by Rachel L. Richardson
Lessons in Appraisal Theory
Presenting on assemblage, plottage, and remnants in his office’s bi-monthly staff meeting, Gary DeClark— MAI, CRE, FRICS, R/W-AC, and Senior Managing Director of Valbridge Property Advisors | Chicago Metro—reviewed concepts and definitions from appraisal theory classes.
While for some these might simply be abstract ideas, for DeClark they are facets of real estate he has witnessed throughout his 40-year career in appraisal—amid the rise and fall of market cycles.
Cultivating his expertise in these specialty property types, DeClark shares, “I’ve always been a proponent that a single avenue to value doesn’t tell you the proper story.”
“If the property that you’re appraising is more mainstream,” he concedes, “those types of properties are easily valued in a sales comparison approach because there’s a lot of data for that… or by an income approach for the same reason.” But when a property is more nuanced, he shares, a cost approach can help answer the questions of land value and economic feasibility.
This is particularly relevant in the unique cases of assemblage, plottage, and remnants.
- Assemblage involves the combination of multiple parcels into one.
- When assemblage is done for an economic benefit, it has generated a plottage value.
- Remnants are pieces of land that may be a result of various assemblages over time, discrepancies between deeded legal descriptions and those in title reports, or a leftover swath of land after an eminent domain taking.
- These unique cases (assemblage, plottage, and remnants) require special considerations from an appraisal perspective.
“When you have one parcel being associated or combined with another one, two, or three (or whatever the case may be),” says DeClark, “you have now assembled one parcel to many others, and you now have an assemblage.”
“Now that can be where it stops,” he adds. For example, there may be someone who assembles adjacent parcels simply to have more yard space around his house, because he likes the space it provides.
Many times though an assemblage is not simply to add space, but rather to allow an owner to do more with the land—to build more. This yields an economic benefit. “When you assemble property for an economic benefit,” DeClark shares, “that is more along the lines of what’s termed plottage.”
“In [an] urban setting,” he says, “many times land is not only valued on a per-square-foot basis, but it’s also on a developable-square-foot basis called floor area ratio (FAR). This effectively means you can develop higher, and rather than look at strict dollars-per-square-foot of the surface, you look at the density or dollars-per-square-foot of FAR.”
Due to various zoning requirements—such as for setbacks or open space—assembling a larger parcel from multiple smaller ones can bring with it the advantage of greatly increasing the total square feet of improvements a developer can put on the parcel. It can also mean lower unit costs to develop since otherwise (if they were trying to construct higher density improvements on a smaller parcel) they would likely need to go through a costly zoning variance approval process and have other increased costs.
For this reason, an assemblage created for an economic benefit is one that has generated a plottage value.
“Land is always residual to the value of the improvements put on it,” DeClark adds. “If you can put more on a land parcel it’s going to have more value than what can be achieved from developing a smaller project on the same sized parcel.”
DeClark shares how transportation-oriented developments (TODs) are key examples of assemblage and plottage in action. These developments involve many residential (and sometimes commercial) units and are designed to aid commuters by providing easy access to work hubs via transportation systems such as rail lines. They usually adhere to an increased open space requirement must receive development approval. However, the required number of parking spaces is less than in other suburban developments because of proximity to the transportation hub. Instead of driving to work, the dweller takes a commuter train.
Because construction of parking is so costly, DeClark says, the lower parking requirement affords TOD developers an opportunity to construct more rentable or saleable improvements (apartments or condos) on a smaller lot. Further, parking requirements often dictate the number of units that can be approved for development.
“Assemblage and plottage components are very much in the market when you’re talking about redevelopment,” DeClark notes, “and you see them all the time in TOD developments.” By creating a large enough parcel through the assemblage of smaller ones, TOD developers can cash in on the economic benefit of building at a greater density, and with fewer parking spaces than would be required in a typical residential area.
So what are remnants and where do they enter the picture? DeClark describes remnants and shares three scenarios that can cause them.
Remnants. DeClark explains, can arise through eminent domain proceedings—such as those we described in an earlier post on our right-of-way specialty practice.
He shares, for example, how a parcel might have a portion of the subject cut out of it to accommodate a corner widening for a stretch of new roadway, creating a small corner fragment of the original parcel. “It ends up being termed a remnant,” he says of this corner fragment. “It’s a leftover piece.”
While valuing parcels that may render remnants created through eminent domain proceedings, DeClark notes it is essential to consider the laws that apply in each instance, since federal and state laws on the subject can vary.
