INTRODUCTION

In any appraisal situation, it is important to consider if the calculated value seems reasonable. It is
fundamental to temporarily disregard the often complicated detail of a property and ask, ‘Does this
seem reasonable?’ or ‘If the property really was for sale, how much would it sell for?’. This is a
quick check on the figure derived from calculations. From time to time, the appraiser will discover
that the calculated figures add to a certain amount which may be too high or too low.

In determining the valuation method to be used, it would be best for the appraiser to apply the same
method or process as a typical buyer and seller to have a feel of the market. In mass appraisal, it is
not expected or possible to individually assess or value each property.

In undertaking a general revision of values, many individual sales analysis will likely be conducted
in the same way that it would require for individual valuations in order to obtain the best results,
given the constraints that are placed on assessors. Mass appraisal is the task of valuing many
properties at the same time. In arriving at the valuation factors used in mass appraisal, individual
elements such as unit value, which make up the mass appraisal, would have likely been derived
from analysis of individual properties or groups of properties.

The valuation approaches are also extensively discussed in the Philippine Valuation Standards:

“In many, but not all, countries three valuation approaches are recognized in the
valuation process: sales comparison, income capitalization, and cost. While a well-
evidenced market may make the cost approach less relevant, a lack of comparable
data may cause the cost approach to be predominant. The laws of some countries
preclude or limit the application of one or more of the three approaches. Unless
there are such restrictions or unless there are other compelling reasons for a
particular omission, it is reasonable for the valuer to consider each approach. In
some countries, the use of each approach is mandated unless the valuer can
demonstrate a lack of supporting data or other valid reason for omission of a
particular approach. Each approach is based, in part, on the Principle of
Substitution, which holds that when
 CHAPTER 2: Valuation Approaches, Techniques and
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several similar or commensurate commodities, goods or services are available, the
one with the lowest price attracts the greatest demand and widest distribution. In
simple terms, the price of a property established by a given market is limited by
the prices commonly paid for properties that compete with it for market share, the
financial alternatives of investing money elsewhere, and the cost of building a new
property or adapting an old property to a use similar to that of the subject property
(property being valued)”.

THE SALES / DIRECT COMPARISON APPROACH

The sales comparison approach or market approach is based on the proposition that an informed
buyer would pay no more for a property than the cost of acquiring an existing property of similar
nature.

“The sales comparison approach recognizes that property prices are determined by
the market. Market value can, therefore, be calculated from a study of market
prices for properties that compete with one another for market share. The
comparative processes applied are fundamental to the valuation process.” –
Philippine Valuation Standards (1st Edition) - Adoption of the IVSC Valuation
Standards under Philippine Setting (2009)

Also referred to as the direct comparison, sales comparison approach is particularly applicable
when there is an active market with sufficient number of adequately verifiable transactions.
However, the direct comparison approach is not quite as useful in an unreliable or an inactive
market, which can be the circumstance in a small LGU.

The starting point of the direct comparison approach is the assembly of property facts and
accumulation of market data in the form of current market sales and offerings. These are
combined in the valuation process to develop an estimate of market value.

After the market information have been collected, adjustments must be made to the sale prices
of these comparable properties to account for differences in date of sale, physical characteristics,
market conditions, and terms of sale when compared to the subject property. All adjustments are
made from the comparable property to the subject property, i.e., the sale price of the comparable
property is adjusted for differences relative to the subject property. Adjustments should be made
carefully as each adjustment may lead to a potential error.

In the case of all valuations, the ultimate values established rely on proper collection of sales data,
sound analyses, and intelligent application of the resulting analyzed information.

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Units of Comparison and Value. Before any valuation technique is applied, the appraiser must
consider the method of comparing one similar property to another – there must be a way of
relating similar properties (which are different in themselves) with each other by using a common
factor. ‘Units of Comparison’ are units of measurement that allow us to analyze real properties by
factors recognized in the market, and attach peso amounts to these units. Hence, a square meter,
for instance, is a ‘Unit of Comparison’, and Php600 per square meter, as a ‘Unit of Value’ both
being recognized by the market, are likely to be the factors in the mind of sellers and buyers.

Remember that a valuation is an attempt to mimic the market and determine what processes the
market would follow, and arrive at an appropriate value. Thus, the appraiser would try and use the
method and units of comparison that would be used by a buyer in considering the property. Buyers
of residential property do not often calculate square meter values consciously. However, analysis
can often show a pattern that allows valuation analysis.

Using the Direct Comparison Approach relies heavily on using appropriate units to compare one
property to another. The following units of comparison are typically found in the market:

Square Meter. Square meter (m2) is a well-used unit of comparison applied to properties that
typically sell based on land or building area (most properties). This unit can be used to value
residential, commercial, and small industrial sites. Square meter is almost the universal unit of
comparison. It is widely applicable and a dimension that many people can grasp easily.

Although a square meter is a recognizable area, many buyers (particularly residential buyers)
do not actually think in square meters. Rather, they think as to whether a property is suitable,
appears ‘big enough’ for their needs, has the right number of bedrooms, etc. Some care must
be taken when using square meter values, as two houses in a similar location and exactly the
same size may sell for different amounts due to the number of bedrooms (e.g., two bedroom
house with big living area and a three-bedroom house with small living area, both of the same
size, are likely to sell for different amounts). Analysis of sales may reveal the difference.

Meter Frontage. The market recognizes that the meter frontage of a property contributes to
value. Meter frontage is sometimes useful in valuing central business districts, downtown
commercial, lake front, or deep water port industrial property (i.e., frontage to the water). It
is a key factor for those property types where the length of actual frontage to a road (or other
feature) has significant impact on the way a property can be used. This applies particularly to
retail (as the retail premises rely a lot on public display and providing an inviting presence to
the buying public) and to industrial and commercial property where access for transport,
deliveries, etc., are important. Many properties are unaffected by frontage for as long as the
land has a useful shape and adequate access. For instance, a large industrial plant has adequate
access for transport purposes but the manufacturer does not need to have his actual factory
built along the road. Thus, it can function just as well on a rear parcel.

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Meter frontage is not usually a key factor in residential property provided that the residential
property has an appropriate frontage for the location in which it is located. Thus, a residential
land parcel of 12-meter frontage and 20-meter depth (thus 240m2) will is less likely to sell for
a significantly different amount to that of a property that has a frontage of 13 meters and 18.5-
meter depth (thus 240m2). It is only when the shape of a residential parcel starts to become
difficult to use efficiently that the value would change noticeably. Consider a parcel with 8m
frontage and with a depth of 3m (24m 2) or maybe 6m frontage with a depth of 40m (240m 2). The 8-
meter and 6-meter frontage properties may sell for less than the 12m frontage properties due to
being narrow and not being as efficient a shape for residential purposes.

