Sunday, October 28, 2007

Sales comparison approach

Sales comparison approach

From Wikipedia, the free encyclopedia

The sales comparison approach (SCA) is one of the three major groupings of valuation methods, called the three approaches to value, commonly used in real estate appraisal. This approach compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions. The process uses one of several techniques to adjust the prices of the comparable transactions according to the presence, absence, or degree of characteristics which influence value. As such, all sales comparison approach methods are variations on hedonic-type measurements, which determine the value of something as the sum of the value of the various components which contribute utility.

Units of Comparison

The SCA relies on the assumption that a matrix of attributes or significant features of a property drive its value. For examples, in the case of a single family residence, such attributes might be floor area, views, distance to amenities, number of bathrooms, lot size, age of the property and condition of property.

Economic Basis

The sales comparison approach is based upon the principles of supply and demand, as well as upon the principle of substitution. Supply and demand indicates value through typical market behavior of both buyers and sellers. Substitution indicates that a purchaser would not purchase an improved property for any value higher than it could be replaced for on a site with equivocal utility, assuming no undue delays in construction.

Examples of Methods

In practice, the most common SCA method used by estate agents and real estate appraisers is the sales adjustment grid. It uses a small number of recently sold properties in the immediate vicinity of the subject property to estimates the value of its attributes. Adjustments to the comparables may be determined by trend analysis, matched-pairs analysis, or simple surveys of the market.

More advanced researchers and appraisers commonly employ statistical techniques based on multiple regression methods which generally compare a larger number of more geographically dispersed property transactions to determine the significance and magnitude of the impact of different attributes on property value. Research has shown that the sales adjustment grid and the multiple regression model are theoretically the same, with the former applying more heuristic methods and the latter using statistical techniques[1].

Spatial auto regression plagues these statistical techniques, since high priced properties tend to cluster together and therefore one property price is not independent of its neighbor. Given property inflation and price cycles, both comparison techniques can become unreliable if the time interval between transactions sampled is excessive. The other factor undermining a simplistic use of the SCA is the evolving nature of city neighborhoods, though in reality urban evolution occurs gradually enough to minimize its' impact on this approach to value.

In more complex situations, such as litigation or contaminated property appraisal, appraisers develop SCA adjustments using widely accepted advanced techniques, such as repeat sales models (to measure house price appreciation over time), survey research (e.g. -- contingent valuation), case studies (to develop adjustments in complex situations) or other statistically-based techniques.

Further reading

  • The Appraisal of Real Estate, 12th Edition, by the Appraisal Institute is an industry-recognized textbook.
  • The Uniform Standards of Professional Appraisal Practice, by The Appraisal Foundation, updated and published annually through the 2006 edition; henceforth, updated editions are to appear biannually.

References

  1. ^ see, for example, Lentz and Wang, Journal of Real Estate Research, 1997

Real estate appraisal

Real estate appraisal

From Wikipedia, the free encyclopedia

Real estate appraisal is the practice of developing an opinion of the value of real property, usually its Market Value. (Real estate appraisal is American usage; many other countries use the terms property valuation or land valuation.) The need for appraisals arises from the heterogenous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location - which is the most important determinant of their value. So there cannot exist a centralised Walrasian auction setting for the trading of property assets, as there exists for trade in corporate stock. The absence of a market-based pricing mechanism determines the need for an expert appraisal/valuation of real estate/property.

A real estate appraisal is performed by a licensed or certified appraiser (in many countries known as a property valuer or land valuer). If the appraiser's opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property. For mortgage valuations of improved residential property in the US, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report.[1] Appraisals of more complex property (e.g. -- income producing, raw land) are usually reported in a narrative appraisal report.

Types of value

There are several types and definitions of value sought by a real estate appraisal. Some of the most common are:

Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgably, prudently, and without compulsion.[2]

  • Value-in-use – The net present value (NPV) of a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, which may be above or below the market value of a property.
  • Investment value - is the value to one particular investor, which may be above or below the market value of a property.
  • Insurable value - is the value of real property covered by an insurance policy. Generally it does not include the site value.
  • Liquidation value -- may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings.

