A common mistake – What to do with “extra” land
Improperly handling excess and surplus land is a common mistake among inexperienced appraisers. When a property has “extra” land that is not required to accommodate the subject improvements, it is important to identify whether then land is considered excess land or surplus land. The decision is critical to providing an accurate and reliable value conclusion in the appraisal report. Excess land can be separated and sold off as a distinct property while surplus land cannot be separated and sold off. When a property has excess land, it is essentially two separate properties and the value of the excess land needs to be reported as a separate value.
When completing a highest and best use analysis for a commercial property it is imperative that the appraiser makes the correct distinction between excess land and surplus land. Excess land may even have a different highest and best use than the rest of the property. However, surplus land will not have a separate highest and best use from the rest of the property. If excess land has a separate highest and best use, it might need its own set of comparable data.
Let’s consider an example of a property with “extra” land. The example property is a ten-acre lot that has a mixed-use zoning located off a heavily-traveled commercial roadway. The zoning allows for a number of uses including retail, office, and multi-family residential. The property is currently improved with a multi-family development that is fully supported by eight acres, indicating the property has two acres of “extra” land. The “extra” land is located along the subject’s road frontage along the heavily-traveled commercial roadway and could be easily separated and sold off, indicating that it is excess land. Based on the subject’s mixed-use zoning the excess land could be developed with a retail improvement to take advantage of its frontage and access from a heavily-traveled roadway. The excess land would actually have a different highest and best use than the rest of the land and needs a separate set of comparable data. A review of the market may indicate that the excess land has a higher unit value indicator than the rest of the property. In this example, the property would have a higher value conclusion if an appraiser properly identified the “extra land” as excess land. An inexperienced appraiser may have incorrectly identified then land as surplus land and used the same unit value indicator for the entire property, leading to a lower overall value conclusion. For more explanation on appraisal methodology, visit our website at www.commercial-appraisers.com.