Week 7 Highest And Best Use Analysis Flashcards
What is highest and best use
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
Typical land uses
Residential commercial industrial agricultural speciality properties (medical/educational)
Explain hbu in site analysis
Mainly used for site analysis
Extremely important in site valuation as the market value estimate depends entirely on the nature of its anticipated use
The highest and best use MUST be
Legally permissible
Physically possible
Financially feasible
Maximally productive
Define highest and best use analysis
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
Property as improved
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
Land as though vacant and proportion as improved
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
Market analysis Process and four parallel tests
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
Test of legal permissibility
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
Test of physical possibility
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
Financially feasible
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)
Test of maximum productivity
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
“Filtering process”
Analysis of legal environment
Analysis of appraised property
Analysis of the market (anticipated change)
Highest and best use in improved properties
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
Improved site value
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
Special situations - interim uses
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
Special situations legally non conforming uses
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
Define interim use
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
Define mixed use
Combination of compadiable land uses in an area or in a single building
Explain land valuation techniques
Direct comparison Residual approach Allocation Income capitalisation techniques -direct captiaisation / land residual -direct capitalisation/ ground rent -discounted cash flow method
Direct comparison approach
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
Explain market residual approach
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
Explain allocation
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
Explain direct cap-land residual
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
