AI General Market Analysis & Highest and Best Use - PART 2

Step 1 of Residual Demand Analysis consists of

specifying the demand and supply situations, comparing the two, and analyzing market implications, only.

Micro location analysis focuses on

subjects location within neighborhood or office node

In regards to feasibility The purpose of residual demand analysis is to interpret

the forces of supply and demand.

When more than one fundamental demand analysis method is used, normal/equilibrium vacancy is calculated from

the reconciled demand number.

For what purpose is the ideal improvement used?

to calculate feasibility rent

For a Level C marketability study to be appropriate, how many of the following can exist? • complex property • large property • unstable market

two or more of them

Bilateral monopoly theory predicts a minimum sale price and a maximum sale price, but no __________________________

unique price.

If a use is not currently financially feasible and If it is possible to forecast the time that a use will become financially feasible

use then becomes a candidate for the maximally productive use.

Residual demand analysis is the most reliable tool to forecast whether and when a ________________________________

use will become financially feasible.

What are market indicators of financial feasibility? Low _____________ and high _______________...

vacancy rates rental rates

In land utilization, the ratio between the _________________ of the product flowing from the site and the________________________that produced it.

value expense of the labor and capital

What is the fundamental source of demand used when conducting a fundamental demand analysis using the segmentation method in Step 3 of a Level C study of an office property?

work force

In order to project office jobs, what trends must be analyzed? (3)

• Employment Trends • Population Trends • Income Trends

Given the following information, what is the net operating income for this property? Operating Expense Ratio - 32% of EGI Potential Gross Income - $500,000 Vacancy and Collection Loss - 5% of PGI

$323,000

The subject property is an older duplex located in a beach community on land zoned for single unit use. Given the information below, if the duplex is a legally nonconforming use that can be occupied as a duplex but cannot be replaced if it is destroyed, what is the land value associated with the property? Physically depreciated improvement value $75,000 Site value as duplex $450,000 Site value as residence $400,000

$400,000

The Ideal Improvement is what (3 things)

- Does not suffer from any depreciation. - Is used to calculate feasibility rent. - Helps the appraiser estimate depreciation in the cost approach.

In the income capitalization approach, market analysis:

- Helps identify the most likely user of the property - Supports estimates of current market rent and vacancy - Supports estimates of projected market rent and vacancy - Supports estimates of projected operating expenses - Helps quantify risk and thus supports the selection of the capitalization rate and the discount rate as well as the likely investment holding period

In the cost approach, market analysis provides:

- Information on land or site value - Information on local market costs of site development and improvement construction - Support for judgments about effective age and remaining economic life and, therefore, the age life estimates of depreciation - Identification of functional and external obsolescence and helps to quantify depreciation

Requisite space per office worker - Sources of info include

-BOMA International -Local historical data -Typically the relationship between current office employment and current office demand

In Level C Step 3 what is different?

-Forecast workforce -Estimate the percentage of office occupants occupying space in the subject property's class of office building. -Estimate the requisite space per office worker - Calculate the demand for office space

Financial feasibility can be indicated through market analysis in two ways:

1. Implied through market activity, and 2. Measured through calculation.

The two major parts of a valuation appraisal are reflected in the purposes of highest and best use analysis:

1. In the first part of a valuation appraisal, the foundation for value (highest and best use) is established. 2. In the second part (application of the three approaches), that value is measured.

Data required to calculate feasibility rent (8 items)

1. Land (site) value to end users 2. Site preparation costs 3. Gross building size and rentable area 4. Building and other improvement costs 5. Overall capitalization rate (RO) 6. Estimated market rent 7. Estimated property operating expenses or operating expense ratio 8. Estimated stabilized vacancy and collection loss (V&CL)

Conduct trend analysis using inferred data for MF (3 steps)

1. Measure and project the number of households 2. Evaluate demand for the subject property type 3.Identify the performance primary competition

Three quantitative ways of measuring financial feasibility through the use of market supported rents and occupancy.

