Land value is what a location is worth when you strip away all that exists upon the land. An economist will tell you that it's the unimproved market value of a site (buildings = improvements).
As an illustration, consider two Holiday Inns on opposite sides of town. Both are on one acre lots, built at the same time, and used the same architectural drawings, contractors, and materials to be constructed. Yet, one is closer to a major employer, a large park, and has views of the water. Compared to the other Holiday Inn, the hotel on the water has higher occupancy, people pay more per night to stay there, and the breeze off the water keeps it cooler in the summer and cheaper to heat in winter. Even though they're physically identical buildings, it would cost a hotel investor considerably more to purchase the Holiday Inn by the water. An economist would conclude that the two hotel buildings are of equal value while the one acre of land near the water has considerably greater value than the acre where the other Holiday Inn is located. The difference in land value explains the difference in price.
Transit access - like access to major employers, a large park, or views of the water - is an attribute of a location. The access can confer considerable value to the land.
Some might say that land value also excludes what is under the land. For example, one might exclude the value of mineral deposits when stating a more pure valuation of a particular location. Since these rights are often sold separately in mineral rich U.S. states, they can be easy to appraise and subtract from the core site value.
Though I do not subscribe, some economists might also try to estimate and exclude speculative development value when calculating land values. The "option value" component can be a large percentage of a property's overall market value.
Extending the example above, let's say that the Holiday Inn close to the water is zoned by the city to allow any type of commercial development as long as it does not exceed 100 feet in height. This gives the landowner a valuable option to expand the existing building or use the land in a different way. This option may be valuable purely as a contingency or may allow for a more valuable land use than the current hotel (thus redevelopment would be an attractive opportunity). While some landowners might be somewhat unaware of the options that they posses, the option value is an important part of any investor's valuation and will generally be reflected in a competitive offer. The option value can be estimated by appraisers and assessors and subtracted from the overall land value.
Transit improvements can have a profound impact on land use controls (zoning, etc.) and can influence market demand for a location. Thus, transit improvements can impact a landowner's options, which is reflected in what people are willing to pay to potentially execute those options in the future. I consider option value to "run with the land" and include it when quoting a land value. This is in keeping with appraisals for land value taxation purposes where land is taxed based on its potential use irrespective of its underutilization.
So, once again, land value is what a piece of land is worth once you exclude the value of everything sitting on the land.
Ian Carlton is a transportation and land use expert specializing in transit-oriented development (TOD). He helps clients - including transit agencies, planning departments, and landowners - optimize real estate development around transit.
Special thanks to Burt Gregory at Mithun for permission to use the Portland Streetcar image above.