The Importance of Property Surveys In Joint Ventures

Joint ventures in land depend on surveys to document investment quality.

Land investments are subject to an apples-to-oranges dilemma in establishing pricing. But the industry has survey methods that investors depend upon.

All property carries some value, but the conundrum is that land and buildings are akin to snowflakes: No two are alike.

For example, Parcel A of 20 acres may carry a magnificent view of the sea and enjoy just the right amount of access from a highway. Parcel B, 20 acres situated across the road, might stretch up a steep, rocky hillside and be riddled with industrial waste from decades ago. Further, one or both parcels may not have been sold for generations, which leaves an absence of comparative numbers of then-versus-now valuations. Participants in joint ventures in strategic land investment are well advised to invest in A over B for obvious reasons.

This is why all real property undergoes property or land surveys, which help determine the market value of the asset. The outcome of a valuation is particularly important for investors who may not even physically inspect the property but who instead depend on land investment specialists to identify and manage the investment.

A property survey involves looking at a property for both its tangible characteristics as well as anything that can impact its value in the future. A “cost-” or “summation approach” to valuation takes into account the land minus the cost of depreciation or replacement of buildings on the property.

For individuals and institutions participating in land investments and commercial property that will be rented (including those purchased in joint ventures), the “investment method” is used. This method takes into consideration the potential income stream for renting the property, as demonstrated by the rental rates of similar properties in the immediate vicinity.

A variation on the investment method is the residual method, used for properties that are raw and likely to be developed. This method requires a well-considered plan for how it will be developed, taking into account the following:

• Land value

• Development costs

• Site preparation costs, including demolition of existing buildings, decontamination and remediation (in brownfield lands), and construction of roads and service diversions

• Fees (legal, selling agents, stamp duty land tax, options costs)

• Minimum profit requirements

• Gross development value for the completed development

Land investment consultants necessarily must provide full accounting in a prospectus document to potential joint venture participants. Potential investors should also engage the services of an independent financial advisor to determine if and when a land investment is an appropriate component of their investment portfolio.

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