Hectare Measure. The market often measures the value of agricultural and farm properties on
a per hectare basis. Hectare equivalent to (10,000m2) value (as a unit of comparison) may also
be applicable to large industrial or residential development sites.

Other Units of Comparison. When not applicable in the residential appraisal, other units of
comparison may be the number of rooms (e.g., hotel), volume in cubic meters (e.g., timber,
building used for cold storage), number of car park spaces (e.g., multi-storey car park in the
city) or seating space/tables for a restaurant. There are many other units of comparison, and
they relate to the nature of the business or use of the land/building.

SPECIAL NOTE REGARDING ROUNDING OFF NUMBERS

The actual arithmetic calculations performed in the appraisal process will often result in generating precise
numbers (e.g., Php2,386/m2) as a value. It is appropriate in such cases to round numbers to the nearest ten,
hundred or thousand, perhaps even ten thousand pesos, depending on the value or numbers concerned.

In any case, a valuation or appraisal is an estimate, and by its very nature an estimate should be a round number.

In rounding off values, the following could be done:

Php2,386 could become Php2,390 or better still Php2,400
Php8,947 could become Php8,950 or Php8,900, or Php9,000.
Php176,300 could become Php176,000, or Php175,000 or Php180,000 or maybe even Php200,000 when talking
about very general levels of value for instance.
Larger numbers such as Php1,760,000 could legitimately be rounded up or down to Php1,800,000 or
Php1,750,000, depending on the circumstances.

Rounding off is best done at the conclusion of a calculation; thus, only one rounding off is undertaken.
Multiple rounding off within a calculation can sometimes distort the final result.

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THE COST APPROACH

The cost approach is based on the proposition that an informed buyer would pay no more for a
property than the cost of land and improvements required in reproducing a substitute property
with the same utility as the subject property.

“The cost approach, also known as the contractor’s method, is recognized in most
countries. In any application, the cost approach establishes value by estimating the costs of
acquiring land and building a new property with equal utility or adapting an old property
to the same use with no undue expense resulting from delay. The cost of land is added to
the total cost of construction. (Where applicable, an estimate of entrepreneurial incentive,
or developer’s profit/loss, is commonly added to construction costs.) The cost approach
establishes the upper limit of what the market would normally pay for a given property
when it is new. For an older property, some allowance for various forms of accrued
depreciation (physical deterioration; functional, or technical, obsolescence; and economic,
or external obsolescence) is deducted to estimate a price that approximates Market Value.
Depending upon the extent of market data available for the calculations, the cost approach
may produce a direct indication of Market Value. The cost approach is very useful in
estimating the market value of proposed construction, special-purpose properties, and
other properties that are not frequently exchanged in the market.” - Philippine Valuation
Standards (1st Edition) - Adoption of the IVSC Valuation Standards under Philippine
Setting (2009)

In cost approach, the starting point is the assembly of property facts and the accumulation of cost
data. These are combined in the cost estimating process to develop a Reproduction Cost New or
Replacement Cost New.

Reproduction Cost New is the cost to create a virtual replica of the existing structure,
employing the same design and similar building materials.

Reproduction Cost New means reproducing the property exactly as to how it is/was, even
though the design may be outdated or materials may be inefficient, etc. For example, the
Replacement Cost New would require the costing of timber trusses if they were present in the
building under consideration even though steel trusses are the modern replacement and may be
cheaper or more efficient. The Replacement Cost New would include the cost of any period
features such as decorative columns, or fancy front veranda which would not likely be
included in a modern building of the same type.

Replacement Cost New is the replacement cost estimate that envisions constructing a
structure of comparable utility, employing the design and materials that are currently used in
the market.

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It is the current cost of constructing a similar property using modern materials, standards,
design, etc. This would allow the use of steel trusses in place of timber, or perhaps plastic pipe
in place of galvanized steel or copper. An old warehouse may have had internal columns to
support the roof framing whereas a modern warehouse probably has a large open interior due
to portal frame construction. The cost of replacement of a warehouse would, in this case, be
the cost of constructing a portal frame building of the same area or purpose as the existing
building. Cost of replacement is commonly based on building area. However, in cases where
modern industrial practices do not require as much floor area as previous practices, a
customized building may need not be the same area as the original building.

In residential construction, it is generally accepted that Replacement Cost New is calculated

on the area of the building, plus additional amounts for other improvements, such as fencing,
paving, outbuildings, etc.

Depreciation refers to the adjustments made to the costs of reproducing or replacing the assets
to reflect physical deterioration and functional (technical) and economic (external)
obsolescence in order to estimate the value of the asset in a hypothetical exchange in the
market when there is no direct sales evidence available.

Functional obsolescence can be caused by advances in technology that make new assets more
efficient in delivering goods and services. Modern production methods may render previously
existing assets fully or partially obsolete in terms of current cost equivalency. Applying
optimization process will account for many elements of functional obsolescence.

Obsolescence resulting from external influences may affect the value of the asset. External
factors include changes in economic conditions which affect the supply of and demand for
goods and services produced by the asset of the costs of its operation. External factors also
include the cost and reasonable availability of raw materials, utilities, and labor.

Replacement Cost New Less Depreciation (RCNLD) is the term often used by valuers in the
Philippines and is equivalent to the term Depreciated Replacement Cost. This reflects the
effects of depreciation on a building or other improvement from all sources, and provides an
estimate of the contribution to value by the improvements.

Calculating Reproduction Cost and Cost of Replacement. There are four common methods
of determining cost as far as appraisal in the Philippines is concerned:

1. The Civil Engineering or Quantitative Method. In this method, calculations are made by
the type and quantity of all materials and labor required in the construction of a building to
determine its replacement cost. This is the most common method adopted by appraisers in
the Philippines. Estimates include all design fees, costs of permits, supervision and
builders profit. Value based purely on cost of materials and direct labor does not properly
reflect the cost to the buyer.
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2. The Unit-in-Place Method. The ‘unit costs’ for elements that make up the building are
assembled and worked up to the total cost of replacement. Examples would be a 300m 2
concrete at Php/m2, 125m sewer drains at Php/m, etc. It is important that all elements are
included and small items are not forgotten. All profits and fees must be included as well.

3. The Indexing Method – This method requires establishing a base cost and year from
which the adjustment in costs are measured. The base year may be scored at 100, and
subsequent costs changes may be reflected in the modified index. As costs increase (or
decrease), the changes are expressed as percentages above or below the base. This method
requires careful monitoring of cost changes and incorporating costs in to the model to
reflect the progressive increases.