1. The land residual technique, 2. Feasibility rent analysis, and 3. The profitability index.

A Level C analysis may be required if (as it pertains to the # of HH)

A decline in the number of households is evident

External Obsolescence Adjustments can be made with

A discount rate

Co-Op / Cooperative Ownership

A form of property ownership in which each unit owner holds stock in a cooperative apartment building or housing corporation Obligated to pay a monthly maintenance charge that represents the proportionate share of operating expenses and debt service

Speculative-investor sale

A sale to a buyer who bought with no intention of immediately utilizing the property to its highest and best use; e.g., sale of land to a buyer who holds the property in the hope of selling the land to an office developer in the future.

Residential capture analysis

A type of analysis that focuses on the percentage of the total potential market a residential property or project is expected to attract.

In the sales comparison approach, market analysis helps identify comparable properties by:

Aiding in the identification of the appropriate elements of comparison Identifying the most likely purchaser of the property; e.g., owner-occupant, investor, etc.

Intranodal considerations

An office building competes primarily with other office buildings in its own node, so the subject property's location within the node is critical to determining its competitive position.

What are key office variables and trends in the OFFICE case study property's market area that could be relevant for this subject property?

Answers include: • Occupancy rate, historical absorption, trends in rent levels • Current citywide office space occupancy of 85% • Current citywide Class A office space occupancy of 94%

The highest and best use of a site as though vacant is based on the premise that

Any existing improvements can be demolished.

Financial Feasibility - means the use is

Any physically possible, legal use of property that produces a positive return to the land after considering risk and all costs to create and maintain the use; any use that results in a positive land value.

Physical limitations that may change over time include:

Availability of utilities Availability of public transportation Completion of contamination clean-up

Young Singles like what externalities? (just look don't answer)

Bars, take-out restaurants, clubs, fitness/sports facilities, inexpensive recreation / theaters / entertainment.

To determine Capture Rate for Entire Market

Calculate pro rata of Class A (subject type) SUPPLY, and then apply the same percentage to the DEMAND

Which of the following statements best describes capture analysis?

Capture analysis is concerned with the expected performance of the subject property.

Multiunit Class Types & Descriptor words (Class A-C)

Class A - Excellent & High-Quality (garage parked) Class B - Good (parking garage often included) Class C - Average & Average-Quality

Demographic growth rates do not do what!?

Compound...

CRA

Conversion of the Property to Alternative Use Renovation of the Space Alteration of the Property

Based on the information below, what is the highest and best use as improved of the property? Value as-is as an office building: $550,000 Cost to convert to a medical office building: $200,000 Cost to upgrade the office building to current standards: $75,000 Value if converted to a medical office building: $775,000 Value if upgrades to an office building at current standards: $600,000 Value if vacant land: $250,000 Cost to demolish existing building: $50,000

Convert the building to a medical office building CV as Medical = $25,000 All other options = ($350,000 to $0)

Market Areas (delineation) typically associated with Level A?

County City Metro Area Macro trends

Married / No Children like what externalities? (just look don't answer)

Cultural, entertainment / theaters, high-end eateries, pet parks

An indicator of future performance.

Current and past performance of the subject node

Market activity as an indication of financial feasibility - appraiser should be researching

Current sales and leasing activity can sometimes indicate the strength of a market. For instance, if an appraiser is considering the financial feasibility of a vacant site for retail use, the market should be investigated for recent sales of vacant sites to end users. Numerous recent sales to end users would imply that the use is financially feasible

Considerations in residential situs analysis include - School district - Commuting time - Entertainment linkages What are these considerations called?

Dominant Considerations

What is the first step in analyzing the probability of a zone change?

Eliminate legally unacceptable uses such as those that have a clear history of denial.

For a use to be a candidate for the highest and best use, it must be

Eventually legally permissible, eventually physically possible, and eventually financially feasible.

The Elderly like what externalities? (just look don't answer)

Family-style restaurants, health care, public transportation, parks

In order for a CRA to be financially feasible, it must add at least as much value to the property as it costs (including profit.) This relationship is expressed by the following formula:

Feasible IF Property Value as is ≤ Value after CRA - CRA Costs

Profitability index > 1

Financially feasible

CRA Analysis Steps / Formula

For each proposed use Value as CRA use LESS: As-Is Value LESS: CRA Cost = Contributory Value Highest Contributory Value is the HBU As-Is also must be calculated (Contributory Value always = $0)

Rentable area

For office or retail buildings, the tenant's pro rata portion of the entire office floor excludes penetrations

The most important characteristic in choosing a comparable property is similarity in

HBU

Two types of HBU

Highest and best use of a site as though vacant Highest and best use of a site as though improved

Why might the results of a Level C study differ, if at all, from those of a Level B study conducted for the same property?