Price versus value

It is important to distinguish between Market Value and Price. A price obtained for a specific property under a specific transaction may or may not represent that property's market value: special considerations may have been present, such as a special relationship between the buyer and the seller, or else the transaction may have been part of a larger set of transactions in which the parties had engaged. Another possibility is that a special buyer may have been willing to pay a premium over and above the market value, if his subjective valuation of the property (its investment value for him) was higher than the Market Value. An example of this would be the owner of a neighbouring property who, by combining his own property with the subject property, could thereby obtain economies-of-scale. Such situations often arise in corporate finance, as for example when a merger or acquisition is concluded at a price which is higher than the value represented by the price of the underlying stock. The usual rationale for these valuations would be that the 'sum is greater than its parts', since full ownership of a company entails special privileges for which a potential purchaser would be willing to pay. Such situations arise in real estate/property markets as well. It is the task of the real estate appraiser/property valuer to judge whether a specific price obtained under a specific transaction is indicative of Market Value.

Market value definitions in the US

In the US, appraisals are performed to a certain standard of value (e.g. -- foreclosure value, fair market value, distressed sale value, investment value). The most commonly used definition of value is Market Value. While USPAP does not define Market Value, it provides general guidance for how Market Value should be defined:

...a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.

Thus, the definition of value used in an appraisal analysis and report is a set of assumptions about the market in which the subject property may transact. It becomes the basis for selecting comparable data for use in the analysis. These assumptions will vary from definition to definition but generally fall into three categories:

  1. The relationship, knowledge, and motivation of the parties (i.e., seller and buyer);
  2. The terms of sale (e.g., cash, cash equivalent, or other terms); and
  3. The conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale).

In the US, the most common definition of Market Value is the one promulgated for use in Federally regulated residential mortgage financing:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.[3]

For example, adjustments must be made to the comparables sales prices for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment.[4]

Three approaches to value

There are three general groups of methodologies for determining value. These are usually referred to as the "three approaches to value":

The appraiser will determine which one or more of these approaches may be applicable, based on the scope of work determination, and from that develop an appraisal analysis. Costs, income, and sales vary widely from one situation to the next, and particular importance is given to the specific characteristics of the subject.

Consideration is also given to the market for the property appraised. Appraisals of properties that are typically purchased by investors (e.g. - skyscrapers) may give greater weight to the income approach, while small retail or office properties, often purchased by owner-users, may give greater weighting to the sales comparison approach. While this may seem simple, it is not always obvious. For example, apartment complexes of a given quality tend to sell at a price per apartment, and as such the sales comparison approach may be more applicable. Single family residences are most commonly valued with greatest weighting to the sales comparison approach, but if a single family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful.

The cost approach

The cost approach was formerly called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is often referred to by the abbreviation RCNLD (reproduction cost new less depreciation or replacement cost new less deprecation). Reproduction refers to reproducing an exact replica. Replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials. In practice, appraisers use replacement cost and then deduct a factor for any functional disutility associated with the age of the subject property.

In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.

The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. The cost approach is often the only reliable approach when dealing with special use properties (e.g. -- public assembly, marinas).

The sales comparison approach

Main article: Sales comparison approach

The sales comparison approach examines the price or price per unit area of similar properties being sold in the marketplace. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparables to the subject to determine the value of the subject. This approach is generally considered the most reliable if adequate comparable sales exist. In any event, it is the only independent check on the reasonability of an appraisal opinion.

Note that this approach develops value from a purely pricing scheme, and as such is an example of a revealed preference model. An interesting perspective on the relationship between relatively subjective human estimation as compared with that obtained by purely mathematic modeling is contained in "Simple Heuristics That Make Us Smart" by Gerd Gigerenzer. Dr. Gigerenzer, a psychologist, asked people to estimate some real world facts based simply on their knowledge, experience and impressions. Common knowledge and some simple rules created models which were close to those produced by multiple regression analysis (MRA) and neural networks. The predictive value of the human models applied to a new sample was a bit better than the mathematical models, suggesting that the mathematical models may have described the data better but missed the predictive relationships. Similarly automated valuation models frequently find building size (square feet or meters) predictive of value, even when that information is not explicitly advertised. This is similar to the example in "The Wisdom of Crowds", Surowiecki, in which the scientist Francis Galton observed a crowd at a fair to, on average, accurately estimate the size of an ox.

The income capitalization approach

Main article: Income approach

The income capitalization approach is used to value commercial and investment properties.

In a commercial income producing property this approach capitalizes an income stream into a present value. This can be done using revenue multipliers or single-year capitalization rates of the Net Operating Income. The Net Operating Income (NOI) is gross potential income (GPI), less vacancy (= Effective Gross Income) less operating expenses (but excluding debt service or depreciation charges applied by accountants).