4. The Comparative Method – In this method, the cost is estimated from known
construction costs of similar property expressed in terms of units of size or capacity (e.g.,
per square meter of floor area). Such information may be gained from analyzing the
building cost of recently sold properties with new construction. This method is simple and
effective, as it incorporates all costs, fees, and profits. It is simply the transport of cost
information from one property/building to another of the same type.

Estimating market value (of a whole property) through the cost approach, as described above,
generally follows these steps:

1. Value of Land (obtained by comparison with market-based sales)

2. Add Current Replacement Cost New
3. Subtract Physical Deterioration: Curable and Incurable
4. Functional Obsolescence
5. Economic Obsolescence (generally

incurable) Results in (4) Indicated Market

Value.

Note that it is almost impossible to separately assess the drop in value attributable to the
individual elements of depreciation, thus, the depreciation shown in any calculation will be the
value deduced from transactions. In circumstances where no indicative transactions exist, it may
be necessary to apply depreciation rates or formula developed over years of experience, or
imported from other locations.

Caution When Using the Cost Approach. In many cases, the cost approach is a legitimate
method of valuation. However, when using the cost approach, it is most important to only ‘cost’
those items that are contributing to the value of the property.

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Consider a house with a regular water supply and an artesian well at the back of the property
wherein the owner decides to put in a second well in front of the property which costs Php15,000.
When undertaking a valuation, it could be considered that the extra well adds no value, and
therefore, should not be included in calculating the replacement cost or value. In such a case, the
cost does not equal the value even when the additional well is new and perfectly functional. The
case would be different if the buyer would have a need for the second well, wherein the cost of
which can be included in the valuation.

In some instances, an improvement can actually be a detriment. Consider a sturdy concrete block
garage on a piece of land that has been subdivided from a larger house and land parcel. The garage
is in good order and has been used by the owner of the original large parcel. However, to construct
a new house on the subdivided land, this perfectly good, original garage might need to be
demolished, the concrete floor broken up, and all the scrap removed. This demolition exercise would
cost money and could easily reduce the value of the lot itself. If a similar clear vacant lot would
sell for Php400,000, the lot with the garage would probably sell for a little less due to the cost of
demolition.

For the cost to equal the value, the item must be new or equal to new, and contribute fully to the
highest and best use of the property. For an ‘improvement’ to add value, it must have a beneficial
use. If it has no immediate use or no perceived future use, then it will have little or no value.

THE INCOME CAPITALIZATION APPROACH

The income capitalization approach is the determination of value of an income stream or potential
income stream or cash flow. In property appraisal, the income stream is most often the annual net
rent. The income approach expresses a fixed relationship between the two factors of (1) net
income and (2) capital value. Simple capitalization considers that the income being obtained is
available in perpetuity, and expresses value purely as a factor of the current annual income.

“The income capitalization approach can be applied in both Market Value

assignments and other types of valuations. However, for Market Value
applications, it is necessary to develop and analyze relevant market information.
This focus differs distinctly from the development of subjective information for a
specific owner or the reflection or viewpoint of a particular analyst or investor.” -
Philippine Valuation Standards (1st Edition) - Adoption of the IVSC Valuation
Standards under Philippine Setting (2009)

With the income approach, an estimate is made on the prospective economic benefits of
ownership. This approach assumes that an informed buyer would pay no more for a property than
the cost of obtaining an income stream of the same size and embodying the same risk as that of the

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subject property. Applications

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The income approach is not commonly used in determining ordinary residential values, but can be
a primary valuation method for apartments when it can be seen that the value of a certain type of
apartment is connected to the ability of that type of apartment to generate rent. This is common in
larger cities or high-density residential areas.

Income approach is most applicable in the case of investment or commercial properties, wherein
this approach would be a method adopted by sellers and buyers in the market.

Given that most buildings have different levels of expenses (compared to each other), it is
common to adopt the ‘net rent’ as the annual income element in the capitalization. After all, the
buyer is buying the property for income generation purposes - it is the money he/she will get that
is of key interest, and not so much the rent paid; hence, the best basis is to use net rent.

The approaches selected must be supported by the facts and circumstances of the case on hand.
The applicability of any approach in a given valuation problem depends on the character of the
problem, the type of property involved, the nature of the market, and the availability of the
required data of
appropriate quality and quantity.

CAPITALIZATION PROCESS

To undertake this process thoroughly, the sale price and the net income of a property must first
be determined. In many cases, the net income will be unknown and it may be necessary to adopt
various costs and expenses (financial outgoings) in order to deduce the net income from the gross
income information. The ‘gross income’ is the total amount receivable by the landlord.

The capitalization concept comprises three main factors, these being (1) market value, (2) rental
value, and (3) capitalization rate. If any two of these factors are known, the other can be
calculated.

In certain instances, calculating reliable outgoings may not be possible and capitalization may be
calculated on a gross income basis. The gross income basis has potential for considerable error, as
a landlord or owner, in reality, only gets to keep the net amount of the rental income after
expenses. Thus, any individual property may have a high rent, but if this rent is also associated
with high expenses, then the amount actually retained by the landlord will not be as much as it
would first appear.

In essence, capitalization determines and expresses the market value as a multiplier of the annual
income, or put in another way, it may perhaps more correctly express the income as a percentage
of the value. For example, a property worth Php2,000,000 with a return of Php250,000 per annum
would have a capitalization rate of 12.5% (i.e., [Php250,000 / Php2,000,000] x 100 = 12.5%).
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This shows that the annual income is 12.5%Applications
of the selling price (value). Thus, we have a 12.5%
capitalization rate.

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a. Determine the Gross Income. Income is determined by confirming what the tenant is paying
and by considering whether that rent is reasonable and in line with other comparable
properties. If existing rentals of the subject property are not in line with the comparable
buildings, then the valuer should ascertain the reason for this. The valuer should estimate the
current market rental value of the property based on comparable rental evidence. In adopting
the income approach, it is not necessary to use the actual rent being paid for the property as
the rent for valuation purposes. If the rent was set years ago, then it is more appropriate to
apply the current rent to the property, less an allowance for vacancy and uncollected rent.

b. Deduct the Expenses/Outgoings. Outgoings and expenses are items which an owner is
required to spend to maintain optimum rental level. Typical expenses would include
property taxes and any other local government charges, water and utility charges, repairs and
maintenance, insurance, and administrative and management costs.

c. Determine the Capitalization Rate. Income capitalization rate is derived from the internal
rate of return of an investment. A rate of return includes rate on and return (recapture) of
capital invested on building improvements separate and is apart from capital investment in the
underlying land.

d. Capitalize the Net Income. Analyzing the comparable sales is the only way a valuer can
establish the capitalization rate.