Historical trend analysis may be unreliable in a volatile market.

The Special Issue of Consistency in Determining the Highest and Best Use of an Improved Site

If an opinion of market value is the goal of the appraisal, the site must be valued on the basis of its highest and best use. This is self-evident for vacant land; for improved property, it is just as important.

For office space, capture analysis by the pro rata share method is based on which of the following?

In an office market, demand should be distributed proportionately on average based upon the total supply of office space.

In Level C, competitive supply is measured...

In the same way as Level B

In Level C, residual demand is calculated...

In the same way as Level B

For the office building case study property, what would you expect to be the market area?

In this case, the market area is the entire city, including all three office nodes.

ECONOMIC forces pertain to

Income (median/mean) HH Tenure

Intra VS Inter?

Intra = within Inter = between

Timing is in the future - who is the value related to?

Investor Value

Four Elements of Production

Land Labor Capital Entrepreneurship

Value Indicated from Cash Flow LESS ____________________ = Residual Value to Land

Less development and construction costs

Which of the following marketability analysis relies primarily on macro data found in market studies?

Level A

What is the lowest level of marketability study that may still be reliable if the property is complex compared to the market or the market is volatile?

Level B

How do Level C marketability studies differ from Level B studies when analyzing property productivity?

Level B studies rely on description, and Level C studies employ ratings grids

Losing population but gaining households, what is needed

Level C

What is the lowest level of marketability study that can be reliable if the property is complex compared to the market and the market is volatile?

Level C

Which of the following marketability analysis adds the supply and demand data obtained from the property's immediate market area?

Level C

Which of the following marketability analysis includes a competitive ranking of the subject property and its general location?

Level C

The performance of the subject property's primary competition is one indication of the reliability of a Level B marketability analysis. If the primary competition in the competitive market area is performing poorly - Level C needed

Level C is required

General demographic and forecasting sources: Noncommercial Providers

Local council of governments Local college or university such as Center for Regional Analysis http://www.cra-gmu.org/ (George Mason University)

OFFICE What to look at for both Macro and Micro locational analysis?

MACRO - Identify the nodes of office buildings within the metropolitan area and the growth pattern MICRO - characteristics of the subject property's location within its node

Timing is Now if

Market

___________________ is a set of arrangements in which many buyers and sellers are brought together through the price mechanism.

Market

The process which focuses on general market information about a property type or a defined area is called

Market Study

_______________________ is integral to the highest and best use analysis and is not a stand-alone process in a market value appraisal.

Market analysis

If the competitive market area is strong while the community is weak or losing households, a Level B __________?

May be justified

If the competitive market area is weak while the community is gaining households, a Level B __________?

May not be justified

____________________ is the statistical measure of reliability based on how the data is spread out around the middle within a data sample.

Measures of dispersion

OFFICE Typical market area AND competitive market area

Mkt Area - Community Comp Mkt Area - Office Node

What determines if a use is Reasonably Probable?

Must be legally permissible and physically possible

NNN vs Full-Service

NNN is ALL property expenses Full-service is inclusive of all expenses associated with occupancy

NPV Interpretations (3)

NPV = + : When NPV is positive, the investment is financially feasible; NPV = 0 : If NPV is zero, the investment is neutral NPV = - : When NPV is negative, the investment is not financially feasible.

___________________ is the difference between the present value of all expected investment benefits (PV) and the present value of the capital outlays.

Net present value

NAICS and SIC

North American Industry Classification System Standard Industrial Classification

Which of the following ingredients distinguishes a potential market from an actual market?

Occupancy

The type of space required for office market segmentation depends on? (4) OFFICE

Occupancy Prospective Tenant Building Classes Building Types

Internodal considerations

Office nodes compete with each other with regard to tenant appeal and, on a secondary level, an office building competes with buildings in different nodes. In both cases, the strength of the competition is the key element of comparison to consider.

