Knowing how to calculate the land value of property is a vital tool. While there will be some property owners that are fine to go with the law of local averages — taking a selection of those properties in similar locations and industries, then making a rough averaging calculation — this isn’t an advisable approach. It’s not especially accurate and, depending on the intentions of your calculation, can be a costly misstep.
As such, it’s important that you approach your assessment with a commitment to accuracy and honesty. Whether you’re selling, buying, or leasing a commercial property, or even determining worth for the IRS, your attitude to valuation is as important as the calculation itself. That said, it’s not always easy to know how to go about this.
Let’s take a closer look at how to calculate the land value of your property.
In Brief
Your quickest solution is simply getting an appraisal performed. Professionals in the field know what to look for when reviewing the varied advantages and disadvantages of a property and which aspects of the land contribute not just to the basic cost but also the current and potentially future value.
In the simplest terms, knowing how to calculate land value of property for commercial use comes down to looking at the physical, geographical, potential usage, and current market elements relating to the property and determining what renters or buyers will pay for its use. While these can be informed by opinion, the value should be backed up by supporting documentation wherever possible in order to be credible.
There’s quite a lot of contributing factors to this issue, though, and it’s worth exploring some of these in more detail.
What is Land Value?
There are several different types of valuation that you can get for commercial real estate and they don’t all represent the same elements. It can be easy to get confused about the definitions involved. For instance, due to its name, it’s easy to think the “land value” simply refers to the current value of the land itself and nothing else. Yet, this definition actually refers to a “site valuation”. As such, to be able to correctly calculate the land value of property, it’s important to first understand what this actually means.
When we talk about land value, we mean the value of the land itself in addition to any improvements and modifications that have been applied to it. This means that all the aspects that can plus or minus the worth of the basic land are used in determining the true value of the property. This is one of the reasons why an expert appraiser tends to be used during the process, as there are various nuanced elements to take into consideration.
Knowing what some of these are prior to the appraisal can help you to make any adjustments, improvements, and repairs that make a difference to the land valuation. This is particularly important if you’re planning on selling your property or working with a project leasing agent to maximize the rental potential of your commercial real estate.
What Should You Consider?
When you work with an appraiser, they will usually take into account various aspects of your property in order to determine the full land value. This then gives you apt information to apply toward selling or leasing your property at the most appropriate price. However, it’s worth knowing what variables should factor into this valuation so that you make a better informed review of your appraisers report and bring up anything you feel should be taken into account that hasn’t been.
These elements contributing to the overall value usually include:
Buildings Cost
Often this is referred to as the replacement value of the buildings. In essence, rather than determining how much a building on the land cost you to build, part of the value takes into account how much it would currently cost to replace the physical elements of the building. The same goes for any fixtures, fittings, and appliances that are inside the property, too. This really refers to the simple intrinsic value of these items, rather than what they represent to the convenience and operations of those who might want to rent the property. As a strictly financial consideration, it’s a relatively easy aspect of calculating the land value of property to establish and verify.
Income Potential
A slightly more complicated but no less vital metric to consider when determining land value is its potential to generate income. This is most popularly known as income capitalization. Again, the metric you’re looking at here will generally depend on the intention of the valuation. If you’re planning on selling your property or determining land value for insurance purposes, the appraiser will likely review based on the likely net income leasing this property to other businesses could generate for you or the buyer. If you’re calculating land value to determine rental rates it might take into account the likely income businesses could expect in that area.
The Market
There is a certain amount of comparison that factors into how to calculate the land value of property. After all, the market for both selling and leasing properties can fluctuate depending on geographical areas, industrial usage, even what styles of property are trending at any given time. As such, a simple and relatively effective metric to include in the valuation is a market comparison. This will involve researching similar local properties with comparable facilities in a relative state of repair. Bear in mind that this doesn’t account for the final land valuation, but it is a useful gauge of what buyers and renters are willing to pay for it at the time.
Location
The geographical position of your property is as important in commercial real estate as it is in residential. This is one of the most variable factors of a valuation and there are a number of different elements contributing to how much a location adds or subtracts from a property’s overall worth. How close it is to high-traffic roadways, the amount and type of parking spaces in the nearby area, and ease of access for delivery drivers all contribute here. Not to mention that the surrounding properties and amenities can suggest the potential for large amounts of consumers to visit the property if it is used as a retail space. The population of the location can also play into the assessment, as it helps to determine what industries are in demand for the area and whether the property is suitable for these.
Aesthetics
Believe it or not, aesthetics can be useful in calculating the land value of a property. Consumers will make choices to keep patronizing a commercial establishment based on how it looks. Renters and buyers alike are more apt to spend more on a property if it has an attractive or cutting-edge appearance. Not to mention that poor aesthetics of a property can represent that a significant amount of investment needs to be applied by a buyer or renter before it is suitable to house a business. While the value applied to this is likely to be based on the appraiser’s experience and opinion rather than empirical figures, it can still be a significant consideration.
Wrapping Up
Understanding how to calculate the land value of a property comes down to the sum total of a variety of contributing factors. It is rarely if ever based on a single aspect of the property, as this type of appraisal takes into account all elements that can add or detract from the intrinsic worth of the land. This will include the cost of buildings, market fluctuations, potential income, and aesthetics. But it is certainly not limited to these, and many more factors can contribute to what the true value of a property is at any given time. By teaming up with a qualified and experienced appraiser, you can get an accurate valuation that can help you make the most out of your property investment.
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