Chapter 4 Highest and Best Use

Legal Permissibility as Vacant Process

1. Zoning 2. Building Codes 3. Historic Area? 4. Deed Restrictions and Covenants 5. Consult Master Plan

Legally Nonconforming Uses

A legally nonconforming use is defined in The Appraisal of Real Estate, 13th Edition, as "a use that was lawfully established and maintained, but no longer conforms to the use regulations of the current zoning in the zone where it is located." Legal, nonconforming uses generally result because the municipality has rezoned an area in order to transition the area into a different use. The transition process is typically allowed to occur naturally - as opposed to the requiring that all existing properties which do not conform to the new ordinance being razed to make way for an alternative type of development. Legal, nonconforming uses can take the form of under- or over-improvements. A single family residential dwelling situated in an area that has been rezoned for commercial use typically represents an under-improvement. If the surrounding area has clearly demonstrated a trend of razing or renovating existing residential properties to make way for a commercial use, the highest and best use study, as improved, would include an analysis of the benefit of razing versus the benefit of renovating.

The next thought should be building code requirements?

Building codes are very different for residential and commercial properties and can have a significant impact upon development costs for the analysis of financial feasibility.

historic area

Is the property located in a designated historic area of the community? Historic districts have many restrictions that apply to the use, appearance, and exterior maintenance of the property.

Highest and Best Use Not Required

Many valuation assignments do not require an opinion of market value. In those assignments, a determination of the highest and best use for the property will not be accomplished. The following are examples of assignments whereby the client is not interested in the market value of the property and an opinion of highest and best use is not relevant to credible assignment results: Investment value Insurable value Liquidation value Book value Value in use In these assignments, the appraiser's scope of work should indicate that the analysis of highest and best use was not necessary to produce credible results.

Maximally productive?

Of those uses which have been identified as financially feasible, the appraiser must identify the one use which results in the highest value, or return, to the land. Maximum productivity is one of the factors to be considered in this analysis process. The income derived from an income producing property should be able to sustain a positive cash flow after all of the expenses of building stewardship and the debt service have been accounted for. The highest and best use of the property will require a profit or some other benefit for the owner/investor. The cash flow equates to a rate of return for the initial investment. An analysis of competing uses and their resulting cash flows will allow the appraiser to support his or her highest and best use decision. The profitability in the selection of the highest and best use as well as the positive cash flow at a rate determined to be acceptable in the market are important aspects of the maximum productivity analysis. It has been placed at the end of the determination process because all of the other items to be considered in this analysis must be satisfied first. Profitability cannot be attained if the use is not legally permissible, physically possible, or financially feasible. It is only when all of the other requirements have been analyzed and satisfied that the question of cash flow and profit can be analyzed.

master plan.

The appraiser will want to consult the community's long range plan or master plan. What is the community's plan for expansion of the various residential and commercial districts? Where are the public utilities being expanded? In which direction is the community expanding its boundaries? What are the community's plans to upgrade or expand the public utilities?

zoning ordinance

The first thing which should come to the appraiser's mind is the zoning ordinance currently in effect that regulates the allowable uses for the subject land or site. The ordinance will include such things as the improvement's height restrictions, set back lines for the front and rear areas of the site, parking requirements if applicable, the ratio of the improvement's "foot print" to the green area, and any special allowable uses within the designated zoning classification. The ordinance will also identify the provisions for those legally non-conforming properties that are currently within the designated zoning area.