Definitions:
Gross Income The rent income plus other income statutory and
building expenses/outgoings paid by the tenant.
Net Income Gross income less expenses/outgoings
Capitalization Rate Yield or expected return (The higher the initial
return, the lower the value and the greater the risk)

Formula: V = I / R
Where: V = Value
I = Net Income
R = Capitalization Rate
Capitalization Rate = Income /
Value
EXAMPLE

Given: Building Area: 80m2 (high quality investment type

apartment) Rental: Php12,000/month (Php144,000/annum)
Capitalization Rate: 11%

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Solution: Capitalized Value (Market Value) = (Php144,000/0.11) = Php1,309,090

In this instance, there is no need to calculate land or building values separately, as these
are both included in the total value of Php1.3 Million.

Reminder: In using proper capitalization rate, valuers/appraisers must be aware of and

evaluate the factors that investors consider. These are: (1) alternative investments to make
capital earn (e.g., stock and bonds markets and their yields); and (2) conditions in the
mortgage market.

There are other capitalization methods to estimate the value of property, such as
Discounted Cash Flow (where the income is still capitalized although the income is
discounted by various amounts, taking into account the cost of money, inflation, rent
reviews, lease terminations, re- lettings, specific maintenance and other matters, over a
longer period than the current year). The use of Internal Rates of Return or Hypothetical
Development are also valid valuation processes. However, these are not suited to ‘mass
appraisal’, particularly on residential mass appraisal, and therefore are not explored in this
chapter.

EXERCISE ON SALES ANALYSIS

What capitalization rate should a valuer use on a two-storey block of 14 small apartments,
each let at Php7,000 per month, with total outgoings of Php150,500, given the following?

a. Each of the units is 45m2 in area and the land is 350m2.

b. These apartments were built approximately five years ago, as were the sales that
occurred recently in the locality.

New good quality apartments are costing between Php13,500 and Php14,000 per square
meter to build.

Sales Evidence
Sale 1: A two-storey block of 12 small good quality apartments, each let at Php6,500
per month. Apartment area of 45m2 each. Land area of 400m2. Annual outgoings
Php144,000. Sold at Php9,970,000.

Sale 2: A two-storey block of 10 small good quality apartments, each let at Php6,500 per
month. Apartment area of 47m2 each. Land area of 300m2. Annual outgoings of
Php136,000. Sold at Php7,800,000.

Sale 3: A two-storey block of 16 smaller good quality apartments, each let at Php4,500 per
month. Apartment area of 38m2 each. Land area of 300m2. Annual outgoings of
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Php125,400. Sold Applications
at Php9,410,000.

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Table 1: Sales Analysis Exercise
Particulars Sale 1 Sale 2 Sale 3
Rent per month (Php) 6,500 (x12) 6,500 (x10) 4,500 (x16)
Gross annual rent (Php) 936,000 780,000 864,000
Outgoings (Php) 144,000 136,000 125,400
Outgoings % GR 15.38 17.44 14.51
Net rental (Php) 792,000 644,000 738,600
Sale Price (Php) 9,970,000 7,800,000 9,410,000
Net cap rate (i.e., after
7.94 8.26 7.85
payment of expenses)
(%)
Gross cap rate (%) 9.39 10.00 9.18

For purposes of the above example, the results are very close. This happens in actual
situations in orderly markets, but many buyers are uninformed and do not always act
prudently. It must also be acknowledged that many purchases are undertaken with money
earned off-shore and can skew the local market at times.

Valuation Observations:
1. All rents appear to support each other;
2. The lower rents in sale 3 are for much smaller units;
3. Outgoings vary a little, although overall are within 20% of each other; and
4. Net Capitalization rates are very close.

Property to be valued: Block of 14 small apartments

Each apartment has a rent of Php7,000 per month
Total outgoings of Php150,500 per annum

Computation
Gross Rental = (14 x 7,000 x 12) Php1,176,000
Outgoings = Php150,500
Net rent = Php1,025,500

Capitalization rates are very close ranging from 9.18% to 10%, and support each other.
Adopt a rounded lower amount of 9.25% for subject property. The percentage adopted is
lower than the ‘average’ due to aligning with the very small apartments. At 9.25%, the
subject property would have a value of Php11,086,486 (Php1,025,500/0.0925) or
Php11,100,000.

In the case above, an individual valuation has been undertaken. For LGU’s SMV purposes,
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Applicationsneed to be shown separately. For an
this is not efficient, and the land and
buildings SMV, a
square meter rate needs to be established for the land and the buildings. In order to
establish

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the building’s value alone, which is the value shown by these type and area of apartments
(and likely can be applied as the ‘Buildings Value’ for SMV purposes), the appraiser would
need to know the land values in the locality. In the example, assume the land value is
Php7,500/m2.

Sale 1. Selling price of Php9,970,000

Analysis: Land area of 400m2 at Php7,500/m2 Php3,000,000
Balance (representing buildings of 12 apartments at 45m2 each) Php6,970,000
Php6,970,000/540m2 (12 units at 45m2 ) Php12,907/m2

Therefore, the value attributable to buildings on Sale 1 is Php12,900/m2 .

Sale 2. Selling price of Php7,800,000

Analysis: Land area of 300m2 at Php7,500/m2 Php2,225,000
Balance (representing buildings of 10 apartments at 47m 2 each) Php5,550,000
Php5,550,000/470m2 (10units at 47m2) Php11,808/m2

Therefore, the value attributable to buildings on Sale 2 is

Php11,800/m2. Sale 3. Selling price of Php9,410,000

Analysis: Land area of 440m2 at Php7,500/m2 Php3,300,000
Balance (representing buildings of 16 apartments at 38m each) Php6,110,000
2

Php6,110,000/608m2 (16 at 38m2) Php13,000/m2

Therefore, the value attributable to buildings on Sale 3 is Php13,000/m2.

Based on the above sales analysis which shows the building to have a value of Php12,900 or
Php11,800 or Php13,000, the valuer is now in a position to select a value for SMV purposes.
All sales occurred at about the same time, with the highest and lowest amounts having a
difference of Php1,100. This is a range of about 9%, and an LGU appraiser would be happy
with this. The ‘average’1 of the building values is Php12,566. For purposes of this exercise,
the appraiser will adopt Php12,500 as the appropriate added value of buildings. This amount
is adopted on the principle that there is insufficient evidence to be confident of the values,
and that Php12,500 is inside the range of the sales. It also provides some benefit of the doubt
to the taxpayers, given the limited number of sales considered.

