Week 7 Highest And Best Use Analysis

Question 1

What is highest and best use

Answer 1

The process of identifying the reasonably probable and legal use of vacant land or improved property, which is physically possible, financially feasible and that results in the highest value as of the date of the examaniation

Question 2

Typical land uses

Answer 2

Residential commercial industrial agricultural speciality properties (medical/educational)

Question 3

Explain hbu in site analysis

Answer 3

Mainly used for site analysis

Extremely important in site valuation as the market value estimate depends entirely on the nature of its anticipated use

Question 4

The highest and best use MUST be

Answer 4

Legally permissible
Physically possible
Financially feasible
Maximally productive

Question 5

Define highest and best use analysis

Answer 5

Reasonably probable and legal use of vacant land or an improved property that is legally permissible, physically possible appropriately supported financially feasible and that results in the highest value

Question 6

Property as improved

Answer 6

There are 3 possibilities that must be considered
Demolish existing improvements and redevelop
Continue existing
Modify existing

An ideal improvement described at the conclusion of the analysis of highest and best use as though vacant

Question 7

Land as though vacant and proportion as improved

Answer 7

Hbu and hbu of land as through vacant and the hbu of a popperty as improved are connected but distinctly different concepts.
Consider a single unit residential property located in a area of commercial use - if there is a market demand for commercial use the maximum productivity of the land as though vacant will most likely be for commercial use

In this case residential improvements may contribute little if any to the value of the property as a whole except as interim use during the transition between land uses

If however the market value of the permitted commercial use less octet to demolish the residential improvements then the highest and best use of the property will be for continued residential use

Question 8

Market analysis Process and four parallel tests

Answer 8

Define problem

Economic overview and alternate use of scoping - overview of Eco base, site and location

Market analysis:
To determine highly probable use (screening process)
Property productivity
Physical attributes 
Legal attributes
Location attributes 
Supply and demand
Subject capture

Financial analysis

Four tests 
Legally permissible 
Physically possible
Financially feasible 
Max productive

Conclusion
Specified in terms of 
Use
Market participants:
User of space
Most profitable buyer

Question 9

Test of legal permissibility

Answer 9

Public restrictions:
Zoning regulations, building codes, controls, heritage control, environmental regulation

Private restrictions:
Easements, restricted covenants on land, title

Modification or change should also be considered - influencing future use e.g gov planning rails ways, easements

Public restrictions tend to chnage over time unlike private

Question 10

Test of physical possibility

Answer 10

If legal uses are permissible then...
Addresses physical characteristics associated with the site:
Size and shape
Topography 
Risk of natural disasters 
Frontage and depth
Accessibility 
Availability of public utilities 

If the cost of grading or constructing a foundation on the subject site is higher than a typical sites in the area competing for the same use the subject site may not be economically feasible for highest and best use that would otherwise be indicated

Question 11

Financially feasible

Answer 11

Of the legal and physical possible uses which uses are economically possible, sensible or financially feasible

What uses produced property worth more than cost?

What produce competitive return considering risk?

All uses that can be expected to yield a positive return are financially feasible (value of development exceeds cost of development)

Question 12

Test of maximum productivity

Answer 12

Applied to the uses that have past the first three tests

Produced greater rate of money amount of return or results in higher value

The residual land value is the highest and best use - found by estimating the value of the proposed use (land and improvements) and subtracting the cost of labour capital and enterprise coordination expected to create the improvements

Question 13

“Filtering process”

Answer 13

Analysis of legal environment
Analysis of appraised property
Analysis of the market (anticipated change)

Question 14

Highest and best use in improved properties

Answer 14

Much more difficult than if land is considered vacant
Demolition costs and installation costs of new building

Purpose - should the existing improvements on the property be maintained in their current condition or altered to make them more valuable

Question 15

Improved site value

Answer 15

Most of the time highest and best use of a property as improved (as currently developed) is the current use

This is because the cost of construction and demolition is higher than cost of construction alone and also the opportunity cost of time for the conversion

Question 16

Special situations - interim uses

Answer 16

The use to which a site or improved property is out until it is ready for the future hbu

Interim use is the current hbu
E.g-0 acre parcel in zone one hbu = residential family homes
Week demand and supply
Therefore interim could be agriculture use

Question 17

Special situations legally non conforming uses

Answer 17

A use that was lawfully established but now is non conforming to current regulations
E.g. Auto repair shop - eventually neighbourhood became residential

Future
Permit pre existing use to continue but prohibit expansion or major alterations
Sometimes neighbouring properties can place enough pressure to reduce nonconforming use

Question 18

Define interim use

Answer 18

The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use

Question 19

Define mixed use

Answer 19

Combination of compadiable land uses in an area or in a single building

Question 20

Explain land valuation techniques

Answer 20

Direct comparison
Residual approach
Allocation
Income capitalisation techniques
-direct captiaisation / land residual 
-direct capitalisation/ ground rent
-discounted cash flow method

Question 21

Direct comparison approach

Answer 21

Procedure- sales of similar parcels are analysed compared and adjusted to provide a valuation amount for the land being valued

Applicability- most common technique for valuing land and preferred method when comparable sale available

Limitations - lack of sales and comparability of available data may weaken the support of the value estimate

Question 22

Explain market residual approach

Answer 22

Land value is extracted from the sale price of an improved property by deducing the value of improvement

Used to estimate the land of improved properties in rural areas and properties in which improvements contribute little to total property value

Question 23

Explain allocation

Answer 23

Allocation method not commonly used in reality
However useful when transactional data on comparable sites in the immediate area is not available

Land value is inferred from the price range of improved properties in the intermediate area if an appropriate ratio can be established in the area

E.g.
Newly built house sells for $300k
Developer says improvements were $200k
Therefore improvements total value =2:3
Thus the land value account for 33% of total value 

Subject property is valued at $450k
Applying 33% ratio means the value of the land is approx 150k

Question 24

Explain direct cap-land residual

Answer 24

Valuer determines highest and best use of land as though vacant
From market rent and operating expense
Calculate how much of the income is attributed to the building
Subtract this amount from estimate now
Apply market derived land capitalisation rate