An appraisal of land starts with the first two components of Highest and Best Use analysis: what is Physically Possible and what is Legally Permissible?

Issues of physical possibility include size, shape, soil suitability, frontage, visibility and access. Legal issues can be particular to an individual property. Easements, deed restrictions and leases can encumber a property and limit current or future development. Legal issues can be regulatory in nature. Wetlands, endangered species, and stormwater management regulations are good examples. Legal issues include, often most importantly, local zoning codes because they drive the uses permitted and the density of development. Residential developers are concerned with the types of units permitted (single family dwellings, townhomes, apartments, etc.) and the potential number of dwelling units. Broadly, commercial developers are concerned with the uses permitted (retail, office, industrial, etc.) and potential floor area. The greater the square footage permitted, the higher the value.

Although appraisers are not planners or engineers they typically have a working knowledge of the first two components of Highest and Best Use discussed earlier. They also have the specialized skill set to address the next two steps in Highest and Best Use analysis: Financially Feasible and Maximally Productive.

Once an appraiser has determined the Physically Possible and Legally Permissible Uses and potential density an analysis of the marketplace must be undertaken to determine which of these uses are Financially Feasible. For example, a vacant parcel on a side street might be a poor location for a retail strip center, but it might be well suited for an office building. Then the real drill-down begins. Is there a market for new office space? Is there any new construction in the area? How do values in the area compare to current construction costs? Once the Financially Feasible uses have been established, the appraiser determines which use is Maximally Productive - the use that brings the highest value to the land.

The Highest and Best Use of an improved property is, more often than not, the current use. Depending on the type of property and the use of the report, the appraiser will simply start "pulling comps," sales and leases of similar properties in the market area. Land valuation includes a detailed Highest and Best Use analysis which is more demanding and requires a superior skill set.

fter the Highest and Best Uses has been determined the appraiser uses data sources t his or her disposal to identify potential land sale comparables. It is imperative that the appraiser understand that value follows use. A sale of land for the development of a three story office building should not be used to value a parcel of land that has a Highest and Best Use of industrial development, even if the permitted square footage is identical. Land Sales must be carefully researched. It is safe to say that the appraiser should be as familiar with each of the land sales as the subject property.

Once the land sales have been researched the appraiser selects the most comparable sales for analysis. Next, an appropriate Unit of Comparison must be selected. Years ago, appraisers use a simple Per Acre or Per Square Foot analysis. We have found that the minimum today is a Per Usable Acre analysis because the usable portion (net of wetlands, slopes, and other physical encumbrances) of the property is isolated.

The most precise analysis for residential land is Per Dwelling Unit. This requires detailed knowledge of the development potential of the subject and all the land sales, but it most closely mimics the market because that is what buyer-developers are focused on.

The same applies to commercial property; the most precise Unit of Comparison is Per Proposed Building Square Foot. Certain specialized property types have unique Units of Comparison. For example, day care centers can be analyzed Per Child Permitted by State License. Theaters and restaurants are sometimes valued Per Seat. Marinas are valued Per Slip and some high-density retail space in urban areas or on boardwalks are valued Per Front Foot. It is up to the appraiser to discuss this Unit of Comparison issue with market participants to determine the best fit.

The land sales are then typically arrayed on an adjustment grid and adjusted for differences in Property Rights Conveyed, Financing, Conditions of Sale and Market Conditions (Time). These four adjustments are made in a series. The next adjustments are at the discretion of the appraiser and can include Location, Physical (size, shape, easements, etc.) and Size. The most important adjustments in many parts of the country are Zoning and Approvals. In Zoning the differences in density are addressed. If the subject is in a zone that permits single family dwellings on 20,000 square foot lots and the land sale is in a zone that has a minimum lot size of 30,000 square feet, an adjustment is warranted.

Approval status is often the most important adjustment because fully approved parcels can garner significantly higher sale prices. We recently performed an analysis of "flipped" residential land sales. The first sale was the purchase of raw land and the second sale was the sale of the fully approved parcel. The results, which showed a premium between 39% and 572%, were eye-opening.

After the land sales are adjusted the appraiser must reconcile the adjusted sale prices to a single value. The net and gross adjustments are analyzed, and the appraiser determines how much weight will be given to each land sale in the final value estimate.

The users of land appraisals vary widely. Banks use appraisals for financing, but individuals and/or their attorneys order land appraisals for estate settlement, partnership or family disputes, divorce, tax appeal, eminent domain actions, potential acquisition or disposition, donation, and many other reasons. The appraisal is typically performed by a state licensed or certified appraiser, but sometimes brokers will offer price opinions.

Cost and time vary depending on the complexity of the assignment and the type of report required. The valuation of a single-family lot could cost $250 to $1,000 and take less than a week. A complex valuation for eminent domain purposes with reports from other professionals (engineers, planners, cost experts and others) could take six months and cost $25,000.

Like any other appraisal for lending purposes the bank may only lend a percentage of the land value. Many banks will not lend on land unless the buyer has a plan to develop the property and a successful track record in the development of similar properties.