1
Average values should be avoided where possible. The ‘average’ value in an area will change every time an additional property
33
 CHAPTER 2: Valuation Approaches, Techniques and
sells and is brought into the ‘average’ calculation. If two or Applications
three of the ‘better properties’ in an area are sold, the ‘average’ per m2
will be higher than ‘if not so good properties’ are sold and averaged, although the typical values in the area will not have changed.

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 CHAPTER 2: Valuation Approaches, Techniques and
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e. Check the property valued by capitalization

This property is a two-storey block of 14 good quality small apartments, each let at Php7,500
per month, with total outgoings of Php150,500. Each of the apartments is 45m 2 and the land is
350m2. Capitalized value shows Php11,100,000.
Land 350m2 at Php7,500/m2 = Php2,625,000
Buildings being 14 apartments at 45m each x Php12,500/m2 =
2

Php7,875,000 Total value based on land and buildings = Php10,500,000

The ‘capitalized value’ is Php11,100,000 and the land and buildings value is Php10,500,000.
The difference of Php600,000 is under 6%, and the values support each other.

If the task was to conduct an individual valuation, then the capitalized value of Php11,100,000
is the preferred methodology and value, under the assumption that this is the basis on which
such properties were being bought and sold. For SMV purposes, the LGU is exploring a
valuation method applicable across a large number of properties and that can provide an
equitable basis for the RPT.

The practical and realistic approach for LGUs is to adopt the added value of the buildings on a
square meter basis. The square meter rates can be determined using capitalization or
depreciated replacement cost. This method is preferred because LGUs generally have good
building area records, rents are sometime hard to confirm, and capitalization rates may not be
reliable. The square meter rates are readily applied in determining the values for individual
properties within a mass appraisal process.

In the example cited, it would be appropriate to apply Php7,500/m 2 for land suitable for
apartments, and Php12,500 as the added value of five-year-old apartments in good condition.
As a result, the earlier exercise did not attempt to develop a Depreciated Replacement Cost
element. Given that the Replacement Cost New of the apartments is Php14,000/m 2 , the drop in
value from new is Php1,500 over a five-year period. To check if an even rate of depreciation was
adopted, this would be Php300 per annum which is just over 2%, and based on other material
examined, is likely to be in order.

The illustration above demonstrates the information that may be gained from sales and how
this information may be analyzed and applied.

LGUs are unlikely to use individual capitalization valuations in the regular course of applying SMVs.
However, it is an available method. More likely, LGUs will use capitalization tools in analyzing
transactions in order to derive units of value for buildings of various commercial or industrial
nature and land values.

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications

DISCOUNTED CASH FLOW

The Discounted Cash Flow (DCF) is a method of determining the value of a property (or any
asset that generates income) by anticipating the future cash outflows (expenditure) and cash
inflows (income) on a periodic basis and by determining the net cash flow per period (usually
annual), and then recalculating these cash flows to represent their present value. These future cash
flows are recalculated (‘discounted’) to represent their value at a particular time, usually at the
time when the calculation is undertaken, and become known as the present value.

The annual cash flows are discounted by an amount or factor that represents the opportunity cost
and risk factors that exist from the time of the expected future cash flow back to the present.

The DCF is a valuation method where expected future cash flows applicable to a piece of real
estate are discounted at an interest rate that reflects the risks of the project, the cost of money and
any expectations of the investor.

The discount rate is established by two key elements. These elements are:

1. Time value of money. A developer or investor would prefer to have cash now than in the
future. Thus, the investor will require some benefit or compensation to offset the delay in
receiving this money — the further the future cash flow is, the lesser present value it offers.

2. Risk and uncertainty that the future may hold. The investor would require some benefit
or compensation for putting their funds at risk due to the possibility that the expected cash
flow may not materialize.

EXAMPLE 1

Assume that a single payment (cash inflow) of Php500,000 is due in 10 years. How much
would an investor pay now to receive this payment? Inflation is expected to be 8% per annum.
The present value of Php500,000 due in 10 years at 8% is Php231,600. Put it the other way, if
an investor pays Php231,600 now at 8% per annum, then it would amount to Php500,000 in 10
years. In this example, the discount is purely for inflation - so a person who invested
Php231,600 in a property now, in anticipation of receiving Php500,000 in 10 years, has really
made no profit but just kept level with inflation. The property investor has not received any
benefit from risking their money over a period of years.

Thus, an investor would normally require an amount to recover the risk factor and some profit
in addition. It could be expected that an investor would require at least a 9% return. So when
Php500,000 is due in years, the amount an investor would pay (discounted at 9% for 10 years),
36
 CHAPTER 2: Valuation Approaches, Techniques and
Applications
is equivalent to Php211,200. Thus, approximately Php20,000 per year is gained over the 10-
year period. This is a small amount of ‘profit’ for risking Php231,600 for 10 years. In reality, an
investor would be seeking a much bigger margin. In this case, there is only one payment made
at the start, then another one after 10 years. In normal circumstances of real estate, there would
be monthly or annual cash-flows to the owner.

In the investment property example earlier discussed, the payment made at the start would be
the purchase price (market value) of the property, and the cash inflow would be the annual
rent plus the final value of the property if it was sold at the end of a specified period of years.
Thus, a property investor usually receives annual cash flow and always has the property.

Example for Present Value of Money Cash Flow

In calculating the ‘Present Value’ of a cash flow over a period of time, the most accurate
method is to base the calculation on the actual payment periods that would be expected. If the
rent is to be received monthly, for instance, then the cash flows for the ‘present value’ calculation
should also be done monthly. In the subsequent example, the cash flows are shown on an
annual basis for a clearer illustration.

Consider a property owner’s position in his property which provides the opportunity to receive
rent for six years. The owner also has to make some payments for minor expenses associated
with the property.

For the first three years the rent is set at Php120,000

For the second three years the rent is set at Php120,000 plus a contracted increase in the lease
of 7.5% or Php9,000. The total rent is Php129,000 equivalent to Php120,000 + Php9,000.

The tenant pays almost all of the operational expenses of the building, thus, these are not
expenses of the landlord. The landlord’s expenses are estimated at only Php10,000 in the first
year, increasing at 5% every year.

