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IF YOU OWN A HOUSE ON 40 ACRES, most banks will base your residential loan on the house and the surrounding 5 acres and will disregard the remaining 35 acres. The 5 acre portion is called the “land in use.” The 35 acre portion is called “excess land.” The reason for this separation is that banks don’t generally like to loan money on unimproved land.
Excess land is unused land which is not needed to serve or support the primary highest and best use. It can be dividable or undividable, and can even have its own separate highest and best use, such as agriculture or timber production. Commercial and industrial properties sometimes have excess land reserved for future expansion of the existing use. In Mendocino County, excess land falls into the following categories.
- surplus land which is not dividable or salable
- surplus land which can be sold to an adjacent property owner through a boundary line adjustment
- surplus land which can be sold by subdividing
- surplus land which can be sold by subdividing or through a boundary line adjustment by obtaining a certificate of compliance
Large-Lot Zoning and Rural Sprawl
Like many rural areas, Mendocino County uses a variety of large-lot zoning categories to limit population density and help preserve agricultural and forest lands. Rural Residential (RR) zones allow 1, 2 and 5 acre lots. Upland Residential (UR) and Agricultural (AG) zones allow 20 and 40 acre lots. Range Land (RL), Forest Land (FL) and Timberland Production (TP) zones allow 160 acre lots. Many of these zones include large lots with only one or two single family residences.
Since 1983, the County has allowed second residential units on any lot where a single family dwelling is a permitted use. The second unit only requires an administrative permit and building permit. Second units are still not allowed within the Coastal Zone. However, the County intends to amend the General Plan to allow second residential units within appropriate areas of the Coastal Zone after the required land use studies are completed.
Many planners now realize that large-lot zoning has created a new problem called “rural sprawl,” the country cousin of urban sprawl. The proliferation of isolated homes on large lots has resulted in deforestation, habitat destruction and miles of poorly-maintained dirt roads which cause erosion and the siltation of streams and rivers.
Some rural counties now think a better planning solution is to encourage small compact communities and manage the surrounding open space more carefully. However, the typical rural home buyer wants a large lot, these lots are readily available, and this is the reality of the market place today.
The Land in Use
The “land in use” is that portion of the property which serves or supports the principal use or improvements. For unimproved land, the land in use is that portion which is most suitable for supporting the primary highest and best use.
For a single family residence, the land in use can range anywhere from a 1/6 acre city lot to about 5 acres. For horse properties, estates and “ranchettes,” the land in use may be as large as 10 to 20 acres or more.
For unimproved residential land, the land in use is the best home site, along with any land needed for a well, septic system and outbuildings.
Estimating the Value of Excess Land
Appraising a house on a large piece of land can be difficult, especially if the property is unique and there are no comparable sales. The concept of excess land allows the appraiser to separate the improved portion from the excess portion, making it easier to find comparable sales. This can be a useful tool for estimating the value of large rural properties, whether improved or vacant.
Estimating the value of the land in use is fairly easy, because it involves the same process used for other conventional lots of similar size. However, estimating the value of the excess land is more complicated, and involves a different process for different types of excess land.
Timber Value
Merchantable timber can contribute significant value to excess land. Estimating timber value usually requires the services of a registered professional forester working with an experienced timberland appraiser.
The forester walks the property and measures a portion of the trees in a statistical sampling process called a “timber cruise.” After the timber cruise, the forester estimates the total volume and value, by species, of the standing timber and the portion which is harvestable. The forester may also estimate the present value of future harvests using a discount factor. The forester then provides a final estimate of the present value of the timber less all harvesting costs.
A professional timber cruise can be expensive, but may be justified if the timber contributes a lot of value to the excess land. Without a timber cruise, the comparable sales should include properties which are similarly forested.
It’s important to understand that merchantable timber only contributes a portion of its value to the value of the land, depending on the size of the property and its highest and best use. This portion can range from 75 percent on large industrial timberland properties to zero (or less) on small residential lots. Cutting trees on residential parcels can destroy their appeal and cause a loss in market value which exceeds the net value of the timber harvest.
Undividable Excess Land
Estimating the value of undividable excess land is a three-step process. The first step is to identify the land in use and estimate its value. The second step is to estimate the land value of the whole property. The third and final step is to subtract the value of the land in use from the land value of the whole property.
If the excess land has significant merchantable timber, a portion of the net timber harvest value should be added.
Boundary Line Adjustments
Estimating the value of a boundary line adjustment is more complicated. In a typical boundary line adjustment, two adjacent property owners agree to move a common lot line. This increases the size and adds to the value of the buyer’s parcel. At the same time, this decreases the size and lowers the value of the seller’s parcel.
A piece of land involved in a boundary line adjustment can’t be divided or sold as a separate lot. There is typically only one buyer and one seller, and therefore no market value.
Boundary line adjustments involve a branch of economics called “bargaining theory,” which predicts that a buyer and seller with this kind of bilateral monopoly would share any cooperative surplus equally. In other words, they would split the difference between the seller’s loss and the buyer’s gain.
Subdividable Excess Land
Entire books have been written on the subject of subdivision analysis. Countless developers and land speculators have gone broke or struck it rich based on how well they estimated the value of subdividable land. Subdivision analysis is complicated because it requires doing thorough research and making careful assumptions.
Estimating the value of subdividable land normally requires some kind of discounted cash flow analysis. This is a type of computerized spreadsheet which lists all income and sales for future years and then discounts these cash flows to a present value using a discount rate. The discount rate can vary, depending on the perceived risk, the rate of inflation, the subdivider’s desired profit, the expected land value appreciation and other factors.
Certificates of Compliance
Many land owners have discovered they can get an “instant subdivision” by taking advantage of the County’s “certificate of compliance” process. This controversial ordinance legalizes “phantom subdivisions” which may lie hidden under present day lot lines. This has created a windfall for some and a disappointment for others.
In 1986, prompted by State law, the County of Mendocino passed an ordinance “un-merging” substandard parcels. This ordinance allows nearly all lots which were under separate ownership before 1972 to be grandfathered as legal lots with a certificate of compliance, regardless of lot size, location or shape.
The County won’t make a determination until the property owner submits an application and pays a fee. But they will accept any reasonable evidence of separate ownership, including old deeds and utility records. However, several test cases have shown there is no guarantee the County will allow these substandard lots to be developed or reconfigured with a boundary line adjustment.
These substandard parcels may add value if they can be reconfigured and improved with an internal lot line adjustment. They may also add value in a boundary line adjustment with an adjacent property. In many cases they may add no value at all.
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Chet Boddy, Real Estate Appraisal, Sales and Consulting
43300 LR Airport Road, #59, Little River, CA 95456
707-937-4011, office
707-937-4818, fax
chet@chetboddy.com
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Copyright © 2002 Chet Boddy, All Rights Reserved
Chet Boddy is a Certified General Real Estate Appraiser, Realtor“ and real estate consultant who has lived on the Mendocino Coast since 1976. Look for this and other real estate columns on Chet’s web site at www.chetboddy.com
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