Highest and Best Use Definitions

The definition of highest and best use, as taken from The Appraisal of Real Estate, 13th Edition, pages 277-278, and published by the Appraisal Institute, is as follows: "The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value." A similar definition of highest and best use is found in The Dictionary of Real Estate Appraisal, Sixth Edition, and published by the Appraisal Institute, as follows: "The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. Another definition that has been advanced is taken from The Illustrated Dictionary of Real Estate Appraisal by Henry S. Harrison, page 138, published by Collegiate Distributing Company, 315 Whitney Avenue, New Haven, CT 06511: "The utilization of a property to its best and most profitable use. It is that use, chosen from among reasonably probable and legal alternative uses, which is found to be physically possible, appropriately supported, and financially feasible to result in the highest and best use." Other common statements associated with the highest and best use are: "The physically possible, legally permissible, financially feasible and reasonably probable use that produces the greatest value for the property on the effective date of an appraisal", or "The use that gives the property the greatest value as defined on the effective date of the appraisal", or "The use that produces the optimum value for the property", or "The use that creates the greatest return." Each of these definitions identifies that the highest and best use has several contributing parts. The use must be legally permissible, physically possible, and financially feasible with the appraiser being able to support each of these contribution factors. The land and the improvements must be able to produce the greatest value and create the greatest return as of a specific date in time. Even though all of the definitions specifically mention the property, initially the highest and best use essentially refers to the land, or site. The improvements may or may not actually contribute to the highest and best use of the land area. When looking at the definitions, we can recognize that the components initially apply to the highest and best use of the land at a specified period in time. The market value of the land is always determined by its highest and best use. The land's highest and best use may be limited due to several factors which we already know to be either governmental or private restrictions (legal). The value of the land is enhanced by location and utility (physical). The appraiser, through market analysis, will consider demand for the subject land area in a particular location and the scarcity of available land in that particular area. The market forces are at work as the appraiser will examine those physical and economic forces, as of a specific date, and form a supportable opinion for the land's highest and best use. The improvements to the land also can contribute to the land value. The improvements are normally valued for their contributory value relative to the highest and best use of the land. In most residential appraisal assignments, the land is already improved with some sort of building. The appraiser will determine, through an inferred analysis of the market, whether the present improvements actually contribute to the overall highest and best use of the land area. As discussed, determination of the highest and best use of the property, as of an effective date, is a requirement for the appraiser's development process when accepting a "market value" appraisal assignment. The appraiser must gather, or assemble enough relevant information about the property to analyze the market area and develop an opinion of the property's highest and best use, first as though the land were vacant, and then as the land is actually improved. Once the highest and best use opinion has been developed for the property, the judgment phase of the appraisal assignment can end and the execution phase -- the actual valuation process -- can begin.

Is the highest and best use of the land, in the mind of the appraiser, financially feasible?

This consideration is also called economic feasibility. There are two interconnecting analyses required for this determination as to the highest and best use for the land. The first analysis is the inferred analysis of the relationship between the supply and the demand for a site's particular highest and best use. Is there a need or demand for this use of the land? How many other similarly used land areas are there in the market area? Can the market support another land use of this type? The appraiser will reflect on the principle of competition.

Legal Non Conforming Use Example

As an example, the subject property is a 3,200 square foot, two-story, single-family dwelling which was constructed in the early 1900s. At that time, the zoning permitted residential dwellings and the subject was constructed in compliance with the then zoning and building codes. Over the years, the traffic pattern has shifted and the street on which the subject is located has become a major east/west arterial. Approximately 15 years ago, in light of this shift in traffic patterns, the city revised their master plan and determined that residential use along the subject's street was an under-utilization and that the area would be better served under light commercial uses (professional offices and light retail). In driving the subject's street, the appraiser identified that approximately 50% of the dwellings are now in use as professional offices, predominantly attorneys, CPAs, and insurance agents. It was also noted that, in each case, the existing residential structure was retained and renovated for office use. After researching sales of properties in the subject's market area, the appraiser concluded the following: SFR sale prices ranged from $85 to $100 per square foot of gross living area. Sales of SFR converted for office use ranged from $85 to $95 per square foot of gross building area (in this case, GBA and GLA were identical). Cost to convert an existing SFR property for office use would approximate $10 per square foot of gross building area. In this example, there is currently no economic benefit to the conversion of the subject from residential use to commercial (office) use. The appraiser's conclusion would be that the highest and best use of the subject property is to continue its use as a single family residential structure until such time as the market is able to absorb the renovation costs as well as any market-driven entrepreneurial profit. On the other hand, what if the appraiser has determined that selling prices for single family residential properties which were converted for use as offices currently range between $125 and $145 per square foot. In this case, the market is clearly demonstrating that it not only will absorb the renovation costs of $20 per square foot, but that it will also offer an entrepreneurial profit. $85/sf - $100/sf = Value as SFR +$10/sf - = Cost to convert =$95/sf - $110/sf = Total Investment $125/sf - $145/sf = Value as Comm'l/Office Bldg - $ 95/sf - $110/sf = Total Investment = $ 30/sf - $ 35/sf = Positive return on Investment (Profit) The highest and best use conclusion, based upon this data, would be to convert the existing structure for use as a professional office. The appraiser would advise the client immediately of this conclusion since the valuation process to follow would be of a commercial property, not a residential property. In the above examples, the analyses were relatively straight-forward and the results were clear. In many cases, the analysis becomes very complex, with multiple alternative uses to analyze. It may also be necessary to reconstruct and analyze operating expense statements for the various uses in order to determine both financial feasibility and maximum productivity.

