AG HBU Part 16. Highest and Best Use Applications

Question 1

A 20-acre property is currently improved as an orchard. The orchard brings net operating income of $1,200 per acre per year, and the current capitalization rate is 4.0%. If vacant, the land could be sold today for single-unit residential development at a price of $32,000 per acre. The cost of clearing the trees and grading the site is $3,000 per acre. Because of a proposed freeway extension, it is expected that a mixed-used development with some commercial and office uses will be financially feasible in five years. The mixed-use land value at that time will be $65,000 per acre, after clearing and grading. The cost of clearing and grading in five years is $3,200 per acre. The discount rate is 15%.

What is the current highest and best use of the property as improved?
A. continued use as an orchard
B. interim use as an orchard; mixed-use development in five years
C. interim use as an orchard; single-unit residential in five years
D. single-unit residential development; timing is now

Answer 1

B. interim use as an orchard; mixed-use development in five years

Current value under the orchard scenario:
20 × $1,200 = $24,000 ÷ 0.040 = $600,000
Current value under the residential scenario:
20 × $32,000 = $640,000 – (20 × $3,000) = $580,000
Value in 5 years under the mixed-use scenario:
20 × $65,000 = $1,300,000 – (20 × $3,200) = $1,236,000
Current value under the residential scenario:
$694,962 (n = 5, 1⁄4 = 15, P = 24,000, M = 1,236,000; solve for $)

Course handbook guidance: Part 16, item III, 16.2 Problem

Question 2

A 20-acre property is currently improved as an orchard. The orchard brings net operating income of $1,200 per acre per year, and the current capitalization rate is 4.0%. If vacant, the land could be sold today for single-unit residential development at a price of $32,000 per acre. The cost of clearing the trees and grading the site is $3,000 per acre. Because of a proposed freeway extension, it is expected that a mixed-used development with some commercial and office uses will be financially feasible in five years. The mixed-use land value at that time will be $65,000 per acre, after clearing and grading. The cost of clearing and grading in five years is $3,200 per acre. The discount rate is 15%.

What is the current market value of the property?
A. $580,000
B. $600,000
C. $669,000
D. $695,000

Answer 2

D. $695,000

Course handbook guidance: Part 16, item III, 16.2 Problem

Question 3

The zoning code restricts building heights to 35 feet on sites of less than 1 acre, but it allows up to 75 feet on sites of more than 1 acre. A developer acquires three small parcels of 0.3 acre, 0.4 acre, and 0.5 acre to create a development site of 1.2 acres that will allow the taller building height. This is an example of
A. assemblage.
B. excess land.
C. legal nonconforming use.
D. plottage.

Answer 3

A. assemblage.

Course handbook guidance: Part 16, item V.A

Question 4

The developer in the previous question paid a total of $700,000 for the three small sites. The value of the overall 1.2 acres is $900,000. What is the proper label for the $200,000 incremental value?
A. assemblage value
B. benefit
C. entrepreneurial incentive
D. plottage

Answer 4

D. plottage

Course handbook guidance: Part 16, item V

Question 5

An auto body shop is located on a site zoned for office. Auto body is not a permitted use in the current zone, but the city allows the auto body use to continue because it predates the change in the zoning ordinance. This is an example of
A. continuing use.
B. illegal use.
C. legal nonconforming use.
D. predetermined use.

Answer 5

C. legal nonconforming use.

Course handbook guidance: Part 16, item IV