Chapter 7 - Land Value and Highest and Best Use

What are the four tests of highest and best use / land plus improvements

(1) Is it legally permitted? (2) Is it physically possible? (3) Is it financially feasible? (4) Is it the most productive? *** If the appraiser finds that a potential use fails to meet any of the tests, then that use is not an option for highest and best.

What are the 2 ways of testing financial feasibility

(1) Check the return on investment for the existing use; if positive, it passes the test. (2) Compare the value of the property as improved with the value as if vacant. If it is greater, it passes the test.

Techniques used in valuing land components

(1) Direct sales comparison (2) Allocation (3) Extraction (4) subdivision development analysis (5) Land residual (6) Ground rent capitalization (7) Sales comparison *** (most reliable)

Explain speculative use

People often buy land to hold for future sale in the belief that the land's value will appreciate. This is considered a speculative use because there is a great risk in assuming the market will react in a certain way.

the highest and best use of a property must be one that is:

(1) Legally permissible: the use must comply with laws, regulations, and ordinances. (2) Physically possible: the use must be consistent with the site characteristics and physical features of the property. (3) Financially feasible: the use must add more value than it costs to implement. (4) Maximally productive: the use must yield the most value in comparison with other potential uses.

To determine legal permissibility of a use, an appraiser must consider:

(1) Private land restrictions: deed restrictions, covenants, leases, agreements, easements, encroachments. (2) Public legal restrictions: environmental regulations, building codes, zoning ordinances.

Two functions are served when an appraiser analyzes a site's highest and best use as though vacant:

(1) The appraiser is able to determine what use of the site would produce the site's maximum income (2) The appraiser can more easily identify comparable properties because the analysis of the "highest and best use as though vacant" of comparable properties tend to be very similar to the subject property's analysis.

Explain single uses

A property that is developed to a use that is unlike its neighbors. The existing use must pass the four tests for highest and best use, or else the analysis will conclude that some other use would be better.

Explain legal nonconforming uses

A use that was lawfully established and maintained but no longer conforms to the current zoning regulations is known as a legal nonconforming use.

How is residual land value derived

A value is estimated for a site developed for a certain use, and the combined costs of capital, labor, and coordination needed to create the improvements are subtracted from it. The remainder is the value attributed to the land in that use.

The conclusion to a highest and best use analysis should specify A.) when the optimal use could be achieved and who would be the most likely buyer or user. B.) the historical values of the property based on past individual owners. C.) the projected vacant land value to the user. D.) when a decrease in land values might occur in the future for the buyer or user.

A.) when the optimal use could be achieved and who would be the most likely buyer or user.

If there are already dozens of competing gas stations in the area, a site that is zoned appropriately and offers the ideal physical configuration for a gas station would be considered A.) Non-conforming. B.) financially unfeasible. C.) financially feasible. D.) physically impossible.

B.) financially unfeasible.

A site's developed value for a certain use, when reduced by the combined costs of capital, labor, and coordination needed to create the improvements results in A.) net land value. B.) residual land value. C.) depreciated land value. D.) land value by extraction.

B.) residual land value.

Why is it probable that the existing use of a property automatically passes the legal permissibility and physical possibility tests

By the fact that the improvement already exists, it most likely complies with zoning and other regulations. If it were not physically possible, it wouldn't exist as it does. However, the appraiser cannot assume either to be true and must check for compliance with laws and for physical problems.

When valuing the land, if the residential improvements actually detract from the value of the land one option is to A.) ignore the value of the residential improvements. B.) disregard the non-conforming use. C.) demolish and remove the improvements, returning the property to the condition as if vacant. D.) renovate the improvements to arrive at highest and best use.

C.) demolish and remove the improvements, returning the property to the condition as if vacant.

When the improved property is not in legal compliance it is said to be A.) financially unfeasible. B.) upside down. C.non-conforming. D.) constricted.

C.non-conforming.

How do you calculate what a property's land is worth on its own (minus any improvements)

Compare the characteristics and sales prices of similar sites with the subject real estate.

What problems associated with physical property are addressed in the physically possible test

Functional and condition problems

Does land depreciate Do improvements depreciate

Land does not depreciate. Improvements are subject to depreciation.

What is the difference between land and improvements with regards to value

Land is considered to have value. Improvements are considered to contribute value to the land.

Explain excess land

Land that exists beyond the requirements of a specific use - not needed to support the primary use.

How is land value related to highest and best use

Land value is a component of the highest and best use of a property; highest and best use is a fundamental consideration in estimating land value.

What do most states require with regards to site valuations

Most states require separate site valuations for real estate tax (ad valorem) calculations, since the assessed tax value is almost always divided between the site (land) and its improvements.

What value refers to the increase in unit value resulting from the improved usefulness when small plots are combined to form a larger one

Plottage value.

What are some ways that the physical characteristics of a property can affect the determination of highest and best use as if vacant

Soil conditions may not support a use; the size and shape (frontage and depth) may eliminate a use; climate conditions and environmental features may make a use impossible or too expensive to develop for a use; offsite limitations such as access to utilities may make a use physically impossible.

The test for maximal productivity of the property as improved takes into account:

The costs of, and return on, making modifications to deal with deficiencies discovered in any of the previous tests.

Explain highest and best use as improved

The permitted and most productive possible use of the land and improvements as they exist, considering the feasibility of retaining or renovating the existing improvements. If the cost of demolishing the existing improvements and building new ones would be offset by the new contribution to overall value, then retaining or renovating would not be considered feasible. In other words, the existing use will continue as highest and best unless the land value in its highest and best use would exceed the value of the entire property in its existing use plus the cost to remove the improvements.

Explain highest and best use though vacant

The permitted use of the land, assuming the land to be vacant or capable of being made vacant by demolishing existing improvements, that yields the highest present land value after deducting costs of labor, capital, and coordination.

How does an appraiser appraise vacant land VS. non-vacant land

When the land is already vacant, the appraiser's task is clear—value the land as it is. When it is not vacant, the highest and best use must take into account the existing use and all potential uses.

While a site is waiting to be developed into its future highest and best use, it may be improved to what type of use

a temporary, interim use

The outcome of the four tests applied to potential uses is the

ideal use of the land

The maximally productive use, of the legal, possible, and feasible uses, will be the one that yields the highest ...

residual land value