Testing for Highest and Best Use as Improved

At this point, the most important question to be answered is: Is the highest and best use of the land, as vacant, consistent with the use as currently improved? An affirmative answer will, for all intents and purposes, identify the current use as the highest and best use, as improved. A negative answer will require the appraiser to further analyze the improvements to determine if they are capable of being renovated or remodeled to enable them to be used to the highest and best use of the land, as vacant. If renovating or remodeling is not financially feasible, the appraiser must then determine if the value of the land would be better served if the improvements were razed and the site developed to its highest and best use. When the improvements have a negative impact upon the land, and demolition of the improvements is called for, the appraiser must include the cost of demolition (plus any salvage value) in the feasibility analysis. If neither of these choices results in a value which exceeds the "as is" value of the improved property in the current market, the conclusion may be for the property to continue in its current use until such time as it is financially feasible to renovate, remodel, or raze the improvements. The appraiser would continue the appraisal process, valuing the property "as is" under the theory of consistent use - that is, the land as well as the improvements would be valued under the same use.

deed restrictions and covenants

Be sure to check for the deed restrictions and covenants for the particular developed location of the property. Deed restrictions can be inserted into deed transfer documents and they will be upheld by the courts providing they are not discriminatory in nature. Covenants will be enforced by the development's property owners association. Covenants can be the most restrictive of all of the limitations on the actual use of the property.

Competitive versus Complementary

Competition is good for the market -- up to a certain point. Too much competition becomes disastrous as the market cannot support the number of properties with the same use. Does the market need another competing land area of this type? It may be that the market could absorb a complementary type of property use but not another competing property use. An analysis of the market's supply and the demand will be a consideration in determining the highest and best use for the land area.

Financial Feasibility - As Vacant

If the proposed highest and best use has passed the legally permissible and physically possible tests, the appraiser will determine if the cost to achieve the remaining uses can be recovered by the property's increased value or whether the property will generate enough income to support the required rate of return for the investment. Does the cost to develop the land with each of the legally permissible and physically possible uses contribute to the value of the property? That is, once developed, will the market be willing to cover the cost of purchase of the land and the development of the improvements? If the highest and best use is to be an income producing property, will the development of the site result in a profitable use which meets, or exceeds, the required rate of return for the investor? Only those uses which produce a positive return are considered for the final test of maximum productivity.

Highest and best use and Fannie Mae/Freddie Mac:

In the 2016 Fannie Mae Selling guide, B4-1.3-04, Appraisal Report Assessment: Site Section of the Appraisal Report (2/23/2016), it says "Highest and Best Use Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report. The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site. The appraiser's highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use."

Is the highest and best use of the land, in the mind of the appraiser, physically possible?