“In an eminent domain valuation,” he shares, “the appraiser is tasked with estimating a value for the property before the taking and immediately after the taking to estimate just compensation due the property owner—in essence the difference between before and after values. The difference can include the value of the part taken and any damage to the remainder. And if the taking renders a remainder as an uneconomic remnant, that economic loss must be included in the award of just compensation due ownership.”
“The interesting part,” he says, “[is] there are federal rules and there are state rules for eminent domain, and the state rules don’t necessarily have to mirror the federal scheme. You’ve just got to understand what area of the world you’re practicing in and do the valuation accordingly.”
“Alternatively,” he adds, “[a remnant] can come through various assemblages over the course of time for various properties.” In this setting, a remnant could even have been its own parcel; it’s just that eventually, because of all the redevelopment in its neighborhood, it became the only one of its kind. Since redevelopment can necessitate rezoning, it may even be that eventually this remnant parcel has become too small to be developed on its own and becomes a remnant.
“If properties were assembled over time,” he adds, “it is not always the case that the legal descriptions of the various parcels share the same borders. Different surveyors could have done the work at different times and maybe an error occurred. Or there was a failure for all title encumbrances to be noted in a title report. Although not regularly, these occurrences can happen.” The question here, DeClark says, may be “How is that error going to be modified?” A correction can sometimes leave a remnant piece.
For DeClark, one of the many memorable projects involving remnants occurred early in his career, when he was a “cub” appraiser, he says.
The company he was working with at the time was tasked with the valuation of properties along a portion of Lakeshore Drive, a road that runs along Lake Michigan in the Chicago metro area. They were to value the properties along a stretch that had two sharp bends in it—an area known to the locals as the “S curve.” Numerous accidents occurred in that stretch, and the city intended to smooth out the bends in the road through an eminent domain proceeding to add to the safety of the public.
Valuation proved complex, he shared, not only because the properties were in a coveted, upscale setting but also because the land uses along the route varied greatly. Uses included open space parkland, marinas, high-rise land sites, and four- to six-story loft buildings.
“Because of the configuration of the S curve,” he adds, for many parcels the taking meant “you could economically no longer do anything with them. They became remnants.”
When it comes to valuation of remnants, DeClark keeps his eye on a few special considerations.
When the remnant has been created by an error in the title report, DeClark says, the crux is: “What’s the value of the property before the problem and after the problem?” Describing the process of a diminution in value report, he says, the remnant parcel’s worth is the “difference between the two” (the before and after) values.
In other cases, property ownership is not in question and there is no before or after.
Perhaps the parcel has just become a remnant through various assemblages over time. As the neighborhood has been redeveloped and potentially even rezoned, a developer may take interest in the area and see an opportunity there—namely, a development that involves assembling this remnant with other parcels near it.
In these cases, DeClark says, “it really becomes important to understand where you are in the process.”
If it is early in the process, the developer may reach out to the owner of the remnant first, because it is an important, “lynchpin piece.” In this timing, before the various larger parcels around it have been assembled, the developer may have a chance to pick up the remnant at a lower cost than later in the process.
“If you’re the developer,” he adds, “you want to jump in early to address this. Unfortunately sometimes you’re stuck with jumping in late.”
If it ends up being late in the process, and the remnant owner realizes the assemblage is occurring and his parcel is integral to the development, then this owner will likely demand a higher price for the piece. To determine if the project is still economically feasible even with this higher asking price, he adds, developers will do a thorough residual analysis.
This analysis, DeClark explains, is a “theoretical valuation” of an entire assembled parcel that assesses the future value of the property as constructed and stabilized. Then the developer will deduct hard- and soft costs, incentives, and entrepreneurial profit. After those deductions, he shared, “whatever is left over is land value.” If the developer finds the project is still economically viable then the assemblage will proceed.
THINKING OUTSIDE THE CHECKBOX
Because of their unusual nature, remnant parcels don’t easily conform to a “checkbox” appraisal format, DeClark shares. There has been a push, he says, to prioritize comparables (comps) as the best avenue to value, which can be an issue with unique properties like remnants.
“Are you going to be able to find in the market another remnant piece like the one you need to put a number on?” asks DeClark. Typically, no.
To cultivate expertise in valuation of both typical and unique properties, DeClark says, “it’s really important that all appraisers have exposure to other things besides appraising.” He adds that exposure to a range of real estate activity—such as brokerage, management, development, real estate taxation, law, or finance—helps an appraiser approach valuation from a more nuanced perspective.
Having this perspective is “exceptionally important,” he shares. When appraisers grow in their careers and become familiar with these facets of the industry, he adds, this perspective allows their approaches to become more individualized and multifaceted—not trying to forcibly apply “the same old tools in the bag,” but rather to take a reasoned, defensible approach to the complex variables in play.