Why are office buildings often found in clusters?

Office tenants generally seek the same linkages.

A highest and best use conclusion states that the highest and best use of the subject vacant site is to sell the property to an owner-user for immediate development. Which issue was overlooked?

Physical Use

Make sure that a HBU conclusion addresses (3)

Physical use Timing of use Most likely buyer/user

Highest and best use conclusions should state the (3 things)

Physical use, the timing of the use most likely purchaser and user.

"What factors drive the local economy and market?" What analysis answers this?

Primarily employment Macro analysis

_____________________ is based on the premise that the subject property should attract demand in relation to its size.

Pro-rata share method

The Dictionary definition lists six items that must be considered in a highest and best use study,

Reasonably probable Legally permissible Physically possible Financially feasible Maximally productive Result in the highest value

_________________ is part of the micro location analysis for an office building.

Relative location of the subject property within the office node

________________ uses these steps: 1. Identify the existing situation. 2. Identify the future situation.

Residual demand analysis

Empty nesters like what externalities? (just look don't answer)

Restaurants, freeway access, recreation, shopping

How would the conclusion differ for a property's highest and best use if legally permissible were performed before physically possible, instead of legally permissible before physically possible?

Reversing that sequence results in the same number of uses to consider for financial feasibility.

_____________ is the comparison of the subject property with the market it serves over time and across space; the expected percentage of the total demand or residual demand that a specific property can expect to attract now and in the future; short-term capture is referred to as absorption; long-term capture is referred to as share of the market.

S

SKIP

SKIP

End-user sale

Sale to a buyer who intends to immediately utilize the property to its highest and best use e.g., sale of land to an office developer who buys with the intent of immediately developing an office building.

Market segmentation

Segmenting Demand Dividing market demand into meaningful user groups based on the property's attributes - i.e., identifying different user groups attracted to the physical, locational, legal and political, and design and amenity attributes of the real estate.

This projection is based on the most recent growth rate is the most conservative because it disregards the earlier, high-growth years.

Short Trend

Which lot characteristic is most likely to appeal to an older couple?

Small lot size

These forces influence property values and define communities (4) SEGE

Social Economic Governmental Environmental

When concluding an ideal improvement for land or a site as though vacant, it is mandatory that this conclusion (description) be as ____________ as the _____________ demands

Specific Market

What is a synonym for 'dispersion?'

Spread

Procedure for Analyzing the Probability of a Zoning Change (4 steps)

Step 1. Eliminate legally unacceptable uses. Step 2. Complete a productivity analysis of the subject property. Step 3. Rate the factors for possible zoning change. Step 4. Reconcile and make a final judgment on the probability of a zoning change.

Demolition Alternative Steps (5)

Step 1: Estimate the value of the site as though vacant and available for development to its highest and best use. Step 2: Estimate the value of the property as improved. Step 3: Add the cost to demolish the existing improvement(s). Step 4: If the total value of the property as improved plus the cost to demolish is lower than the value of the site as though vacant, the improvements should be demolished. Step 5: If the total value of the property as improved plus the cost to demolish the improvements is higher than the current value of the site, the improvements should not be demolished at this time.

Steps for Solving for Feasibility Rent (5 steps)

Step 1: Estimate total project costs: Step 2: Multiply total project costs by overall capitalization rate (RO) to get feasibility NOI (IO). Step 3: Add operating expenses (OE) to get feasibility EGI Step 4: Adjust for stabilized vacancy and collection loss to get feasibility PGI. Step 5: Divide feasibility PGI by rentable square feet of building to get feasibility rent per square foot.

The subject property's node is always identified as part of _____________ (step)

Step 2

For Levels B and C, which step or steps are nearly identical except for extent?

Step 4, measure and forecast supply; and Step 5, calculate residual demand

For the office building case study property, what would you expect to be the competitive market area?

Suggested Solution: The best answer would be the Central Business District node.

_____________ uses the following steps: Identify direct competition. Identify significant attributes and characteristics of competing properties. Segment supply characteristics to match demand characteristics.

Supply analysis

____________________ is the total supply that a given amount of demand can support; equals measured demand plus an allowance for frictional vacancy.