In the majority of assignments, the highest and best use of the land is not to leave it as vacant land. The appraiser must look to the allowable uses and determine the physical requirements for the use of the land or site. Is the site large enough to accommodate the appraiser's highest and best use decision? What are the zoning requirements relating to the required setbacks and the ratios between the land green areas and the building's footprint? Does the shape of the land area allow for the highest and best use per the appraiser's decision? The appraiser will determine whether the land area is conducive to development for the highest and best use. The appraiser will have to analyze the requirements for the highest and best use of the land, and further testing may be necessary for a final determination. What is the topography of the land area? How much soil would have to be excavated to facilitate the highest and best use? How much dirt will have to be brought to the site? Will the ground support the type of improvement necessary for the highest and best use? Is the soil strong enough to support the type of highest and best use envisioned by the appraiser? What is the soil density of this land area? Are there local restrictions for accessing the land? Does access present a problem for the highest and best use? Is the land located in a flood zone? What additional problems does the physical location present? Are public utilities available at the land area? What is the cost to provide the utilities, if not already present at the site? Are the present utilities adequate, in relation to capacity, for the land's highest and best use? Will additional on-site requirements be necessary to connect to the existing public utilities? The answers to these questions will comprise the analysis of the physical capabilities of the site to determine the feasibility of the highest and best use.

Are there other uses which provide less risk and could produce a greater profit? Of course, it is without question that time is of the essence and the appraiser is analyzing the market within a specified time frame.

Is there a period of time required for the determined highest and best use to start producing that stabilized income stream necessary to bring about the positive cash flow? If time is a requirement, how much time will be required? How long will it take for the market to absorb the determined highest and best use for the property? Depending on the time period required for stabilization, we know that time is money in the eyes of an investor. With the time being a major consideration, the appraiser may consider an "interim" highest and best use for the property. Interim use will be discussed later in this material. Having given consideration to all of the above factors, the appraiser must be able to support his or her decision concerning the highest and best use of the property as of a specific date in time.

Physical Possibility - As Vacant

Looking at the parcel or viewing the land using a topographical map may indicate that the shape of the site is or is not conducive to the development of the legally permitted uses. The site will have to be large enough to facilitate the highest and best use. This may require additional analysis from the market place to determine how much land area is required for the proposed use. Will the proposed improvement fit on the site? Is the land area level or is it rolling? Will excavation of the site be required? How much dirt will have to be removed from or brought onto the site? Is the site below grade and is this advantageous for the proposed use? Are the public utilities available at the site boundaries or, if not, how far away from the site are they? How much will it cost to bring the utilities to the site? Will the existing utilities be adequate for the proposed highest and best use? Is the ground strong enough to support the proposed improvement? Will soil density tests be required? Negative answers - or excessive site development costs - will help the appraiser eliminate potential uses from consideration of financial feasibility.

Multiple Uses

Most appraisal books dwell on the theory of a single use as the highest and best use for the property. All of the analysis that examines the market and the property assumes the appraiser will be able to determine that single use which would be the highest and best use for the land and, if applicable, the improvements. In the case of residential properties, the appraiser has little trouble defining the highest and best use, especially if the site is in a developed subdivision. Multi-use properties are another type of property that will require additional market data for proper analysis. These are properties that are best suited for a mixed-use; that is, a property containing multiple uses under the same roof. In New York City for example, there are several buildings in Manhattan which contain retail stores, service centers, restaurants, and office space, with the remainder of the building consisting of several floors of residential condominiums. In this example, the building has several different uses. The municipal zoning ordinance allows for the extended uses of the building. Some of the high-rise buildings also have parking garages for both private and public parking as parking spaces are at a premium in the heart of the city. In many smaller rural communities throughout the country, the downtown multi-story commercial buildings are of the older stock. It is fairly common for the first, or ground, floor are reserved for merchants and commercial use while the upper stories are reserved for apartment dwellers. Many of these apartments are occupied by individuals who lack their own means of transportation. The public transportation that serves the downtown area also serves the apartment dwellers for their daily needs. In the highest and best use analysis, the appraiser is required to determine the market for this multiple use property. Who would buy this type of property? Very often, the market is limited to investors who plan to either continue with the renters in place or renovate and resume its use as a multi-use, income producing property. The market for this type of property can be larger than the typical neighborhood for residential properties. The expected income or potential income is the only factor the investor is interested in and financial feasibility is the driving decision-making factor. It is critical, therefore, that the highest and best use analysis be supported by adequate market data for the return rates for the actual investment. What is the expected income from the tenancy for this building? How much money will have to be expended to maintain the tenancy for the building? What are the anticipated expenses? What is the net income after all expenses and allowances for the replacement of major systems? What is the anticipated rate of return on such an investment? These questions will require additional research and analysis on the part of the appraiser, and each actual allowed use will have to be analyzed to the satisfaction of the lender and/or investor.