Alternatively, multiple years of net operating income can be valued by a discounted cash flow analysis (DCF) model. The DCF model is widely used to value larger and more expensive income-producing properties, such as large office towers.

UK valuation methods

In the UK, valuation methodology has traditionally been classified into five methods:

1. Comparable method. Used for most types of property where there is good evidence of previous sales. This is analogous to the sales comparison approach outlined above.

2. Investment/income method. Used for most commercial (and residential) property that is producing future cash flows through the letting of the property. If the current Estimated Rental Value (ERV) and the passing income are known, as well as the market-determined equivalent yield, then the property value can be determined by means of a simple model. Note that this method is really a comparison method, since the main variables are determined in the market. In standard US practice, however, the closely related capitalising of NOI is confounded with the DCF method under the general classification of the income capitalization approach (see above).

3. Accounts/profits method. Used for trading properties where evidence of rates is slight, such as hotels, restaurants and old-age homes. A three-year average of operating income (derived from the profit and loss or income statement) is capitalised using an appropriate yield. Note that since the variables used are inherent to the property and are not market-derived, therefore unless appropriate adjustments are made, the resulting value will be Value-in-Use or Investment Value, not Market Value.

4. Development/residual method. Used for properties ripe for development or redevelopment or for bare land only.

5. Contractor's/cost method. Used for only those properties not bought and sold on the market. Both the development/residual method and the contractor's/cost method would be grouped in the US under the cost approach (see above).

Further considerations

[edit] Highest and best use

Main article: Highest and best use

Highest and Best Use (HABU) is a term of art in the appraisal process. It is a process to determine the use of the property which produces the highest value for the land, as if vacant. There are four steps to the process. First, the appraiser determines all uses which are legally permissible for the property. Second, of the uses which are legally permissible, which ones are physically possible. Of those, which ones are financially feasible (sometimes referred to as economically supported). Of those uses which are feasible, which one and only use is maximally productive for the site. In a simple context, the appraiser must do this twice, comparing the results -- as if the land is vacant and in the as-is-improved state, taking into account the costs of demolishing any existing improvements. The outcome of this process is the highest and best use for the site. An appraisal of market value must explicitly assume that the owner or buyer would employ the property in its highest and best use, and therefore value the site accordingly.

In more complex appraisal assignments (e.g. -- contract disputes, litigation, brownfield or contaminated property valuation), the determination of highest and best use may be much more complex, and may need to take into account the various intermediate or temporary uses of the site, the contamination remediation process, and the timing of various legal issues.[5]

Types of ownership interest

Implicit in the analysis of the subject property is a determination of the interest in the property being appraised. For most common situations (e.g. -- mortgage finance) the fee simple interest is explicitly assumed since it is the most complete bundle of rights available. However, in many situations, and in many societies which do not follow English Common Law or the Napoleanic Code, some other interest may be more common. While there are many different possible interests in real estate, the three most common are:

  • Fee simple value (known in the UK as freehold) - The most complete ownership in real estate, subject in common law countries to the powers reserved to the state (taxation, escheat, eminent domain, and police power)
  • Leased fee value - This is simply the fee simple interest encumbered by a lease. If the lease is at market rent, then the leased fee value and the fee simple value are equal. However, if the tenant pays more or less than market, the residual owned by the leased fee holder, plus the market value of the tenancy, may be more or less than the fee simple value.
  • Leasehold value - The interest held by a tenant. If the tenant pays market rent, then the leasehold has no market value. However, if the tenant pays less than market, the difference betweent the present value of what is paid and the present value of market rents would be a positive leasehold value. For example, a major chain retailer may be able to negotiate a below-market lease to serve as the anchor tenant for a shopping center. This leasehold value may be transferrable to another anchor tenant, and if so the retail tenant has a postive interest in the real estate.