Net cash flow per year would be:

Year 1. Php120,000 less Php10,000 = Php110,000
Year 2. Php120,000 less Php10,500 = Php109,500
Year 3. Php120,000 less Php11,025 = Php108,975
Year 4. Rent Increase. Php129,000 less Php11,580 = Php117,420
Year 5 Php129,000 less Php12,160 = Php116,840
Year 6 Php129,000 less Php12,770 = Php116,230

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 CHAPTER 2: Valuation Approaches, Techniques and
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Total overall rent at face value is Php678,965. However, this does not consider the fact that
these rental payments occur over a period of years; thus, the receipt of income is delayed.

To undertake a simple cash flow analysis, each annual payment is determined and then discounted
from the period it falls due and back to the present time. Assuming Php110,000 is due at the
end of the first year, Php109,500 shall be due at the end of the second year, and so on.

To bring all this to its present value (i.e., to the present day or the date the cash flow is being
considered for purchase), these annual payments must be ‘discounted’ due to the delay in
receiving these payments. The discount rate is the percentage by which the future payments
are reduced in order to arrive at the present value.

Discount rates can be determined in the market (market rates are the most reliable rate as this
is what is used by investors) and may be linked to other forms of investment of a similar risk
or linked to official rates. In this example, the actual percentage is not a key factor. A rate of
8% shall be adopted as the discount rate.

NET PRESENT VALUE = FV

(1 + r)n

The cash flow is presented below.

Conditions:
• Inflation Rate is at 8% per annum
• Rent for the 1st three years is at Php120,000
• Rent for the 2nd three years will have an increase of 7.5% = Php120,000 + Php9,000 =
Php129,000
• An average 5% per annum increase in maintenance cost from the Php10,000 base cost from
the 1st year.

Figure 1: Cash Flow

Net Cash Flow per year
Year Rent Maintenance Expenses (Php) Net Rent (Php)
1 10,000 110,000
2 Php120,000 10,500 109,500
3 11,025 108,975
less =
4 11,580 117,420
5 Php129,000 12,160 116,840
6 12,770 116,230
Total Overall rent at face value 678,965

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 CHAPTER 2: Valuation Approaches, Techniques and
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(Cont...) Figure 1: Cash Flow

Discount Rate
Future Value Present Value
Year 1
(Php) (Php) (rounded
(1 + r)n
off)
1 110,000.00 0.925992593 101,852.00
2 109,500.00 0.85733882 93,879.00
3 108,975.00 0.79383224 86,508.00
4 117,420.00 0.73502985 86,307.00
5 116,840.00 0.68058320 79,519.00
6 116,230.00 0.63016963 73,245.00

By calculating the present value of the rent (as compared to the face value), the actual return is
Php521,309 compared to a face value of Php678,965. The drop in value of nearly Php158,000
is due to the annual deferred income at 8%.

The longer the waiting period for the rent is, the lesser will be its value. At 8%, rent due in 10
years is worth, now, just under half its future value.

The further out the rent is, the less is its value. For example, receiving Php10,000 per year for
10 years at 8% has a present value of Php67,000. Receiving this same amount for 25 years, the
present value of the rent is Php106,000, Php122,000 for 50 years, Php124,943 for 100 years.
Its Present Value after 1,000 years is Php125,000. This may be a simple example, but it
indicates the effect of time on value.

Thus, the ‘future value’ is not guaranteed. To a great extent, this does not matter as long as the
method employed and the results obtained are similar to the methods and results used in the
market. After all, the task is to determine the present value of a property as determined in the
market by the sellers and buyers. If sellers and buyers are using cash flow models or values
that go out 40 years and a distinguishable pattern or model is being used, then the appraiser
should do the same. As with all valuations, the valuation process is to mimic the market.

In determining the value of a property, the appraiser must adjust all the future annual cash
flows to the present time, and also consider into the equation the value of the property as a
whole at the end of the expected cash flow period in line with market expectations. The
mathematics of this situation is simple, whereas getting the inputs requires market research.

From a mass appraisal perspective, the DCF method of valuation would only be used to
determine square meter rates for certain types of properties. LGUs are not expected to carry
out DCF valuations on many, if not at all, properties. However, it may be necessary to carry
out a hypothetical DCF to deduce the square meter values for land or buildings for these rates
to be applied to properties of a particular nature. The DCF process is the means to establish the
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 CHAPTER 2: Valuation Approaches, Techniques and
values to be applied. Applications

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications

Valuation of a forest land area subject to logging. Consider that a government forested land
plantation of 1,630 hectares is leased by a logging company for a period of five years under a
concession agreement. The concession imposes a 35,000m3 per annum maximum extraction
rate. Typical annual logging extraction is 100m 3 of timber per hectare as expected by the logging
company, although this will vary due to terrain within the concession area. A selling quota is
imposed permitting 50% of logs for export market and 50% for the local market.

The price of timber sold in the local market is Php5,000/m 3, whereas it is sold at Php7,000/m3
in the export market. The cost of production is estimated at Php4,000/m3.

Table 2: Sample DENR-Approved Harvesting Schedule for Logging

Year 1 2 3 4 5
Annual Quota (m3) 25,000 30,000 30,000 33,000 35,000
Approved Area 250 300 300 330 450
for Extraction (Ha)

The valuation process requires determining the market value of the concession by calculating
the expected annual revenue, and then discounting to the present value based on the profit
(percentage) the logging company is expecting from the activity.

EXAMPLE

Date of Valuation: 1 January 2010 which is Year 1.

Discount (Capitalization) Rate: 20% (deduced from discussions with logging companies
as to profit margins)
The concession is not yet operating, but is about to commence.

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications
Solution:
Table 3: Solution to Forest Land Exercise
Year 1 2 3 4 5
Expected m3 cuts (based
25,000 30,000 30,000 33,000 35,000
on logged area)
Estimated Revenue 12,500m3 x 15,000m3 x 15,000m3 x 16,500m3 x 17,500m3 x
(50% of the logs for Php5,000/m3 = Php5,000/m3 Php5,000/m Php5,000/m Php5,000/m3
3 3

local market) Php62.5M = Php75M = Php75M = Php82.5M = Php87.5M

Estimated Revenue 12,500m3 x 15,000m3 x 15,000m3 x 16,500m3 x 17,500m3 x
(50% of the logs for Php7,000/m3 = Php7,000/m3 Php7,000/m3 Php7,000/m3 Php7,000/m3
export market) Php87.5M = Php105M =Php105M = Php115M = Php122.5M
Total Estimated Revenue Php150M Php180M Php180M Php198M Php210M
Less: Production Cost 25,000m3 x 30,000m3 x 30,000m3 x 33,000m3 x 35,000m3 x
Php4,000 = Php4,000 = Php4,000 = Php4,000 = Php4,000 =
Php100M Php120M Php120M Php132M Php140M
Net Profit Php50M Php60M Php60M Php66M Php70M

Using the Discounted Rate Method, the annual cash flows from the forest concession can be
brought to a “present value” and then used to calculate the per hectare rate for the SMV.

