unripe territory is engage in a large contract of indecision and assumption as to when (or if) subdivision may take place; the amount and kind of lots (i.e., townhouse, semi-detached, single-family, etc.) possibly to be created; the predictable price (direct and indirect) and accessibility of resources to produce those lots; the projected pricing and sell-off (absorption) of those lots; and timing of expansion expenditures and receipt of profits from lot sales. furthermore, the developer’s income prospect (as a separate line item or as part of the discount rate) and the choice of a suitable reduction rate reflecting the time-value of money and lot absorption risk (not accomplished lot sales as planned) is complicated to enumerate with any level of assurance. At every step in the valuation procedure, a supposition or guess is made for which there is an equivalent boundary of inaccuracy. The scope of mistakes for a particular contribution in the SDM may be tolerable, except, if the margin of error for all of the effort is viewed all together, the court may bring to a close that the general possibilities for miscalculation render the valuation model undependable.
On the suitability of evidence of intended or possible subdivision of intended land, in State v. Inhabitants of Town of Phillipsburg the New Jersey appeals court affirmed that:
…Where the landowner has tender corroboration of a planned or potential subdivision, attempting to set up an amount or worth of individual lots and where the verification indicates that the developer had not made assenting efforts previous to the condemnation to effectuate the improvement of the subdivision, the evidence has been in custody to be forbidden in most of the cases…The courts usually reason that, given that so many issues impose upon the future value of potential lots, not the least being the prospect condition of the market, such proof is too tentative to be considered, and would be inclined to authorize the trier of information to guess the value of the land at an imprecise future date…This defies the universal standard that value is to be determined as of the date of the taking…Thus, it can voluntarily be observed that the subdivision of a tract of land is not just a matter of representation lots on a plan with document lane.
In City of Harlingen v. Estate of Sharboneau, Sharboneau’s evaluator recognized that a fated 9.852-acre area had the prospective to sustained 44 single-family lots averaging 7,700 square feet each, base on an investigation of three existing subdivisions in the area, and sum up below:
Having set up the probable lot gives way and presumes an inclusion period of three years, the appraiser explain the valuation method in the following way:
A sufficiently sized area or subdivision is treasured by approximation of the whole gross sales of all the lots. From the sum deductions that are made for all absorption stage holding expenses such as taxes, insurance, management/security/maintenance, capitalist compensation (developer’s earnings at 25% of gross lot sales receipts), and economic investment costs. If the land is unripe open land, the cost of building is also subtracted to draw from the expected value of the possessions as raw land. reminder: The expected net profits in each year of the three-year sell-out period were discounted at 10.5% to a current value of $413,770, from which was subtracted the straight development cost of $123,150 required to complete the subdivision and to give rise to the predictable net returns from finished lot sales, and to reflect the remaining value of $290,620 produced by the raw land in its “as is” state. In the end, the Texas Supreme Court rejected Sharboneau’s assessment proof of the SDM as not pertinent in calculating the market value of a 9.85-acre taking, as it evade all of the problems that could take place throughout an actual development, alternating in its place the finest likely outcome. In overturning the trial court’s ruling, the Texas Supreme Court observed that the SDM included more than a dozen logical measures, mainly concerning supposition and approximation, any one of which could critically influence the appraisal’s accurateness. This extensive margin for inaccuracy advice next to using… (The appraiser’s subdivision development) approach to value undeveloped land in regular conditions… adding up… (The appraiser’s) subdivision development examination made small or no change for the buyer’s threat that the subdivision might be unsuccessful… (The appraiser) simply understood that it would take three years to sell all the lots in the theoretical subdivision. This forecast is inadequate to account for unforeseen competition, political disagreement to the development, economic to cease to run, or other risks that the subdivision could revolve out to be an awful deal… (The appraisers) subdivision examination determined only what a developer could theoretically meet the expense of to pay to gainfully subdivide the property, not what a developer would pay in the competitive, risk-filled marketplace of the real world.
Conclusion
Despite the technique applicable to the valuation of land, it should be applicable, dependable, and correctly applied as a gauge of market value. Courts consider the SDM, provided subdivision is the highest and best use, and development is ‘imminent’ or ‘immediate,’ but merely if all of the initial requirements of the SDM are fulfilled, and the SCA (direct comparison approach) is not a feasible alternative. For that reason, under the best of situations, the SDM should be carefully used in the valuation of land with subdivision prospective in the disapproval and expropriation procedures.
Reference
Appraisal Institute, The Appraisal of Real Estate. 12th ed. (Chicago: Appraisal Institute, 2001), 343.
Anglyn, William Ted, Moreyra, Robert and Putman, John C. ‘Subdivision Analysis – A Profit-Residual Model,’ The Appraisal Journal, (1988): 45-59.
Kimball, J.R, Bloomberg, Barbara S. and Jones, Steven A. ‘Subdivision Analysis The Appraisal Journal, and valuation,’ (1986): 493-503.
Munson, Chuck ‘Lender Residential Subdivision evaluation using Discounted Cash flow Analysis,’ The Appraisal Journal, (1994): 572-579.
Eaton, J. D. Real Estate Valuation In Litigation, 2nd ed. (Chicago: Appraisal Institute, 1995), 246.
State v. Inhabitants of Town of Phillipsburg, [1990] nJ-QL 521, 573 A.2d 953, 240 n.J. Super. 529.
City of Harlingen v. Estate of Sharboneau, no. 99-1118 (Tex. 2001), TX-QL 2866.
Boykin, James H., Land Valuation: Adjustment Procedures and Assignments, Chicago: Appraisal Institute, 2001.
Brueggeman, William B., Jeffrey D. fisher, and Leo D. Stone, Real Estate Finance. 8th ed. Homewood, Ill.: Richard D. Irwin, 1989.
Duvall, Richard O. and David S. Black, ‘The Development Approach to valuation in eminent Domain Litigation: Capitalizing on The Appraisal Journal (July Potential use,’ 2000): 351-359.
Eaton, James D., Real Estate Valuation in Litigation. 2d ed. Chicago: Appraisal Institute, 1995.
Fanning, Stephen f., Terry v. Grissom, and Thomas D. Pearson, Market Analysis for Valuation Appraisals, Chicago: Appraisal Institute, 1994.
Guntermann, Karl L., ‘the valuation of undeveloped Land: A Reconciliation of Methods,’ The Journal of Real Estate Research, (1994): 169-177.