Scope of work

While USPAP has always required appraisers to identify the scope of work needed to produce credible results, it became clear in recent years that appraisers did not fully understand the process for developing this adequately. In formulating the scope of work for a credible appraisal, the concept of a limited versus complete appraisal and the use of the Departure Rule caused confusion to clients, appraisers, and appraisal reviewers. In order to deal with this, USPAP was updated in 2006 with what came to be known as the Scope of Work project. In short, USPAP eliminated the Departure Rule and the concept of a limited appraisal and created a new Scope of Work rule. In this, appraisers were to identify six key parts of the appraisal problem at the beginning of each assignment:

  • Client and other intended users
  • Intended use of the appraisal and appraisal report
  • Definition of value (e.g. -- market, foreclosure, investment)
  • Any hypothetical conditions or extraordinary assumptions
  • The effective date of the appraisal analysis
  • The salient features of the subject property

Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of investigation, and the applicable approaches to value. The rule provided the explicit requirement that the minimum standards for scope of work were:

  • Expectations of the client and other users
  • The actions of the appraiser's peers who carry out similar assignments

Mass appraisal and automated valuation models

Automated valuation models (AVMs) are growing in acceptance. These rely on statistical models such as multiple regression analysis or geographic information systems (GIS).[6] While AVMs can be quite accurate, particularly when used in a very homogeneous area, there is also evidence that AVMs are not accurate in other instances such as when they are used in rural areas, or when the appraised property does not conform well to the neighborhood. AVM's have also gained favor in class action litigation, and have been substantiated in numerous cases, both in Federal and state courts, as the appropriate method for dealing with large-scale real estate litigation problems, such as contaminated neighborhoods.

Governing authorities and professional organizations

International

The various US and international professional organizations have started collaborating in recent years towards the development of International Valuation Standards which will facilitate global real estate appraisal, a much-needed adjunct to real estate investment portfolios which transcend national boundaries.

The IVSC - The International Valuation Standards Committee, is a Non-governmental Organisation (NGO) member of the UN, with membership that encompasses all the major national valuation standard-setters and professional associations from 41 different countries (including the Appraisal Institute, the RICS and the Appraisal Institute of Canada). IVSC have published the International Valuation Standards (IVS), now in their 8th edition.

United States

Appraisal practice in the US is regulated by the various states. Prior to the 1990's, there were no commonly accepted standards either for appraisal quality or for appraiser licensure. In the 1980s, an ad-hoc committee representing various appraisal professional organizations in the U.S. and Canada met to codify the best practices into what became known as the Uniform Standards of Professional Appraisal Practice, or USPAP. The Savings and Loan Crisis in the U.S. resulted in increased Federal regulation of the mortgage lending process via the Financial Institutions Reform, Recovery and Enforcement Act of 1991. A portion of this act required federal lending regulators to adopt appraisal standards. A not-for-profit organization, the Appraisal Foundation (TAF), was formed by the same organizations which had developed USPAP, and the copyright for USPAP was signed over to TAF. Federal oversight of TAF is provided by the Appraisal Subcommittee, made up of representatives of various Federal lending regulators. TAF carries out its work through two boards: the Appraisal Standards Board promulgates and updates USPAP; the Appraisal Qualifications Board (AQB) promulgates minimum recommended standards for appraiser certification and licensure. During the 1990s, all of the states adopted USPAP as the governing standards within their states and developed licensure standards which met or exceeded the recommendations of TAF. Also, the various state and federal courts have adopted USPAP for real estate litigation and all of the federally lending regulators adopt USPAP for mortgage finance appraisal.[7]

In addition, there are professional appraisal organizations, organized as private not-for-profits, which date to the Great Depression of the 1930s. One of the oldest in the U.S. is the American Society of Farm Managers and Rural Appraisers (ASFMRA), founded in 1929.[8] Others were founded as needed and opportunity arose in specialized fields, such as the Appraisal Institute (AI) and the American Society of Appraisers (ASA) founded in the 1930s, the International Right of Way Association and the National Association of Realtors which were founded after World War II. These organizations all existed to establish and enforce standards, but their influence has waned as the government increases appraisal regulation. In March 2007, three of these organizations (ASFMRA, ASA, and AI) announced an agreement in principle to merge. NAIFA (National Association of Independent Fee Appraisers), a charter member of The Appraisal Foundation, helped to write Title XI, the Real Estate Appraisal Reform Amendments. It was founded in 1961.

The best known professional organization of real estate appraisers in America is the Appraisal Institute. It was formed in from the merger of the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers. Founded along with others in the 1930's, the two organizations merged in the 1990's to form the Appraisal Institute (AI). This group awards two professional designations: SRA, to residential appraisers, and MAI, to commercial appraisers.

