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Excess or Surplus Land: Which Is It?
by Philip G. Spool, ASA
I can’t tell you how many times I either read an appraisal report or heard an appraiser mention that a property is oversized with excess land, when in fact the additional land is not excess land but surplus land. To the average person, calling it excess land would be acceptable, but for an appraiser, it isn’t. A distinction should be made as to whether the property has “excess” or “surplus” land. While the determination that a property has excess land or surplus land, one needs to understand the difference. For this, the definitions for excess and surplus land can be found in The Dictionary of Real Estate Appraisal, Seventh Edition published in 2022.
Excess land is defined as “land that is not needed to serve or support the existing use. The highest and best use of the excess land may or may not be the same as the highest and best use of the improved parcel. Excess land has the potential to be sold separately and is valued separately”.
Surplus land is defined as “land that is not currently needed to support the existing use but cannot be separated from the property and sold off for another use. Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel”.
The definitions of excess and surplus land apply to both residential properties and commercial properties and their application. While residential and commercial properties are analyzed differently, there are more similarities in their analysis. Prior to determining if the land is excess or surplus land, information about the land (site) must be noted, whether a residential or a commercial property. They include the zoning (including minimum lot size and setback requirements), highest and best use, types of immediate surrounding properties, location of existing improvements on the site and supply & demand of land and proposed improvements.
Analysis of Excess and Surplus Land
Most residential appraisers either utilize the FNMA 1004 form or the General-Purpose (GP) form for valuing single family residences. Narrative appraisal reports offer more latitude in explaining your analysis. Typically, the residential appraiser indicates the total lot size of the subject and each of the comparable sales and then makes a dollar per square foot adjustment for their lot size difference and this is done without consideration if the difference is reflected as excess or surplus land. The residential appraiser usually does not differentiate the land as either excess land or surplus land and just applies a dollar amount per square foot to the lot size difference and the adjustment is somewhat less per square foot than what the amount per square foot would be as reflected in the Cost Approach as Site Value.
The dollar amount per square foot is supposed to reflect a supported amount per square foot, yet, I have not seen a residential appraiser supporting the land adjustment, particularly in a paired sales analysis. Most appraisers use a rule of thumb of applying somewhere around percent of the full site value, going as low as one-third to as high as two-thirds. I am not advocating this but in real life, this is what is typically done. The reasoning is that the appraiser rightfully believes that a buyer will only pay for an incremental amount of value towards additional land that is above and beyond what the typical lot size is for the subject property and surrounding properties. However, what is not taken into consideration and should be, is if the additional land creates a premium or if the additional land is not as beneficial for the typical lot size in the neighborhood. A good example of this is if the lot size of the subject is 7,500 square feet with a 2,500 square foot house on the site. If this is typical of the properties in the subject’s neighborhood or immediate area, how much is a person willing to pay for any additional land? In this case, an incremental size of more than the 7,500 square feet. The answer might depend if the additional land is for the backyard, side setbacks from the houses on both sides or perhaps the front yard. The appraiser must also consider a typical owner or buyer’s preference. Ideally, a paired sales analysis between a house with a typical lot versus a house on an oversized lot could be performed. This would be an ideal analysis but in reality, there are many factors that are taken into consideration in the purchase price of a house above and beyond just the lot size. This is why a residential appraiser does not spend too much time trying to figure out a more precise amount of an adjustment that needs to be made for additional land, i.e. surplus land.
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Surplus or Excess?
As stated previously, for a single-family residence, the appraiser must consider the following: zoning (including minimum lot size and setback requirements), highest and best use, types of immediate surrounding properties, location of existing improvements on the site and supply & demand of land and proposed improvements. An important question the appraiser must answer is if the subject site is adequate or oversized to support the current use of the improvements. For a duplex, triplex or a fourplex, which are residential properties that are allowed to be appraised by a state-certified residential appraiser, the analysis is the same but the zoning aspect (density—number of units that can be built on the property) is more important as well as if the land is large enough to add on additional units.