Where: NPV - Net Present Value as of start of year 1.

F1 - Net Profit year 1
F2 - Net Profit year 2
F3 - Net Profit year 3
F4 - Net Profit year 4
F5 - Net Profit year 5
i - Discounted Rate
n - year

Net Present Value of the five annual cash-flows =

F1 + F2 + F3 + F4 + F5
(1+i)0 (1+i)1 (1+i)2 (1+i)3 (1+i)4

Thus:
Php50M + Php60M + Php60M + Php66M + Php70M
(1.20)0 (1.20)1 (1.20)2 (1.20)3 (1.20)4

= Php50M + Php50M + Php41.6M + Php38.1M + Php33.7M

= Php213,618,827 Net Present Value of Logging Concession for 1,630Ha
= Php131,000/Ha

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 CHAPTER 2: Valuation Approaches, Techniques and
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As shown above, the value of one hectare of a forest logging concession in this particular
locality is Php131,000. In isolation, this would not be sufficient to provide a convincing level
for a mass appraisal of other concessions. However, calculating two or three more concessions
with similar hectare values would provide confidence to the assessor in adopting this level of
value (Php131,000 would likely be rounded to Php130,000 for SMV purposes).

The big variable with logging concessions is the volume of timber felled and removed every
year. If logging volumes in the locality vary considerably, it is possible to adopt a Php/m3 of
logs as the comparative factor, in which case the earlier sample calculation can be refined.

Considering that one hectare produces 100m3 of logs. The land value per production in cubic
meters is Php1,300/m3 (Php130,000/100m3). Thus, Php1,300/m3 is the present value per
cubic meter of the logging concession or the unit of value for SMV. To determine the value
of a concession in the locality (which has a sample production rate of 125m 3 per hectare), the
calculation would be:

Total Concession Land area x Logging Volume per Hectare x Land Value per
Cubic Meter (e.g., Php1,300/m3)

The sample rate of Php1,300/m3 is dependent on the extraction rate (cubic meter per year)
being similar to the sample property (i.e., greater number of logs extracted toward the end of
the concession). If the logging activity is uniform across the period, the value per hectare and
per cubic meter would change in comparison to the illustration above, and would have a
higher value due to a greater proportion of the income being brought in during the earlier
period of the concession.

For SMV purposes and in the event that the LGU does not know the per annum production
quota for the rate per hectare (i.e., how many cubic meters in each year), it is appropriate to
spread the annual production activity equally across the life of the concession. This calculation
relies on knowing the total expected harvest over the life of the concession.

LAND AND BUILDING RESIDUAL TECHNIQUES

A legitimate, but generally non-preferred, method of determining land value is the Extraction
Process or ‘Residual Method’. The ‘residual’ and extractive methods are used in the valuation
process to determine the value of one component of a property by deducting the value of other
components from the full value or sale price. This is different from the accounting concept of
residual value, where the ‘residual’ remains after deducting the selling or handling costs.

In this approach, the value of land may be determined by establishing the value of the property
overall (i.e., land, buildings, and other improvements), then subtracting the value of the building

43
 CHAPTER 2: Valuation Approaches, Techniques and
Applications
and other improvements in order to determine the land value alone. In effect, the land value is the
residual amount after deduction of improvements. This method can be used in the case of an
actual sale of an improved property, in order to deduce the land value of that site. The method
can also be used when there are no buildings on a site and a hypothetical building and
improvements are envisioned. The property, as a whole, is then valued. Thereafter, the ‘value’ of
the hypothetical or imaginary building and improvements is deducted, thus, resulting in the
remainder of the value being attributable to the land.

This process can be used for any type of property (i.e., residential, commercial or industrial) but is
probably best in the case of those properties that generate rent and can be valued in the first place
by the capitalization method, assuming that simple direct comparison is not appropriate.

In adopting such a procedure, the actual value of all items that contribute to the total value of
improvements must be included when making the deductions. Deducting the ‘value’ of a main
building is not that difficult, but the appraiser must also consider other improvements, such as
paving, and outbuildings. The land value derived from residual method is not as reliable as that of
from straightforward analysis of vacant land sales as there are a number of adjustments due to the
improvements, and each adjustment is a potential error.

The residual method requires the appraiser to have the following information:
• Reliable estimate of market value or actual market value sale of a property
(preferred);
• Good description of the building (construction type, size, condition, area, etc.);
• Reliable building costs and depreciation rates or values of buildings of
that particular age, style and condition.

HYPOTHETICAL DEVELOPMENT

The Hypothetical Development process allows the value of land and buildings to be determined
even in cases when there may be no sale transactions. In its simplest form, this method can be just
the process of visualizing a development property and then deducting the theoretical cost (value)
of a building from the overall sale price to arrive at the land value as briefly discussed earlier.

In its fullest extent, a whole process can be done to calculate the value. This process replicates
the actual tasks, process, and costs a developer would do when conducting an actual real estate
development. The process done by an appraiser is a feasibility study identical to what a developer
would do when considering the purchase of a major land parcel or property.

Using Hypothetical Development to determine land value, for instance, is a sophisticated

‘extraction’ or ‘residual’ process. In such a case, prior to buying a parcel of land and undertaking
development, and prior to selling individual lots for a profit, a prudent developer will

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 CHAPTER 2: Valuation Approaches, Techniques and
consider the market, Applications

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications
determine how much the lots will sell for, deduct all of the costs of development from the gross
receipts, allow a profit factor, and ultimately arrive at the amount for which they can pay for the
land. This feasibility process is calculated in the reverse order of what would take place in an
actual development.

Consider the following example in which a developer might incur the following costs or
allowances in an activity where the land is purchased, plans are prepared, roads and lots are
developed, a profit is projected, and the lots are sold at a certain price. It is expected that 60 lots
can be generated from this development set out below. A developer’s costs and processes would
likely be as follows:

EXAMPLE 1

Using the known value of raw land, determine the value of developed lots.

Given: Purchase a large parcel of land = Php12,000,000

Plus costs of: Survey, plans, permits and construction costs = 16,000,000
Loan interest charges, advertising etc. = 2,500,000
Total Investment = 30,500,000

Mark-up (25% of total investment) = 7,625,000

Total cost of development including mark-up = 38,125,000
Selling Price of each Lot (Php38,125,000/60 lots = Php635,416.66) = Php 635,500

Considering that there are 60 lots to be sold and assuming that all lots are of similar nature,
each lot would sell for Php635,500. If prices of lots in the locality are close to this price
value and there is appropriate demand, then the development is expected to proceed and
the developer would make the expected profit. Additional profit will be realized if lots are
selling for more than the projected price. Otherwise, the developer would have to
reconsider his options to proceed.