Other leading appraisal organizations include the American Society of Appraisers, National Association of Independent Fee Appraisers, and the National Association of Master Appraisers, which were also founding sponsor-members of the Appraisal Foundation.[9] In recent years, the Royal Institution of Chartered Surveyors (RICS) has become highly regarded in the US, and has formed a collaboration with the Counselors of Real Estate, a division of the National Association of Realtors. RICS, which is headquartered in London, operates on a global scale and awards the designations MRICS and FRICS to Members and Fellows of RICS. The Real Estate Counseling Group of America is a small group of the top appraisers and real estate analysts in the US who collectively have authored a disproportionately large body of appraisal methodology.

United Kingdom

In the UK, real estate appraisal is known as property valuation and a real estate appraiser is a land valuer or property valuer (usually a qualified chartered surveyor who specialises in property valuation). Property valuation in the UK is regulated by the Royal Institution of Chartered Surveyors (RICS), a professional body encompassing all of the building and property-related professions. The RICS professional guidelines for valuers are published in the RICS Appraisal and Valuation Standards, commonly known as the Red Book. While based in the UK, RICS is a global organization and has become very active in the US in recent years through its affiliation with the Counselors of Real Estate, a division of the National Association of Realtors.

Germany

In Germany, real estate appraisal is known as real estate valuation (Immobilienbewertung). Real estate appraisers (Immobilienbewerter or Gutachter) can qualify to become a Öffentlich bestellter und vereidigter Sachverständiger (officially appointed and sworn expert). However, this formerly very important title has lost a lot of its importance over the past years, but still is of some value in court procedures. The title is not generally required for appraisals.

Governing authorities

The real estate appraisal practice in Germany is partly codified by law. The federal Baugesetzbuch (abbr. BauGB, "German statutory code on building and construction'") contains guidelines on governing authorities, defines the term market value and refers to continuative rules (chapter 3, articles 192 ff.). Each municipality (city or administrative district) has to form a Gutachterausschuss (appraisal committee), consisting of a chairman and honorary members [10]. The committee gathers information on all real estate deals (it is mandatory to send a copy of each notarial purchase contract to the Gutachterausschuss) and includes it in the Kaufpreissammlung (purchase price database). Most committees publish an official real estate market report every two years, in which besides other information on comparables the land value is determined. The committees also perform appraisals on behalf of public authorities.

Federal regulations

The BauGB defines the Verkehrswert or Marktwert (market value, both terms with identical meaning) as follows: "The market value is determined by the price that can be realised at the date of valuation, in an arm's length transaction, with due regard to the legal situation and the effective characteristics, the nature and lay of the premises or any other subject of the valuation" [11] (non-official translation). The intention, as in other countries, is to include all objective influences and to exclude all influences resulting from the subjective circumstances of the involved parties.

This federal law is supported by the Wertermittlungsverordnung (abbr. WertV, "regulation on the determination of value") [12]. The WertV defines the codified valuation approaches and the general valuation technique. German codified valuation approaches (other apporaches such as DCF or residual approach are also permitted, but not codified) are the:

  • Vergleichswertverfahren (sales comparison approach) - used where good evidence of previous sales is available and for owner-occupied assets, especially condominiums and single-family houses;
  • Ertragswertverfahren (German income approach) - standard procedure for property that produces future cash flows from the letting of the property;
  • Sachwertverfahren (German cost approach) - used for specialised property where none of the above approaches applies, e. g. public buildings.

WertV's general regulations are further supported by the Wertermittlungsrichtlinie (abbr. WertR, "directive on the determination of value") [13]. The WertR provides templates for calculations, tables (e. g. economic depreciation) and guidelines for the consideration of different influences. WertV and WertR are not binding for appraisals for nonofficial use, nonetheless they should be regarded as best practice or Generally Accepted (German) Valuation Practice (GAVP).

Comments on German GAVP

In most regards Generally Accepted (German) Valuation Principles is consistent with international practice. The investment market weighs the income approach most heavily. However, there are some important differences:

  • Land and improvements are treated separately. German GAVP assumes that the land can be used indefinitely, but the buildings have a limited lifespan; This coincides with the balancing of the assets. The value of the land is determined by the sales comparison approach in both the income and cost approaches, using the data accumulated by the Gutachterausschuss which is then added to the building value.
  • In order to account for the usage of the land, the net operating income is reduced by the Liegenschaftszins (interest paid to the land-owner by the owner of the building, i.e. ground rent). The Liegenschaftszins is the product of the land value and the Liegenschaftszinssatz (interest rate for land-use). The Liegenschaftszinssatz is the equivalent of the yield - with some important differences - and is also determined by the Gutachterausschuss.
  • Unlike the All Risks Yield (ARY) in UK practice, the Liegenschaftszinssatz (abbr. LZ) does not include an allowance for default (not to be confused with structural vacancy), therefore this needs to be subtracted from gross operating income. As a result, the Liegenschaftszinssatz will usually be lower than the All Risks Yield.
  • Based on the assumption that the economic life of the improvements is limited, the yield and remaining economic life determine the building value from the net operating income.
  • It should also be observed that contracts in Germany generally prescribe that the landlord bears a higher portion of maintenance and operating costs than their counterparts in the US and UK.

