The Valuation of Urban Land: Comparison and Critique of Three CAMA Methods

Abstract

We present new methods for urban land valuation based on a high degree of irreversibility given that a substantial structure is present on the land. Irreversibility implies that land and structure value function as a whole until the option to tear down and redevelop becomes valuable. In a typical situation, where structures are far from teardown, irreversibility implies that land and structure value change at about the same rate over time. Land valuation methods based on irreversibility are compared to valuations based on vacant land sales and on land residual methods (land value equals property value minus the depreciated cost to build); both methods predict that land value is much more volatile than structure value whereas irreversibility implies a more stable ratio of land value to property value. We fit all three methods to Maricopa County assessor data during a recovery period (2012-2018). Results show that the land value ratio behaves as predicted by irreversibility, not by the land residual or vacant land methods. We suggest new mass assessment procedures based on the value of the option to redevelop. We provide evidence that our procedures merit further study.