AG HBU Part 13. Fundamental Concepts and the Four Tests of Highest and Best Use Analysis

Question 1

An appraiser identifies four uses for a subject property that are legally permissible, physically possible, and financially feasible. Which is the highest and best use?

A. apartments (highest net operating income)
B. auto service (highest residual land value)
C. office (highest entrepreneurial incentive)
D. retail shops (highest rate of return/capitalization rate)

Answer 1

B. auto service (highest residual land value)

Course handbook guidance: Part 13, items IV.C and V.B

Question 2

A 1.0-acre site is zoned for office use and is physically suitable for an office building. Given the following information, what is the proper conclusion regarding financial feasibility of office use based on feasibility rent?

A. Feasibility rent exceeds current market rent; project is currently financially feasible.
B. Feasibility rent exceeds current market rent; project is not currently financially feasible.
C. Feasibility rent is less than current market rent; project is currently financially feasible.
D. Feasibility rent is less than current market rent; project is not currently financially feasible.

Answer 2

B. Feasibility rent exceeds current market rent; project is not currently financially feasible.

Building cost (18,000 sq. ft. × $185.00) $3,330,000
Site improvements cost (1.0 acre × $200,000) 200,000
Land (1.0 acre × $350,000) 350,000
Total cost including incentive $3,880,000
Capitalization rate = × 0.0750
Feasibility net operating income = $291,000
Operating expenses (18,000 × $8.00) 144,000
Feasibility effective gross income (EGI) $435,000
Stabilized occupancy ÷ 0.92
Feasibility potential gross income (PGI) = $472,826
Maximum building size (sq. ft.) ÷ 18,000
Feasibility rent per sq. ft. = $26.26

Course handbook guidance: Part 13, item V.B

Question 3

A duplex apartment is located on a 0.50-acre site zoned for office. An appraiser identifies three alternative uses, as follows:
ƒ Continue the duplex use, which brings net operating income of $12,000 per year. The capitalization rate for the duplex use is 5.5%.
ƒ Convert the duplex to a two-suite office building at a cost of $75,000 (including entrepreneurial incentive). The net operating income would increase to $24,000. The capitalization rate for the converted office building would be 7.5%.
ƒ Demolish the duplex. If vacant, the site would have a value of $13.50 per square foot as an office site. Demolition cost is $15,000.

Is conversion to a two-suite office building currently financially feasible?
A. yes
B. no
C. cannot be determined without additional information
Course handbook guidance: Part 13, item V.B, 13.7

Answer 3

A. yes (profitability index is > 0)

Course handbook guidance: Part 13, item V.B, 13.7 Example

Question 4

A 4.0-acre site is zoned for apartments, but the apartment market is currently overbuilt. It could be sold immediately for single-unit residential use at a price of $3.50 per square foot. Positive residual demand for apartments in expected in five years, at which time the value of apartment land is expected to be $7.00 per square foot. The discount rate is 12%, which includes holding costs. What is the highest and best use?
A. Apartments; timing is five years; most likely buyer is end user.
B. Apartments; timing is five years; most likely buyer is speculative investor.
C. Single-unit residential; timing is now; most likely buyer is end user.
D. Single-unit residential; timing is now; most likely buyer is speculative investor.

Answer 4

B. Apartments; timing is five years; most likely buyer is speculative investor.

(The most likely buyer conclusion refers to who would buy the property currently.)

Course handbook guidance: Part 13, item V

Question 5

An appraiser concludes that office is the highest and best physical use, but also needs to determine the optimum development density. More intensive development results in higher net operating income, but also a higher cost per square foot. If 8.0% is the appropriate capitalization rate, which of the following is the highest and best physical use?

A. 1-story office
B. 3-story office with elevator
C. 5-story office with parking structure
D. cannot be determined without knowing the current land value

Answer 5

A. 1-story office

Course handbook guidance: Part 13, item V.B

Question 6

The four tests used to determine a property’s highest and best use are
A. appropriately supported, physically possible, financially feasible, and maximally productive.
B. legally permissible, physically possible, financially feasible, and maximally productive.
C. reasonably probable, legally permissible, financially feasible, and maximally productive.
D. reasonably probable, legally permissible, physically possible, and maximally productive.

Answer 6

B. legally permissible, physically possible, financially feasible, and maximally productive.

Preview Quiz

Question 7

According to the theory of consistent use,
A. one site can be substituted for any other site.
B. the improvements must be valued for the same use as the land.
C. the land must be valued for the same use as the improvements.
D. the most likely users must match the most likely buyers.

Answer 7

B. the improvements must be valued for the same use as the land.

Preview Quiz

Question 8

Highest and best use conclusions should state the
A. legal use, the appropriately supported use, and the timing of the use.
B. legal use, the physical use, and the most probable use.
C. physical use, the appropriately supported use, and the timing of the use.
D. physical use, the timing of the use, and the most likely purchaser and user.