Criticism

Mathematically the distinction between land and improvements in the income approach will have no impact on the overall value when the remaining economic life is more than thirty years. For this reason it has become quite common to use the Vereinfachtes Ertragswertverfahren (simplified income approach), omitting the land value and the Liegenschaftszins. However, the separate treatment of land and buildings leads to more precise results for older buildings, especially for commercial buildings, which typically have a shorter economic life than residential buildings.

An advantage of the comparatively high degree of standardization practiced by professional appraisers, is the greater ability to check an appraisal for inconsistency, accuracy and transparency.

Professional organisations

The Federal German Organisation of Appointed and Sworn Experts (Bundesverband Deutscher Sachverständiger und Fachgutachter, abbr. BDSF)[14] is the main professional organisation encompassing the majority of licensed appraisers in Germany. In recent years, with the move towards a more global outlook in the valuation profession, the RICS has gained a foothold in Germany, somewhat at the expense of the BDSF.

With special focus on hypothecary value, in 1996, German banks with real estate financing activities formed the HypZert GmbH[15], an association for the certification of real estate valuers. A HypZert qualification is regarded as mandatory for their appraisers by many German banks.

Israel

In Israel, the real estate appraisal profession is regulated by the Council of Land Valuers, an organ of the Ministry of Justice; the largest professional organisation, encompassing the majority of appraisers/land valuers is the Association of Land Valuers. Valuers must be registered with the Council, which is a statutory body set up by law, and which oversees the training and administers the national professional exams that are a prerequisite for attaining registration. In 2005 the Council set up a Valuation Standards Committee with the purpose of developing and promulgating Standards that would reflect best practice; these have tended to follow a rules-based approach.

Historically, most valuations in Israel were statutory valuations (such as valuations performed for purposes of Betterment Tax - a tax administered on any gains accruing to the property by way of changes to the local planning) as well as valuations performed for purposes of bank lending. This is now changing: since the adoption in Israel of International Financial Reporting Standards (IFRS) (were adopted in 2006; will fully come into effect in 2008), the profession has been additionally engaged in performing valuations for purposes of financial reporting.

See also

See also: German income approach

Further reading

  • Baum, A. and Mackmin, D. (1995) The Income Approach to Property Valuation (3rd Edition). Routledge, London
  • Brown, G.R. and Matysiak, G.A. (1999) Real Estate Investment: A Capital Market Approach. Financial Times, London
  • Isaac, D. (2002) Property Valuation Principles, Palgrave, London
  • Rees, W.H. and Hayward, R.E.H. (ed.) (2000) Valuation: Principles into Practice (5th edition). Estates Gazette, London
  • Simons, Robert (2007) When Bad Things Happen to Good Property Environmental Law Institute, Washington, DC
  • The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice. Updated and published annually through the 2006 edition; henceforth, updated editions are to appear biannually.
  • The Appraisal Institute, The Appraisal of Real Estate (12th Edition). An industry-recognized textbook.

References

  1. ^ https://www.efanniemae.com/sf/formsdocs/forms/pdf/sellingtrans/1004.pdf
  2. ^ IVS 1 - Market Value Basis of Valuation, Seventh Edition
  3. ^ The Appraisal of Real Estate, 12th Ed. (Chicago: The Appraisal Institute)
  4. ^ FNMA form 1025, March 2005
  5. ^ See, for example, John A. Kilpatrick, Valuation of Brownfield Properties, Chapter 29 in LexisNexis Matthew Bender's Brownfield Law and Practice, 2007
  6. ^ "Valuation", RICS Organization
  7. ^ [1] The Appraisal Foundation
  8. ^ http://www.asfmra.org/
  9. ^ 2006 "USPAP Online", Appraisal Foundation
  10. ^ Article 192 BauGB
  11. ^ Definition of market value in German
  12. ^ German text of the WertV
  13. ^ German text of the WertR
  14. ^ German Hompage of the BDSF
  15. ^ German page of HypZert GmbH

Wednesday, October 24, 2007

Zoning

From Wikipedia, the free encyclopedia

Zoning is a term used in urban planning for a system of land-useregulation in various parts of the world, including North America, the United Kingdom[citation needed], and Australia. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another.

