Development Approach Held To Be Admissible
MDOT v Weaver , unpublished opinion per curiam of the Court of Appeals, issued June 27, 2006 (Docket Nos 257798, 257799, 258087, 258088.).
In MDOT v Weaver , the Court of Appeals held that the “subdivision approach” (also called “development approach”) was an admissible methodology for condemnation appraisals. In the subdivision approach, an appraiser attempts to ascertain the value of vacant land by projecting the prices of finished lots and then deducting the projected costs the would precede the ultimate sale (e.g., cost of infrastructure; entreprenurial profit, taxes, brokerage fees, legal costs, etc). Generally, a discount rate is then applied to bring the future income to a present value for the vacant land. As explained in The Appraisal of Real Estate, 11th ed:
The use of subdivision development analysis to value vacant land is most applicable in cases where sales data on vacant tracts of land are inadequate but market data are available on the probable sale prices of developed lots and the demand for such lots.
Traditionally, the development approach seldom has been used in condemnation cases due to the numerous projections involved. For example, the appraiser must project the absorption rate (time to sell off the lots), which, by its very nature, can be difficult to do.
In Weaver , one of the property owners' appraisers laid out a plan with 26 buildable residential lots. He then determined the total cost to engineer, survey, run sewer, and grade the property was $186,000. He arrived at this figure by estimating $6,000 for zoning and preliminary costs, $30,000 for engineering and surveying, $130,000 to run sewer to the property at $50 a foot, and $20,000 for grading-which included approximately $12,000 to move the floodway. He concluded that no discount was applicable because of “the simplicity of the project, the low interest rates, builders' practices of buying lots in bulk, and the high demand for entry level housing.”
Defendants' other expert generally agreed with these estimates, but he calculated that the floodplain work would require an additional $20,000. He also subtracted $100,500 in soft costs-which consisted of marketing and professional fees and taxes-and $100,000, approximately 10.97 percent, in entrepreneurial profit.
MDOT filed an application for leave to appeal with the Michigan Supreme Court on August 8, 2006.