Supportable demand

Surplus VS Excess land

Surplus = Land that CAN be sold of S = Sale -------------------- Excess = Land that CANNOT be sold off

The goal of market analysis is to identify the relationship between quantifiable demand and competitive supply in the subject property's real estate market, both now and in the future.

TRUE

There are times when appraisal assignments do not require a highest and best use determination.

TRUE

These three ingredients - demand, prices, and supply - do not guarantee that a market exists, only that there is potential for a market.

TRUE

In a highest and best use analysis, the phrase maximum productivity is from the viewpoint of?

The buyer

Consistent use

The concept that land cannot be valued on the basis of one use while the improvements are valued on the basis of another

Net present value (NPV)

The difference between the present value of all expected investment benefits (PV) and the present value of the capital outlays (CO): NPV = PV - CO

Ideal improvement

The improvement that takes maximum advantage of a site's potential given market demand, conforms to current market standards and the character of the market area, and contains the most suitably priced components; the improvement that represents the highest and best use of the land as though vacant.

According to the theory of consistent use,

The improvements must be valued for the same use as the land.

Plottage value

The increment of value that often occurs when two or more sites are combined to produce greater utility, resulting in a higher productivity or income than could be obtained from the individual smaller sites.

The profitability Index is most applicable too

The index is most applicable with conversion, renovation, or alteration projects on an improved property.

How does a market analysis for a subdivision differ from a multiunit residential or office project?

The latter have indefinite lives with fluctuating occupancy.

**What is the final determination of a property's highest and best use?

The legally permissible and physically possible use that maximizes land value.

In a distribution of household income that is skewed to the right, why is the mean greater than the median?

The mean is more influenced by higher-income but less-frequent households.

In a normal distribution, which of the following is true?

The mean, median, and mode are all equal.

Profitability index

The present value of anticipated investment returns (benefits) divided by the present value of the capital outlay (cost);

Balance

The principle that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium

Highest and best use

The reasonably probable use of property that that results in the highest value.

Feasibility rent

The rent necessary to justify new construction. This concept helps the analyst determine the timing of development, as well as the difference between required rent and market rent based on known costs and expected returns to the investor

Competitive differential

The result of a comparison between the subject property or a competitor against the market standard. The purpose is to discover the relative strengths and weaknesses of the subject property and the competitive properties

How many market areas are there in Level B vs C

Two in Level B One in Level C

Current OFFICE EMPLOYMENT estimates can often be obtained from:

U.S. Department of Labor (bls.gov) State employment commission Council of governments Commercial vendors (Woods & Poole, Moody's, for example)

Based on the information below, what is the highest and best use as improved of the property? Value as-is as an office building: $525,000 Cost to convert to a medical office building: $200,000 Cost to upgrade the office building to current standards: $50,000 Value if converted to a medical office building: $700,000 Value if upgrades to an office building at current standards: $600,000 Value if vacant land: $250,000 Cost to demolish existing building: $50,000

Upgrade the building to current office building standards.

The value of a property for a specific use is called

Use value

Timing is Now - who is the value related to?

User Value

______________ refers to the ability of a product to satisfy a human want, need, or desire.

Utility

Calculate total space from vacant space

Vacant Space / vacancy rate

How to calculate Land Residual

Value As-if-completed LESS: Building Cost & Entp Profit --------------------- EQUALS: Indicated site value Value mist be positive to be financially feasible

How to Calculate Profitability Index

Value after Renovation LESS Value Under Current Use = Contributory value of the renovation Contributory value of the renovation DIVIDED BY cost of renovation = Profitability Index

FLIP OVER! D

Which of the following charts depicts demand in a conventional market?

Good non-commercial data source(s) for general demographics and forecasting can be

a local college or university.

The goals of competitive market area delineation are to identify • the location in which properties compete for the same purchasing dollars, • properties that compete for purchase demand, and

acceptable substitutes for a property.

Profitability index is also called

benefit-cost ratio

If demolition is ruled out, the highest and best use question then becomes whether what?

changes to the property (conversion, renovation, or alteration) are necessary to achieve its highest and best use.