Scope

Theoretically[citation needed], the primary purpose of zoning is to segregate uses that are thought to be incompatible; in practice, zoning is used as a permitting system to prevent new development from harming existing residents or businesses. Zoning is commonly controlled by local governments such as counties or municipalities, though the nature of the zoning regime may be determined by state or national planning authorities. In Australia, land under the control of the Commonwealth (Federal) government is not subject to state planning controls. The United States and other federal countries are similar.

Zoning may include regulation of the kinds of activities which will be acceptable on particular lots (such as open space, residential, agricultural, commercial or industrial), the densities at which those activities can be performed (from low-density housing such as single family homes to high-density such as high-rise apartment buildings), the height of buildings, the amount of space structures may occupy, the location of a building on the lot (setbacks), the proportions of the types of space on a lot (for example, how much landscaped space and how much paved space), and how much parkingVictoria, Australia, land use zones are combined with a system of planning scheme overlays to account for the multiplicity of factors that impact on desirable urban outcomes in any location. must be provided. The details of how individual planning systems incorporate zoning into their regulatory regimes varies though the intention is always similar. For example, in the state of

Most zoning systems have a procedure for granting variancesproperty in question. (exceptions to the zoning rules), usually because of some perceived hardship caused by the particular nature of the

Types of residential zones would be R1 for single-family homes, R2 for two-family homes, and R3 for multiple-family homes.

Types

Zoning codes have evolved over the years as urban planning theory has changed, legal constraints have fluctuated, and political priorities have shifted.[1] The various approaches to zoning can be divided into four broad categories: Euclidean, Performance, Incentive, and Design-based.

Euclidean

Named for the type of zoning code adopted in the town of Euclid, Ohio, Euclidean zoning codes are by far the most prevalent in the United States,[citation needed] used extensively in small towns and large cities alike. Also known as "Building Block" zoning, Euclidean zoning is characterized by the segregation of land uses into specified geographic districts and dimensional standards stipulating limitations on the magnitude of development activity that is allowed to take place on lots within each type of district. Typical types of land-use districts in Euclidean zoning are: residential (single-family), residential (multi-family), commercial, and industrial. Uses within each district are usually heavily prescribed to exclude other types of uses (residential districts typically disallow commercial or industrial uses). Some "accessory" or "conditional" uses may be allowed in order to accommodate the needs of the primary uses. Dimensional standards apply to any structures built on lots within each zoning district, and typically take the form of setbacks, height limits, minimum lot sizes, lot coverage limits, and other limitations on the building envelope.

Euclidean zoning is utilized by some municipalities because of its relative effectiveness, ease of implementation (one set of explicit, prescriptive rules), long-established legal precedent, and familiarity to planners and design professionals.

However, Euclidean zoning has received heavy criticism for its lack of flexibility and institutionalization of now-outdated planning theory (see below).

Performance

Also known as "Effects-based planning", Performance Zoning uses performance-based or goal-oriented criteria to establish review parameters for proposed development projects in any area of a municipality. Performance zoning often utilizes a "points-based" system whereby a property developer can apply credits toward meeting established zoning goals through selecting from a 'menu' of compliance options (some examples include: mitigation of environmental impacts, providing public amenities, building affordable housing units, etc.). Additional discretionary criteria may also be established as part of the review process.

The appeal of Performance Zoning lies in its high level of flexibility, rationality, transparency and accountability.[citation needed] Performance Zoning avoids the arbitrary nature of the Euclidian approach, and better accommodates market principles and private property rights with environmental protection. However, performance zoning can be extremely difficult to implement and can require a high level of discretionary activity on the part of the supervising authority.

Incentive

First implemented in Chicago and New York City, incentive zoning is intended to provide a reward-based system to encourage development that meets established urban development goals.[citation needed] Typically, a base level of prescriptive limitations on development will be established and an extensive list of incentive criteria will be established for developers to adopt or not at their discretion. A reward scale connected to the incentive criteria provides an enticement for developers to incorporate the desired development criteria into their projects. Common examples include FAR (floor-area-ratio) bonuses for affordable housing provided on-site and height limit bonuses for the inclusion of public amenities on-site.

