Commercial real estate is, by its very nature, rather complicated. From determining a client's needs and wants, to sifting through the various property types available to fill those needs, to the often lengthy purchase negotiations followed by lengthy and intricate due diligence processes, through to final possession, there are many considerations that come into play. As if this wasn't enough, when valuing commercial properties, many more factors enter the equation. Possibly the most complex of these is the valuing of raw development land. Let's have a look at the myriad factors affecting land valuation.

Land Specific Factors

The first group of factors have to do with the land itself. the major ones include;

Lay of The Land - How level or gently rolling is the land? Is the natural drainage complementary to development or will it cause extra costs to be incurred?

Subsurface Conditions - Is the condition of the soil and underlying geology suitable to support the highest and best use of the land? A geotechnical study is generally required, at considerable expense, to determine this. Are their underground watercourses that will affect development?

Surface Water - Are there any watercourses or bodies of water on or near the land that will come under the jurisdiction of the Fisheries Act, Navigable Waters Act, or other Federal legislation affecting waterways?

Environmentally Sensitive Areas - Are there any environmentally sensitive areas on the land?  Are there any endangered species residing on the land? These factors can seriously impact developability.

Environmental Hazards - If the land has been previously used, are there any environmental concerns?

While not an exhaustive list of the land-specific factors, there are generally the major ones. There are also factors that relate to the actual development of the land, let's have a look at these now.

Development Specific Factors

Servicing the Land - Where are the nearest municipal services? What will be the path of the main lines? What is the municipality's policy on who pays (usually you), how, and when? Are any other developers going to be active in the area and when will they be active so that you can recoup your servicing costs? If the area is already serviced, will you be re-imbursing an earlier developer for your share?
If you are just servicing a particular lot, where are the tie-in points? Soil conditions will affect your cost per foot to service. Where is your building site? How far will you have to bring services in?

Highest and Best Use - This can be a difficult one. What development is already in the area? What will complement existing development? What kinds of developments could the area use? Which will bring the best return? If/once you have a specific use in mind, is the land zoned correctly for your usage?

Obscure Regulations - This can be a real surprise. Sometimes not well-known zoning issues can surprise you in a nasty way. Corner sites in high traffic areas will often have setback requirements for visibility and traffic safety which can reduce the buildable area. Sunlight and shadow setbacks can also reduce buildable area dramatically.

Municipal Plan - What are the municipality's plans? If your desired usage doesn't fit the plan for the area, you are facing a large, uphill battle. Most municipal plans and planning documents are available on-line and should always be researched. A trip to the municipality may be in order. When does the municipal development plan foresee development in your area? If you purchase too soon, you may not have roads or services for years.

Other Factors

Time - Just how long is it going to take to complete your structure? Are you going to be selling it or leasing it? You need to account for a reasonable sale period or lease-up period.

Finances - How are you going to finance the development? Financial institutions don't finance development land to the same levels and in the same way as the purchase of existing structures. Be sure you can get financing and accurately predict your financing costs (including the numerous fees before you even see one dollar).

Commissions - My personal favourite, you will likely incur sales or leasing commissions if this is an investment you wish to sell or lease out.

While there are more factors to consider, this gives you an idea of most of the major considerations. There is a bit of good news though. While taking all the above factors into account can be overwhelming, a good commercial real estate agent can help you pre-determine relatively accurately the value of a parcel of land. Using recent comparable sales and accounting for as many of the above factors as possible, your professional REALTOR can give a fairly accurate pre-determination of the price. After negotiating a successful conditional offer to purchase, your due diligence process should allow you to account for many or all of the remaining unknowns.