Unique Properties and Larger Sites

Special use properties are unique in nature and are deserving of a detailed determination for their highest and best use. We have shown that many public buildings, which have become obsolete and no longer support the purpose for their original construction, can be resurrected and enjoy a completely different use from their former special use. We also have residential properties that are considered to be unique in their construction or style. As such, there may be no comparable properties from which to derive certain forms of analysis. The appraiser must search the market area for data that supports the continued use of the property to be its highest and best use; however, the market may not be conducive to the continued use of the land area as a residential property. The current market may indicate a far better use of the site. Look at the following example: The three-acre site was on the outskirts of the community at the time the 4,000 square foot house was constructed. The people in the community all wondered why someone would go to all that trouble to build that huge house outside the community. At the time of construction, 27 years ago, the house was in the country and municipal utilities were not available. Now, municipal utilities have been expanded along with the community's boundaries. The 4,000 square foot house is now inside the jurisdiction of the municipality. Since we know that developers follow the expansion of the public utilities, the area has been subdivided and there are smaller sized residential properties surrounding this unique property. The average lot size is now one-third (0.33) of an acre, rather than the subject's three acres. In the analysis, the appraiser determined that the highest and best use, as vacant, is subdivision into lots containing 0.33 of an acre. However, the as improved analysis determined that, as improved, there is no economic benefit to razing the existing improvements and subdividing the then vacant land. Thus, the highest and best use, as improved, is for the entire three acre site to remain intact and continue in its present use as a residential property. The analysis for the highest and best use was complex and would demand additional research from the appraiser to support his or her determination of the continued use. What is the effective age of the house? Where is the house, in terms of its life cycle? Has the improvement been maintained or is there deferred maintenance? Does the house actually contribute to the value of the three acres if the acreage were to be subdivided? Even though the highest and best use was determined to be its current use, there is every possibility that there is excess land.

Surplus land area:

Surplus land is also the land area that is not required for the subject's highest and best use. This category of land does not, however, command its own value in the market. The market cannot support a value for this type of land area for the following identified reasons. Surplus land is land that: may not be large enough to satisfy zoning requirements if viewed as a stand alone site; may not have adequate access; cannot be separated and used effectively; and is not capable of a separate use. Identification of the different types of land, beyond that which is required for the specific highest and best use, further exemplifies the theories of highest and best use and consistent use. Highest and best use is a market driven concept, with the demands of the market denoting the worth of any land left over after satisfaction of the subject's highest and best use.

Is the highest and best use of the land, in the mind of the appraiser, legally permissible?

The appraiser will examine those governmental and private restrictions on the use of the land area. Is the appraiser's decision on the highest and best use permitted with the existing zoning for the property? Is there a good probability that the zoning for the property could be changed? The appraiser should inquire about historical decisions concerning zoning change requests and review the community's long range development plans. Are there private deed restrictions or land use covenants which would further limit the highest and best use of the land area? Covenants may limit the size or building height of any improvements that could be constructed on the land. Are there governmental environmental restrictions which would limit the optimum use of the land in question? If the highest and best use of the land is not in accordance with the existing zoning requirements, are special use permits available? What is the community's history for approval of special use permits? Is the land located within a historical district? If so, there may be additional governmental restrictions on the use of the land area. Alterations for the use of the land may be prohibited by the restrictions. Is there a long-term lease on the land? Long-term leases may specify a particular use of the land for a given period of time. They may specify additional restrictions which would narrow the allowable highest and best use of the land.

