Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

…Jonathan Miller

Are Land Investments Frozen or Liquid?

Do the FEDS Know What Land is Worth Now?

By James R. MacCrate MAI, CRE, ASA

Turbulent times are affecting real estate values as the value of homes, apartment buildings, retail facilities, and office buildings fall in most markets. I wonder if the auditors, lenders and investors are going to value development projects correctly.

Land gets hit the hardest, but most lenders and developers do not see it that way. In the real estate market, developers use the three factors of production, land, labor, and capital in order to make a profit. Developers provide the fourth factor in production, coordination.

In the current environment, the cost of raw materials has escalated, cost of capital is increasing, the value of the finished product, i.e., an office building, condominium units, single family homes, is falling. In addition, risk takers or developers want a higher return on their equity capital and coordination. Something must give, and that is land value. In classic economic theory, land has the last claim to the residual income.

Developers have reported that when analyzing land, they determine the appropriate product that the site can support, given the location, development regulations, and market conditions, and then estimate the probable price that will be paid for the final product. Deductions are then made for construction costs, profit and overhead, site improvement costs and, if necessary, cost of approval, to arrive at the price per lot of the site with road and utilities to the property line. Any additional offsite costs to bring the property to that state (extending roads or utilities, or making township contributions) must then be deducted as well. The resulting figure is the residual land value.

Historical Trends

Because real estate traditionally competes within capital markets for funds, we compared the historical expected returns from investments in land found by surveys completed by MacCrate Associates LLC, Price Waterhouse LLP, and the Korpacz Real Estate Investor Survey to alternative investments, including: residential mortgages, Baa Rated Bonds, and the ten-year treasury.

The chart clearly indicates that returns on land investments began to fall before 9-11 and spiked back up after 9-11 and, then, trended downward as demand for real estate increased because of very favorable financing. But, the returns prior to 1997 were relatively constant at just over 20%. It is reasonable to assume that investors will, again, require average returns in excess of 20% for speculative transactions. In fact, back in the early 1990’s many investors wanted a 25% to 40% return or more to invest in vacant land. The spreads between the expected land investment return and the ten-year treasury narrowed during the last few years but will probably widen as land as land investments become frozen or illiquid at any price.

Back in the 1990’s

The following chart, from Price Waterhouse LLP, summarizes the expected return by residential developers from 1990 through 1998. Average expected return declined from 27% in 1990 to 20% in 1998.

By 2002, the expected returns were back above 20% briefly, but declined to lower levels that were expected in the mid-1980s when the market was very strong. Currently the Korpacz Real Estate Investor Survey indicates an average of 17.5%. That won’t last long.

So We Can Only Hope That.

The folks in Washington D.C. who are proposing to buy all these mortgages and closing lending institutions that may be in financial trouble must price the assets correctly to reflect the true risk and return that we deserve as taxpayers and investors. Proper valuations require an appraisal which would include a market analysis to ensure that the risks are captured in the discounting process to estimate value and unfreeze the land investments that have been made.

A simple hypothetical example can see the impact that the current crisis is having on the value of land for apartment projects:

During periods of weakness, vacancies increase. In addition, the cost of utilities has been rising. But, this calculation has not taken into consideration the following:

  • Time value of money
  • Increase in interest carry
  • Time to lease up
  • Increase in marketing costs
  • Real estate taxes, theoretically, could be increasing while the value is declining
  • Possible increase in construction costs, besides interest carry
  • Increased entrepreneurial incentive.

What if the returns regress back to the 1990 returns on vacant land? What if the highest and best use was as condominium project before? What happened to the land value when the condominium unit prices are cut in half? Next time!

Rick Wincott, MAI, CRE and Jim MacCrate, MAI, CRE with the assistance of Scott Koenig, wrote an article on Land Valuation and Purchase Price Decisions. You can obtain a copy from Rick Wincott or Jim MacCrate.

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8 Responses to “[Straight From MacCrate] What Is Land Worth?”

  1. Doug Haring, MAI says:

    Found the article very interesting but disquieting, as I am just finishing up final engineering, etc., on my own residential subdivision project. I was concerned about the issues you raise but seeing it spelled out in facts is unpleasant but helpfuf for further planning. Thanks again for the information.

  2. Rick Meyer says:


    Well done. Hope all is well with you and Judy and the rest of the family.

    Rick Meyer

  3. Jackie Nulty says:

    Timely and interesting as always. thank you.

  4. Jim MacCrate MAI, CRE, ASA says:

    Dan Houlihan [danh@nyappraisal.com] sent me the following which you should look at.

    See WSJ article of Fri 10-3 – page B1. Tax implications of selling land at a loss may impact pricing and dumping of land impacting the trend analysis. Tax law allows for companies to apply loses from land sales (and other assets) to profits made in the 2 prior years and get a refund of taxes.

  5. Edd Gillespie says:

    The information you offer and the questions you raise are at the same time helpful and provocative.

    I am located in an area that does not have a great deal of available empirical information about land purchase decisions by developers. May I ask, do the charts reliably apply to less densely developed areas and in the West?

  6. Maureen Mastroieni, MAI, CRE says:

    Jim – thanks for sending this article. I am forwarding it directly to a client with whom I’ve just had a similar discussion. While I agree with your principal points, here in Philadelphia an apartment building would not be a good example. We have found that the rental market is stronger in this type of downturn, and occupancies are quite high. In fact, we have seen tenants are paying $2800 per month to rent a condo or townhouse, when they could easily own something for the same monthly payment. Lack of consumer confidence is the issue. New, for-sale residential development has come to a halt, however, and there are no land sales. Your analysis is right on point and will be helpful in supporting adjustments for market conditions, even in the absence of sales.

  7. Scruggs Love says:

    Jim, this is a very good and timely article. Appraising vacant land is difficult in these turbulent times, even in Texas. Texas is doing better than many other parts of the country. However, marketing time has increased and sales volume for land has decreased, including farms/ranches, commercial tracts, single-family subdivision land, and multi-family land.

    In the metro areas of DFW, Austin, Houston and San Antonio, there are about 55,000 apartment units under construction due to the slow down in the SFR markets. Occupancy and rents are currently high. These multi-family units had financing in place before the financial crisis began to escalate.

  8. Perfect as ALWAYS Jim. We got cut from several lists this year for telling a similar story. At this time, we are avoiding vacant land due to the high liability.