The calculation shown above can be worked in reverse, and this is the manner in which a
feasibility study or valuation exercise would be undertaken in cases where there is a large
piece of development land to be valued, but no direct sale prices of raw land within the
vicinity are available. By establishing lot values or selling prices and by allowing all the
components in the development process, the amount due (market value) for the large
parcel can be determined even though there may have been no sales or asking prices for
large parcels of land for many years.

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications
EXAMPLE 2

Using the known value of developed lots, determine the value of raw land.

Given: Lot value of developed area = Php635,500

The calculation would look like this:

Total Projected Gross Income: 60 lots at Php635,500 = Php38,130,000
Less: Mark-up = 25% of total investment. The mark-up can be calculated by
considering that the gross income includes all the cost, plus the mark-up. Thus, the
gross income is 100% of the total investment, plus 25% for mark-up.

Mark-up is 25% so the calculation is (38,130,000/1.25) x 0.25 = Php7,626,000

Thus balance available for development, interest, etc., and land = 30,504,000
Less: Estimated development costs of construction, plans, fees, etc. = 16,000,000
Loan interest charges, advertising, miscellaneous costs = 2,500,000
Balance available for land purchase = 12,004,000

The Php12,000,000 (rounded off balance) is the amount which would be available for
the land purchase which could be then attributed as the value of the raw land. Thus, by
understanding the market forces, attitudes and developer’s margins, a value can be
calculated for a development site (or building) although there may be no directly
comparable sales.

The same process can be undertaken in a sales analysis to estimate the profit a developer
would have made, as long as the gross realization can be calculated (from real sales) from
the purchase price of the land (as a whole) and the development costs and interest.
Specialist practitioners in this field have a good grasp of all the elements within the
development process and can determine market value with reasonable accuracy.

EXAMPLE 3

Using the known rental rates per square meter, determine the value of commercial lot.
Find the value of the vacant land in a commercial area.

• Land size is 20m x 25m = 500m2

• Supports four individual ground level retail shops each 100m2 (5m x 20m) with an
area for unloading/casual storage
• Building Unit Construction Cost = Php5,000/m2
• Pavement = Php45,000 (100m2 at Php450/m2)
• Fencing and gate = Php40,000

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications
The ground level retail shops (if constructed) would rent out for Php1,100/m2 per year,
whereas the 2nd level offices would rent out for Php675/m2.

Thus: Gross rent for the shops = 4 x 100m 2 x Php1,100 = Php440,000.

Gross rent for the offices = 4 x 100m2 x Php675 = Php270,000.
Total Rent = Php710,000

In this case, as the hypothetical shops are new, the rent could be ‘capitalized’ directly at
the ‘gross’ or total rent level. Capitalization is a valuation method based on the relationship
between rent and market value (sometimes referred to as capital value vis-a-vis the value
of the capital money tied up in an investment). It is common when undertaking a
capitalization of rent to make an allowance in any year for maintenance and possibility of
vacancies; thus an allowance could be made, but in this example direct gross (i.e., total)
rent is used.

In this sample locality, it is established (by discussions with owners and brokers) that
where information is available, shops generally show about a 9% to 10% return on the
capital investment. As this site is in a very good area where risks are low, we would adopt
9% as the appropriate rate of return on the investors’ capital (capitalization rate) for the
property.

Based on capitalization, this property, as a whole, has a value of Php7,888,888 or

Php7,900,000 (Php710,000/0.09), which could now be considered its market value.

Now that the market value has been calculated, we can determine the land value by
deducting the new cost of such buildings from the value.

Market Value = Php7,900,000

Less: Value added by main building:
New Building (no depreciation)
800m2 (8 shops x 100m2) at Php5,000/m2 = 4,000,000
Paving = 45,000
Fencing and gates = 40,000
Total Construction = 4,085,000
Value attributable to land = 3,815,000
Unit value [Php3,815,000/500m2 (total land size)] = Php7,630/m2

In such circumstances, the residual technique can be done as shown above. In cases when
the value attributable to the land comes near the actual purchase price of the lot being
considered, it would generally be appropriate to adopt the sale transaction as a base for
market value.

48
 CHAPTER 2: Valuation Approaches, Techniques and
Applicationsthe value of land, other approaches
When there are insufficient sales to
determine may be
adopted. The extraction or residual procedure uses the cost approach and requires
subtracting the value of improvements from the total improved sale price/value. By using
this method,

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 CHAPTER 2: Valuation Approaches, Techniques and
Applications
an appraiser would subtract the ‘value added’ of the buildings from the total property value
to arrive at an indicated land value.

EXAMPLE 4

The value of the whole property is known; determine the value of land.
Transacted property, 400m2 land with two-storey building of 300m2 on each
level:

Sale price of property in good location (shop with dwelling above) = Php6,500,000
Less: Value added by building (deduced from sales analysis) = 3,100,000
Indicated land value = Php3,400,000

Thus, the land unit value is expected to be Php3,400,000/400m2 = Php8,500/m2

Assuming that this deduced value seems reasonable, then the value of Php8,500/m2 for
land could be adopted in this location. The assessor/appraiser can search for other sales to
support this value. These may be land sales only or deduced from other transactions.

The same principle of determining the residual value (land) can be used by taking the sale
price, less the depreciated replacement cost of buildings from the total selling price/value.
Where possible, direct market information should be used.

EXAMPLE 5

The value of the whole property is known including depreciation; determine the value
of land.

Given: House and lot sold recently for

Php1,120,000 Land Area = 240m2
Floor Area = 112m2
Type III (Fair
Quality) RCN =
Php8,000/m2
Building Age = 10 years
Depreciation Allowance = 42.5%
Improvements (Concrete Pavement and Fence) = Php85,000

50
 Solution:
Sale Price: Php1,120,000
Less: Depreciated value of house
RCN = 112m2 x Php8,000 Php896,000
Depn = Php896,000 x 42.5% Php380,800
Dep. Value of the House Php515,200

Plus: Improvements Php85,000

Php600,200
Residual Value for Land Php519,800

Value of Land per m2 (Php519,800/240m2) = Php2,165.83/m2 (or Php2,200)

This procedure to arrive at either land or building values should be applied to a

sample size of properties in the market area large enough to give a range of values.
The extraction method is less reliable than the direct comparison approach and
should be used carefully.