If the value of an improved property plus demolition costs is greater than the value of the site as though vacant, the existing improvement(s) must be considered as ________ to the property's highest and best use.

contributing

employment is growing but population is not, what does this signal for OFFICE

could indicate a dependence on commuters and a risk of employment relocation.

population is growing but employment is not, what does this signal for OFFICE

could indicate a future increase in demand for local office space

If local employment and population are growing in unison, what does this signal for OFFICE

could indicate a sustainable need for office space

The purpose of defining an office property's market area is to measure

current and future employment.

Feasibility rent can be used to determine what

depreciation of the existing improved property if market rent is less than feasibility rent

A speculative investor forecasts the future date when end users will re-enter the market (i.e., when market rent reaches feasibility rent) and then ______________________________

discounts the end-user price back to present value.

A regular market curve for demand slopes

down

What is the fundamental demand generator for office space

employment

Availability of ________________ is a major concern in defining the market area.

employment forecasts

The three broad categories of the fundamental generators of demand are

employment, population, and income.

The goal of using inferential statistics in market analysis for appraisal purposes is for reliable ________ of market behavior.

extrapolation

Calculating or estimating a quantity beyond the range of data on which the calculation or estimate is based is referred to as

extrapolation.

The basis for a property's value is the property's

highest and best use

Among all reasonable, alternative uses, ______________________ is the use that yields the highest present land value, after payments are made for labor, capital, and coordination

highest and best use of land or a site as though vacant

The tenants that are not present in the survey of the competition but do exist in the tenant mix in similar market areas are referred to as

holes in the market.

PKF Consulting is primarily a source of data for

hotels.

The most important factor in delineating a market area for office properties is?

identifying and studying all similar office buildings.

In the ________________, market analysis helps identify the most likely user of the property; e.g., typical tenant size, typical tenant type.

income capitalization approach

In the ________________, market analysis identifies current and future competition. What approach is this?

income capitalization approach

In a Level C study of an office property, what method or methods are used to project subject capture?

inferred pro rata share and comparable comparison

Timing affects both

land (or a site) and improved property.

Plottage" is generally used to describe a circumstance in which

larger sites are more valuable per square foot than smaller ones

Key variables usually considered first in market segmentation of an office building are

location and building class.

What types of land tracts can be subdivided?

many types, including commercial, industrial and residential

The end user defines the ______________; the speculative investor determines value by discounting the end-user price for____________________

market time and profit

The ________ of a space identify a property's most productive use.

most likely users

Diseconomies outside a property have a ___________effect upon its value.

negative

Bilateral monopoly suggests that any observed transaction price depends not on supply or demand but on the ____________________ of the buyer and the seller.

negotiating or bargaining skills

OFFICE Usable area

net building area or net floor area

OFFICE - Segmentation of demand is grouping _____________________ into homogenous groups based on their characteristics.

office space users

Class in office building appraisal refers to a system of rating properties based on the

overall appeal in the market.

The losses are extremely low risk, i.e., loss is an absolute certainty Using a discount rate that includes risk almost certainly overdiscounts the losses Overdiscounting the losses results in _____________________________

overstating value

To conclude that a future use will be legally permissible and physically possible, it must be reasonably probable that the

physical or legal status of the property will change in the future.

Recall that after consideration of Elements of Production (land, labor, capital, and entrepreneurial incentive), a use that produces _________________ is feasible

positive land value / return to the land

Financial feasibility is indicated by (3 things)

positive residual land value, active sales of land to end users market rent equal to or greater than feasibility rent.

An office building competes

primarily with buildings in its own node and secondarily with buildings in different nodes.

An analysis of a property's linkages is performed in which of the following steps of the six-step process?

property productivity analysis

Efficiency ratio

ratio between the rentable and gross area of a building

Financial feasibility of the owner-occupied use can only be inferred through

recent market activity i.e., through recent absorption of similar properties.

The highest and best use of a property is the use that

results in the highest value regardless of income potential.

Plain Vanilla Shell is primarily a source of data for

retail.

Taken together, ________________________________ influence the appeal a property has for potential buyers.

site utilization and improved building characteristics

A Finished Lot has what completed

site work utilities to site all permits except building permits all fees are paid except sewer and water tap fees **A lot that is approved and fully prepared to support a building; sometimes referred to as a vacant developed lot