Determining the value of commercial land is a crucial step in any real estate investment. Whether you’re buying, selling, or developing, accurate land valuation helps you make informed decisions and avoid costly mistakes.
Understanding Commercial Land Value
Before diving into calculations, it’s important to understand what makes commercial land valuable. Unlike developed properties, land value depends on:
- Future development potential
- Current zoning restrictions
- Location and accessibility
- Available utilities and infrastructure
- Environmental conditions
- Market demand
Basic Measurements and Terms
You need to know these key measurements and terms to understand land valuation.
Standard Acre vs Commercial Acre
- Standard Acre = 43,560 square feet
- Commercial Acre = 36,154.8 square feet (83% of standard acre)
The difference accounts for space needed for sidewalks, roads, and other requirements
Common Value Expressions
Price Per Square Foot
The property’s value is divided by its total square footage. Used most often in urban areas and for smaller parcels. (Example: A $500,000 lot with 10,000 square feet = $50 per square foot)
Price Per Acre
The property’s value is divided by its total acreage. Common for larger parcels and suburban/rural areas. (Example: A $1 million property on 2 acres = $500,000 per acre)
Total Parcel Value
The complete value of the entire property, regardless of size. Used when comparing similar properties or determining final sale prices. (Example: The entire 5-acre property is valued at $2.5 million)
Three Main Methods to Value Commercial Land
1. Sales Comparison Approach
What it is: Compare your land to similar nearby properties that recently sold.
Best for:
- Vacant land
- Areas with active real estate markets
- Properties with similar characteristics
How it works:
- Find recent sales of similar land
- Adjust prices for differences in:
- Location
- Size
- Zoning
- Utilities
- Access
- Average the adjusted prices to estimate your land’s value
2. Income Approach
What it is: Value based on the income the land can generate.
Best for:
- Parking lots
- Storage yards
- Billboard sites
- Other income-producing vacant land
How it works:
- Calculate annual net operating income (NOI)
- Divide by capitalization rate
- Example: $50,000 NOI ÷ 5% cap rate = $1,000,000 value
- Typical cap rates range from 4-12%
3. Development Method
What it is: Value based on potential development.
Best for:
- Land ready for development
- Properties with clear highest and best use
How it works:
- Calculate the completed project value
- Subtract development costs
- Subtract developer’s profit
- Remainder = Maximum land value
Common Valuation Mistakes to Avoid
Outdated Comparables
To avoid making this mistake, use only recent sales (typically within last 6-12 months) and adjust for market changes.
Environmental Oversight
To avoid this mistake, you must check environmental records, consider soil conditions, and assess flood risks.
Zoning Assumptions
Avoid making zoning assumptions by verifying current zoning, researching possible changes, and researching restrictions.
Infrastructure Gaps
Stay aware of infrastructure gaps by verifying utility availability, checking access requirements, and considering improvement costs.
How to Choose Your Valuation Method
Follow this simple guide to select the right approach:
- Start with Sales Comparison if:
- Similar properties have sold recently
- Market is active
- Properties are truly comparable
- Use the Income Approach if:
- Land generates regular income
- Similar properties are typically leased
- Income stream is stable
- Consider Development Method if:
- Land is ready for development
- Market supports new construction
- Development costs are clear
Get Expert Help from Frontline Real Estate
While these methods provide a framework for valuation, local market knowledge is crucial for accurate results. Frontline Real Estate Partners offers:
- Professional land valuations
- Market analysis
- Development feasibility studies
- Investment consulting
Our team’s deep understanding of Chicago’s commercial real estate market ensures accurate valuations that take all local factors into account.
Schedule a Consultation with a Commercial Land Value Estimator
Do you need help valuing commercial land in Chicago? Contact Frontline Real Estate for a preliminary estimate based on your specific location and requirements.