Incentive zoning allows for a high degree of flexibility, but can be complex to administer. The more a proposed development takes advantage of incentive criteria, the more closely it has to be reviewed on a discretionary basis. The initial creation of the incentive structure in order to best serve planning priorities can also be challenging and often requires extensive ongoing revision to maintain balance between incentive magnitude and value given to developers.

Form-based

Form-based zoning relies on rules applied to development sites according to both prescriptive and potentially discretionary criteria. These criteria are typically dependent on lot size, location, proximity, and other various site- and use-specific characteristics.

Design-based codes offer considerably more flexibility in building uses than do Euclidean codes, but, as they are comparatively new, may be more challenging to create. When form-based codes do not contain appropriate illustrations and diagrams, they have been criticized as being difficult to interpret.

One example of a recently adopted code with design-based features is the Land Development Code adopted by Louisville, Kentucky in 2003. This zoning code creates "form districts" for Louisville Metro. Each form district intends to recognize that some areas of the city are more suburban in nature, while others are more urban. Building setbacks, heights, and design features vary according to the form district. As an example, in a "traditional neighborhood" form district, a maximum setback might be 15 feet from the property line, while in a suburban "neighborhood" there may be no maximum setback.

Zoning in UK

Main article: Development control in the United Kingdom

Development Control or Planning Control is the element of the United Kingdom's system of Town and Country Planning through which local government regulates land use and new building. It relies on the "plan-led system" whereby Development Plans are formed and the public consulted. Subsequent development requires Planning permission, which will be granted or refused with reference to the Development Plan as a material consideration.

There are 421 Local Planning Authorities (LPAs) in the United Kingdom. Generally they are the local Borough or District Councilunitary authority. Development involving mining, minerals or waste disposal matters is dealt with by County Councils in non-metropolitan areas. Within national parks, it is the National Park Authority that determines planning applications. or a

Zoning in Australia

Main article: Development control in Australia

Statutory planning otherwise known as town planning, development control or development management, refers to the part of the planning process that is concerned with the regulation and management of changes to land use and development.[2]

Zoning in New Zealand

Main article: Resource Management Act 1991

New Zealand's planning system is grounded in effects-based Performance Zoning under the Resource Management Act.

Zoning in USA

Main article: Zoning in the United States

Zoning regulations fall under the police power rights state governments may exercise over private real property.

Origins and history

Special laws and regulations were long made, restricting the places where particular businesses should be carried on. In the 1860s a specific State statute prohibited all commercial activities along Eastern Parkway (Brooklyn), setting a trend for future decades.[citation needed]

In 1916, New York City adopted the first zoning regulations to apply city-wide as a reaction to construction of The Equitable Building (which still stands at 120 Broadway). The building towered over the neighboring residences, completely covering all available land area within the property boundary, blocking windows of neighboring buildings and diminishing the availability of sunshine for the people in the affected area. These laws, written by a commission headed by Edward Bassett and signed by Mayor John Purroy Mitchel, became the blueprint for zoning in the rest of the country, partly because Bassett headed the group of planning lawyers which wrote The Standard State Zoning Enabling Act that was accepted almost without change by most states. The effect of these zoning regulations on the shape of skyscrapers was famously illustrated by architect and illustrator Hugh Ferriss.

The constitutionality of zoning ordinances was upheld in 1926. The zoning ordinance of Euclid, Ohio was challenged in court by a local land owner on the basis that restricting use of property violated the Fourteenth Amendment to the United States Constitution. Though initially ruled unconstitutional by lower courts, the zoning ordinance was upheld by the U.S. Supreme Court.[3].

By the late 1920s most of the nation had developed a set of zoning regulations that met the needs of the locality.[citation needed]

New York City went on to develop ever more complex set of zoning regulations, including floor-area ratio regulations, air rights and others according to the density-specific needs of the neighborhoods.

Among large populated cities in the United States, Houston is unique in having no zoning ordinances. Houston voters have rejected efforts to implement zoning in 1948, 1962 and 1993.

References

  1. ^ Holm, Ivar (2006). Ideas and Beliefs in Architecture and Industrial design: How attitudes, orientations, and underlying assumptions shape the built environment. Oslo School of Architecture and Design. ISBN 8254701741.
  2. ^ Gleeson B. and Low N., Australian Urban Planning: New Challenges, New Agendas, Allen & Unwin, St Leonards, 2000.
  3. ^ Village of Euclid, Ohio v. Ambler Realty Co. (1926)