Answer 8

D. physical use, the timing of the use, and the most likely purchaser and user.

Preview Quiz

Question 9

The highest and best use of a site as though vacant is based on the premise that
A. any existing improvements can be demolished.
B. any existing improvements can be rehabilitated.
C. basic site characteristics can be changed.
D. one site can be substituted for any other site.

Answer 9

A. any existing improvements can be demolished.

Preview Quiz

Question 10

The most important characteristic in choosing a comparable property is similarity in
A. design/physical characteristics.
B. highest and best use.
C. location.
D. transaction date.

Answer 10

B. highest and best use.

Preview Quiz

Question 11

What is the final determination of a property’s highest and best use?
A. the available use and program of future use that produce the highest return
B. the legally permissible and physically possible use that maximizes land value
C. the legally permissible and physically possible use that maximizes property value
D. the use that will provide the greatest return after the requirements of land, labor, capital, and coordination have been satisfied

Answer 11

B. the legally permissible and physically possible use that maximizes land value

Preview Quiz

Question 12

In a highest and best use analysis, the phrase maximum productivity is from the viewpoint of
A. society in general.
B. the appraiser.
C. the local community.
D. the property owner

Answer 12

D. the property owner

Preview Quiz

Question 13

For a use to be a candidate for the highest and best use, it must be
A. currently legally permissible and currently physically possible, but eventually financially feasible.
B. currently legally permissible, but eventually physically possible and eventually financially feasible.
C. currently legally permissible, currently physically possible, and currently financially feasible.
D. eventually legally permissible, eventually physically possible, and eventually financially feasible.

Answer 13

D. eventually legally permissible, eventually physically possible, and eventually financially feasible.

Preview Quiz

Question 14

Use the following information to solve qualitatively for the highest and best use of the subject property.
 The subject property is a fully occupied retail structure that sells convenience goods and services, i.e., convenience store, dry cleaner, used (pre-owned) book/CD store, and bar and grill.
 Any other retail or residential use for the property is legally permissible and physically possible.
 The property is located at the corner of South Avenue and Main Street, two arterials in this neighborhood.
 The general area is surrounded by established middle- to upper-middle- income residential units.
 Four city blocks north of South Avenue on Main Street is a major city park.
 New high-rise apartments and convenience retail space are being
developed for four more city blocks along Main Street across from the park.
 Rents at these new facilities across from the park are generally $12–$13 per square foot per year.
 The rent for the subject property is $10 per square foot per year.
 No new development is occurring between the park and the subject
property.
 Older retail structures exist at the intersection of South and Main and for approximately two blocks in both directions along both sides of South Avenue. Several of the retail stores on interior sites are vacant.
 Apartment rents:
New apartments near the park $1,000 per month
New apartments two blocks from the park $800 per month

Answer 14

Highest and best use statement and conclusion:
Apartment use is increasing across from the park at least four blocks north of the subject property. An apartment complex on the subject site would
be at a severe disadvantage. New retail space is being developed to serve the growing apartment market. This signals that the subject property
will mostly serve the older neighborhood in close proximity to it. Renovation could increase rents, but given the market area, new retail space is only commanding an additional $2 to $3 per sq. ft.
Use: Existing retail
Timing: Current
Users: Residential area the property is currently serving

Preview Quiz

Question 15

Three ways of calculating financial feasibility are xxx xxx, xxx xxx, and xxx xxx.

Answer 15

land residual , feasibility rent , and profitability index.

Review Quiz

Question 16

The basis for a property’s value is the property’s xxx.

Answer 16

highest and best use.

Review Quiz

Question 17

Conclusions regarding the highest and best use of a property should specify the xxx xxx xxx… and….

Answer 17

physical use,
the timing of the use, and
the most likely user of the property.

Review Quiz

Question 18

The four tests that a use must meet to be the highest and best use are xxx…

Answer 18

physical possibility, legal permissibility, financial feasibility, and maximum productivity.

Review Quiz

Question 19

Ultimately, for a use to be the highest and best, it must be xxx and result in the xxx.

Answer 19

reasonably probable and
result in the highest land value.

Review Quiz

Question 20

A sale to a buyer who intends to use the property immediately for its highest and best use is referred to as a(n) xxx sale.

Answer 20

end-user

Review Quiz

Question 21

A sale to a buyer who bought with no intention of immediately using the property for its highest and best use is referred to as a(n) xxx sale.

Answer 21

speculative-investor

Review Quiz

Question 22

The difference between the present value of all expected investment benefits and the present value of capital outlays is the xxx.

Answer 22

net present value

Review Quiz