Highest and Best Use Analysis

The first step in developing an opinion of highest and best use for the land is to determine the value of the land as if it is vacant and ready for its allowable highest and best use. That being said, the appraiser is considering the land as already improved to the point that an improvement could be constructed on the land. In a platted subdivision, there are streets or roads for access, utilities have been brought to the lot line, storm sewers have already been constructed, and street lights and fire hydrants are in place. At this point, the "land" has become a "site." In areas which are not platted, or are more rural in character, these improvements may or may not be in place. It is incumbent upon the appraiser to determine what is typical for the market area when analyzing the highest and best use, as vacant.

HIGHEST AND BEST USE THEORY

The highest and best use is a recognized theory used in conjunction with the appraisal process. This theory is founded in the correlation between the highest probable value of the property and its highest and best use to attain the highest return on the owner's original investment. Appraisal assignments that require an opinion of market value imply that the property will be valued at its highest and best use.

To illustrate, the overall costs (including the land value) to construct a four-unit building on the site were $250,000.

The owner would want the worth of the property, with the building construction completed, to be at least $250,000. An investor would probably expect a greater value for the property, after construction of the improvements, to realize a profit for the use of his or her money. The investor expects a rate of return for his or her investment for time and the risks involved. That rate can be realized in the form of increased property value over and above the actual costs to achieve the highest and best use of the land area. Using the example cited above, the investor's expected profit range is between 15% and 20%. If the property was worth at least $287,500 in the market place, the highest and best use would be financially feasible, as the owner/investor would have achieved a 15 percent return on his investment. Anything greater than $287,500 would only serve to increase the rate of return on the investment. The market was able to absorb the land's highest and best use because of the continued demand for this type of land usage. The increase in value was achieved because the indicated the highest and best use was seen as required for the market place. The market does not appear to have an existing oversupply for this type of land usage.

Special Purpose Properties

These are properties which have been improved for a very specific purpose. In other words, their improvements were constructed to serve a singular purpose. Value, or the generation of income, may not have been the primary motivation for their initial development. Various municipal buildings may fall into this category. What is the highest and best use of a vacant post office building? How about the fire station that was abandoned because the new fire fighting equipment would not fit into the building? We have seen local school boards close school buildings because of consolidation. Places of worship have been closed because of the shortage of ministers of the faith. Are these types of assignments to be considered complex assignments? One would certainly think so. In accepting this type of assignment and rendering an opinion of highest and best use, the appraiser is required to assume a completely different market-derived use. Not only must the four factors of analysis be observed for the best use of the land as if it were vacant but the appraiser must decide, based upon the market, if the present improvements actually contribute to the overall value of the property as improved with the special use building that presently occupies the site. What logical alternative use of this special purpose property would the market be willing to accept? Places of worship have been transformed into specialty restaurants and former schools have been remodeled for apartment use. The market will perceive an alternate use for these improved properties and they will begin a new life cycle. Most likely, the appraiser will have expanded his or her market area to identify the demand for this type of property. Who is the typical buyer for this type of property? What are some of the alternate uses for this type of property? The performance of additional analysis is required to support the market acceptance and desirability for these once defined special purpose properties. As a special use property, their economic life has ended. The appraiser must (by analysis) determine if there is an alternative economic life for the improvement. Will the appraiser's determination of the new highest and best use for the property, as improved, contribute to the overall value as perceived by the market? Are the improvements still functional enough for a renovation process? Is it economically feasible to renovate and restore the building for a new highest and best use? Would it be more economical to demolish the present improvement and start over again? If this were the most economical process, the appraiser must then consider the costs of demolition (less salvage, if applicable) as part of the overall analysis to achieve maximum productivity.

Interim highest and best use:

We have introduced the term "interim" in connection with the highest and best use. It is possible that the appraiser will have determined what the highest and best use of the land is going to be in the near future; however, it may be that development to that highest and best use in today's market is premature. An example of the interim use of the land follows: In checking with the city engineer, the appraiser is told that utilities will be in place at the subject location within two years, and that, when the utilities are in place, the vacant land will be rezoned to allow both residential and commercial use. The appraisal assignment's effective date is today. Utilities are not in place as of the effective date of the appraisal. There is no support for the highest and best use of the land area to be used as a residential or commercial development as nothing will happen until the utilities are in place. For the individual land owner, the cost to provide utilities for the subject's development to its highest and best use as a residential or commercial entity is too great and there is too much risk involved. While the highest and best use of the subject property may be for residential or commercial development in a future market, in today's market it is not legally permissible, as the land area is zoned for agricultural use, nor is it financially feasible as installation of the utilities is cost-prohibitive. Ultimately, the highest and best use of the subject land area will be either a residential or commercial use. The zoning changes will reflect and encourage that type of development. But today, the temporary use of the land area is the continued use as an agricultural property. Today's use can be termed to be an interim use for the land area - interim in that the highest and best use of the land is expected to change in the not too distant future. The appraiser will identify the interim use and appraise the land accordingly, using today's date as the effective date. The appraiser will also note, in the appraisal report, the fact that the ultimate highest and best use for the land area will be forthcoming when the community has the public utilities in place. Additionally, the report should include the statement from the city engineer that those utilities will be in place at the subject land area within two years. At that time, the land area's highest and best use should change - assuming, of course, that the developed land is still in demand. The value of the land area should also change to reflect its ultimate highest and best use having been achieved. The appraiser will be able to fully support the analysis process for the ultimate highest and best use of the land area. In the example stated above, the appraiser was able to analyze the market and determine there was a market demand for developed land in the community. That same analysis indicated that it was not feasible (supportable) to appraise the vacant land area with a highest and best use other than agricultural use at the present time. In this example, today's highest and best use determination was to not develop the land area but rather to value it in its present use. The development of a vacant land area is not always the highest and best use of the land. Only by analyzing the market and applying the four factors of analysis as identified above will the appraiser be able to determine those forces that will affect the highest net return for the land over time.

Testing Highest and Best Use

When a highest and best use analysis is required, the appraiser must devote an appropriate amount of time to performing this analysis. Consideration of the two factors - legal permissibility and physical possibility - focuses on information which was obtained during the research of the subject's relevant characteristics. These two tests are applied before the other two tests; it does not matter which one is actually first. It is recommended that the more restrictive factor be applied first. For example, if a property is zoned for only single-family homesite use, the appraiser should consider this factor first; that way the appraiser will not need to waste time considering all of the other uses that might be physically possible. The third test, financial feasibility, relies on data obtained for the performance of the Cost, Sales, and Income approaches. For owner-occupied, single-family properties, the information gathered in the Cost Approach will identify the site value and current building costs. The information gathered in the Sales Comparison Approach will identify the market's perception of the current worth of existing properties. For investment properties, the information gathered in the Income Approach will speak to the investment market's perception of value. With the data analyzed for the first three "tests", the appraiser is in a position to determine the fourth factor, the maximum productivity, of the use or uses identified in the first three steps.

Maximum Productivity - As Vacant

While there may be several uses which would attain profitability, only one will result in the maximum productivity for the property. Which one of the considered several uses will return the greatest profit to the investor? If the property is not an income generating property, which one of the considered uses will produce the greatest increase in value for the property owner? That use which produces the greatest return to the land, is the highest and best use, as vacant. Once the highest and best use, as vacant, has been concluded, the appraiser is now prepared to move into the analysis of the highest and best use of the land as it is currently improved.

The second analysis will determine if the cost to achieve the highest and best use is going to be returned to the property owner or investor.

Will these overall costs be returned to the owner/investor in terms of equal or greater property value? Will there be a profit from the initial investment on the part of the owner of the land area? How much will it cost to achieve the highest and best use of the land area? Will the property be worth at least as much, or more, than the overall costs, including land value and profit, encountered to arrive at the highest and best use for the land?

Excess land can be defined as:

land area that is larger than what is typical for the market area; capable of a separate or alternative use; larger than what is required for the subject's highest and best use; accessible; and capable of being sold for a separate use. In the valuation process, the excess land would be valued under its own highest and best use. However, the appraiser must take care in realizing that the value of the whole is not always the sum of the parts. In other words, although the property has two distinct values, the typical single purchaser may not be willing to pay the sum of the two values. The appraiser must also identify whether or not the market would require some type of a discount for purchasing both components.