By: Donald Archer
Recently, we have encountered projects in which the cost of the land had not been distinguished from the purchase cost of the facility. Before we can prepare a schedule reconciling the costs of the project, we have had to determine the land cost since it is not subject to depreciation. There are several methods we have used to determine the land value when it wasn’t given.
- 1. Oftentimes the purchase of the facility is accompanied by an appraisal. The Owner of the facility should request the appraiser to provide an appraised value of the land in addition to the cost of the buildings.
- 2. Another method is to use the assessed value of the property from the local taxing authority. The fallacy of this method is that assessed values are typically much lower than the market value of the property, thus they can provide inaccurate or deflated land values. To convert the assessment to the market value, a percentage ratio of the land to total assessment value can be calculated and applied to the purchase price. The resulting value can then be used as the purchase value of the land.
- 3. A third method is more complicated but has been applied successfully on projects where the land value has not been provided. If the building size is known, the replacement cost of the building can be estimated by multiplying the square foot area of the facility by a given square foot cost using the R.S. Means Square Foot Cost Manual for a typical building with the same use (i.e. warehouse, retail store, restaurant, etc.). The computed building replacement cost can then be subtracted from the purchase price to arrive at the land value. Other considerations such as demolition of existing components, physical deterioration of the facility and additions/deletions of building equipment will need to be addressed.
I hope this guide is useful to you but if you have questions or comments regarding the adaptation of these methods, please feel free to contact me at my e-mail address or phone number, [email protected] or (812) 282-1250.