The following are issues that have to be taken into consideration in order to determine if the land is excess land. This list is not all that might have to be considered and also is not in any particular order, but must be considered.
Zoning: Of most importance is what the minimum lot size for the existing structure and for the additional land that might be considered to be sold off separately.
Location of existing improvements on the site: Is there enough land to build a separate house? Does the location of the existing house sit on a good portion of the land whereby it prevents construction of an additional house and therefore be considered surplus land and not excess land?
Shape of the lot: The shape of the lot must consider if the additional land has enough area for a house to be built that would be acceptable for a property owner.
Highest and Best Use: Is there enough demand for an additional house to be built? This would be important if the area has more supply of houses than demand. In a rising market, there is more demand than supply. Conversely, if there is an oversupply of houses for sale, maybe the additional land would be excess land that could build on sometime in the future.
Legal issues: Check with the building and zoning department of the municipality the subject is located. Is there just one tax folio number or is the property located on more than one tax folio number and can be split into two or more parcels? If so, then inquire if the property has a Unity of Title, preventing the property from being split into separate, buildable sites.
The amount of time spent on the analysis is perhaps more than what the residential appraiser might want to tackle. That is why most residential appraisers don’t even analyze the property to see if there is excess or surplus land.
Land-to-Building Ratio
Regarding an analysis of excess and surplus land in commercial properties, besides the five aforementioned considerations, there are additional situations to be considered.
Commercial properties have additional considerations that affect the land value and would determine if the additional land over and above what is needed for the existing structure is considered either excess or surplus land. For an industrial property, not only is the land-to-building ratio important but what type of industrial property exists. If the building is a distribution warehouse building, are the trucks typically 18 wheelers? If so, then extra land is needed for loading and unloading of merchandise and a higher land-to-building ratio is necessary.
For retail and office buildings, if the land-to-building ratio is greater than the typical ratio, the determination as to whether the additional land is excess or surplus land would be based on the location of the additional land. Would the additional land have access and exposure from the street or would the additional land be located behind the existing building, thus limiting the accessibility of an additional building. If the accessibility to the additional land hinders the construction of a new building, that would indicate surplus land. The same applies if the additional land is best suited for additional parking or expansion of the existing building.
Parking requirements are also an issue. Besides minimum parking spaces and handicap parking spaces, some stores have a higher traffic count and this should be taken into consideration.
Valuing Surplus Land
The most common approach in valuing surplus land for commercial properties, especially warehouses, is the use of the land-to-building ratio. It is also the most misunderstood when valuing the additional land as many appraisers call the additional land excess land instead of surplus land. Before calling it surplus or excess land, look at the survey and see where the building is located in relationship to the entire site. Consider required parking, turning areas needed for delivery trucks, setback requirements and demand for additional buildings and/or expansion to the existing building. More than likely, the additional land will be surplus land instead of excess land. If so, the surplus land will be valued as a contributory value which is a lower value per square foot than if the land was a buildable site as reflected in excess land.
Valuing Excess Land
As excess land may be sold off separately, the property now becomes two properties, maybe more. The excess land will now have its own highest and best use, based on its legal, physical, financially feasible and maximally productive use. Also, the excess land will have its own set of comparables and in essence, valued separately. The value of the excess land, if analyzed on a price per square foot basis, may or may not equal the value of the main parcel (exclusive of the excess land), again depending on its highest and best use.
In conclusion, whether there is excess or surplus land, choosing the correct type of land (excess or surplus), would have an effect on the final value as excess land is typically a higher price per square foot than surplus land. The appraiser should document the rationale and reasons for choosing one over the other. Just follow the stated guidelines in arriving at your choice of the property having excess or surplus land.
About the Author
Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed since 1992. In addition to appraising, he is an instructor with Miami Dade College, teaching continuing education classes. He is also the Vice President and Chairman of the real estate division with the Greater Miami Chapter of the American Society of Appraisers. He can be reached at pgspool@bellsouth.net
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