Sections 4 & 5 Highest and Best Use/Land Value/Cost Approach

Question 1

Interim Use

Answer 1

improvements that are not the HBU may have an interim use that 1. contributes to value, 2 has no value or 3. detracts from value - must be razed

Question 2

H& B Use 4 conclusions

Answer 2

Physical use, timing of use, most likely buyer/user

Question 3

5 buyer types

Answer 3

owner, developer, speculative investor, pure speculator

Question 4

HBU & Assemblage

Answer 4

Assemblage is not a valid H&BU conclusion unless there is a reasonable likelyhood it will occur

Question 5

5 ways to determine Financial Feasibility

Answer 5

1. implied through market activity. 2-5 - calculated through financial analysis - land residual, profitiablity index, feasibility rent, opportunity incentive

Question 6

Land Residual

Answer 6

Vo= Vl+vb Vo = Io/Ro if you know the value of one component and cap rates for 2 components Use a grid w/ IRV on the top and BLT on the side.

Question 7

Feasibility Rent

Answer 7

the rent necessary to justify new construction

Question 8

How do you calculate feasibility rent?

Answer 8

Upside down income approach. value x cap rate plus expenses / 1 - vac = gross income divided by size

Question 9

Opportunity Incentive

Answer 9

Feasiblity test - which model has the greates profit - Opp Incentive =Profit - calculated as Value less purchase price less modification costs = profit/opp. incentive. Make a grid w/ value as modified, less value as is, less mod costs, opp incentive on the left and the uses across the top

Question 10

Monopsony

Answer 10

situation with just one buyer

Question 11

Bonus value

Answer 11

value created by a zoning change if a legal non conforming use is more intense than the legal use.

Question 12

Excess land

Answer 12

land NOT needed to serve the existing improvements, that can be subdivided and sold seperatly. Valued seperatly

Question 13

Surplus land

Answer 13

not needed to support the existing improvements but cannot be separated, may create functional obsolesence

Question 14

Site Coverage Ratio SCR

Answer 14

the building square foot / total site size

Question 15

Floor area ratio FAR

Answer 15

building sq. ft. / total site s.f.

Question 16

Six methods of land valuation

Answer 16

sales comparision, allocation, extraction, Income Analysis-3 land residual, ground rent cap, subdivision analysis

Question 17

Allocation

Answer 17

Vo x %Vl = $Vl

Question 18

Extraction

Answer 18

Vo - Vb = Vl Deduct the value of the component you know from the whole

Question 19

Ground rent capitalziation

Answer 19

Income to the land/ by the rate to the land = value to the land IRV. IRV across the top and BLT on the side

Question 20

In a DCF how do you reflect Developer’s Incentive

Answer 20

as a seperate line item or in the discount rate

Question 21

What are the 4 phases of subdivision analysis?

Answer 21

Plan, Entitlements, Construction, Marketing

Question 22

How do you value land as entitled but not completed in a DCF?

Answer 22

ignore the completed phases (plan & entitlement), adjust the numerical time periods, prospective value

Question 23

How do you value land as entitled & completed in a DCF?

Answer 23

ignore the completed phases (plan, entitlement & construction), adjust the numerical time periods, prospective value

Question 24

How do you calculate land development potential?

Answer 24

Calculate GBA, Landscaping, loading, parking, buffers (don’t double count corners!) etc. to get total required by zoning. Calculate Land to building ratio (required and actual) Land / bldg. Bldg size x required or desired LBR

Question 25

When are special adjustments required to reflect value loss in the cost approach?

Answer 25

leases not at market, financing not at market, unusual conditions of sale, bonus value, rent up adjustment, intangibles

Question 26

How do you reflect a property rights adjustment in the cost approach?

Answer 26

Cost new - depreciation = contributory value of improvements. Plus land, plus site improvements = value of Fee Simple Less property rights adj = value of leased fee

Question 27

Entrepreneurial Incentive

Answer 27

an expectation of a return - prayer

Question 28

Entrepreneurial Profit

Answer 28

an actual return - fact

Question 29

3 components of cost

Answer 29

Direct, Indirect and Entrepreneurial Incentive

hard, soft and profit

Question 30

Cost Estimating services exclude

Answer 30

financing fees, site improvements, lease up or marketing costs, local taxes & fees, entrepreneurial incentive

Question 31

How do you calculate the percentage of something?

Answer 31

Thing /% 25% of 450,000 = $450,000 /1.25

Question 32

How do you handle all the multipliers

Answer 32

multiply them all together and have a single line for them

Question 33

Effective age

Answer 33

must reflect all forms of depreciation

Question 34

Physical life

Answer 34

time a building or component lasts (short lived items)

Question 35

Useful life

Answer 35

time a structure may reasonably be expected to perform (long lived items)

Question 36

Functional obsolescence

Answer 36

relates to only 1 property (deficiency or super adequacy)

Question 37

External Obsolesence

Answer 37

relates to all properties in the market place (locational or economic

Question 38

Incurable physical depreciation

Answer 38

first deduct cost to cure then compute

Question 39

Functional obsolescence curable

Answer 39

caused by a structure improperly built or change in market preference 2 types: deficiency or super adequacy

Question 40

External obsolesence

Answer 40

2 types - locational or economic (can be temporary)

Question 41

Modified age life method

Answer 41

recognizes a prudent buyer would cure curable items and that reduces effective age. Cost new - curable = cost new of incurable less incurable depreciation (effective age/life) plus land and site

Question 42

Market extracted depreciation

Answer 42

only method that reflects the actions of buyers and sellers and the only one that produces an estimate of economic life make sure the effective age of comp and land value are right

Question 43

Breakdown method

Answer 43

divide into 3 groups. 1. cost new curable, 2. cost new incurable short lived, 3. cost new curable long lived.

Question 44

Incurable short lived depreciation

Answer 44

calc the cost new and the depreciation (age/life) of each item to get the total deprecition

Question 45

Physical deterioration

Answer 45

cost new, less curable cost new, less short lived cost new to get the value of what’s physically incurable - use the age life on that number to get deterioration. Then add the cost to cure & the depreciation on the short lived to the deterioration to get the total on whats left of the new bldg.

Question 46

Functional obsolescence table: The Nelson & John combined methodology

Answer 46

1. Reproduction cost
2. Less physical dep
   3A. net cost to cure if curable
   3B. if incurable +value loss or -value gain
3. less cost new of proper item if installed in new construction on value date
4. Total functional obsolesence

Question 47

External obsolescence

Answer 47

measure with paired data or capitalize the rent loss.

Question 48

Deductions to achieve lease up

Answer 48

commissions, marketing, TIs, Concessions, PV of rent loss, Incentive for lease up