Highest and Best Use DecisionsHighest and Best UsePurpose of Highest and Best UsePurpose of Highest and Best Use for Real Estate AppraisalsTwo Major Parts of a Valuation AppraisalApplicationDiscussion QuestionsLand Use AlternativesSlide 9Slide 10Slide 11Testing Highest and Best AlternativesSlide 13Reasonably Probable and Adequately Supported Aspects of Highest and Best UseSlide 15Test the Performance of a Property Use: Information and MeasuresSlide 17Rate Factors for Possible Zone ChangeSlide 19Slide 20Consideration of Alternative UsesSlide 22Mathematical ProceduresSlide 24Slide 25Slide 26So That’s Highest and Best Use Decisions1Highest and Best Use DecisionsWayne Foss, DBA, MAI, CRE, FRICSFoss Consulting GroupEmail: [email protected] and Best UseDefinition:The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.(The Dictionary of Real Estate Appraisal, 4th ed., pg. 135)3Purpose of Highest and Best UseMarket Analysis provides information on physical, legal and economic issuesAnalysis of alternative uses determines the Highest and Best UseProvides an economic basis for the use finally chosen by addressing:UtilityDesireScarcityEffective Purchasing Power4Purpose of Highest and Best Usefor Real Estate AppraisalsEstablishes the criteria for selecting comparable salesEstablishes the elements of comparisonProvides the basis for estimates of physical, functional and external obsolescenceProvides the basis for forecasts required to apply the income capitalization approachOccupancyTiming (absorption)Amount (capture)Rents5Two Major Parts of a Valuation Appraisal1. Basis for Value (Highest and Best Use)2. Application of the Three ApproachesNote: The thorough study of market forces that affect use and value requires study time at least equivalent to the study time afforded to measuring that value by applying the appropriate techniques and procedures of the valuation approaches.6ApplicationVacant LandImproved PropertyLand as though vacantProperty as improvedItems Specified in Highest and Best Use Conclusions:Physical UseTime (probable use date or occupancy forecast)Market ParticipantsTypical User of SpaceMost Probable type of buyer7Discussion QuestionsIf the purpose of a highest and best use study is to establish the basis of value, are the following highest and best use conclusions adequate?Vacant Land: Develop for retail use when the demand warrants.Improved Property: Continue use as a multi-tenant office building.If the highest and best use statements are not adequate, what is missing?What misunderstandings may lead to inadequacies in the highest and best use conclusions?8Land Use AlternativesVacant LandNature of Analysisconsideration of probable alternative usesExtent of the AnalysisUsually involves many highly competitive alternative uses. Requires the most detailed study (fundamental analysis).9Land Use AlternativesLand as though VacantNature of AnalysisImproved property will continue in its current use until the land as vacant, less demolition cost, is more valuable that the property as improved.Extent of the AnalysisIf land value does not approach the value of the property as improved, a detailed study of alternative uses is less critical (inferred analysis).10Land Use AlternativesProperty As ImprovedNature of AnalysisIf the improvements contribute to value such that the value of the improved property is equal to or greater than the value of the land as though vacant, the existing improvement(s) must be considered as contributing to the property’s current highest and best use.Extent of the AnalysisHow long and at what level (occupancy and rents) will the current improvements perform? (timing issue)How long will the current improvements contribute to the property value? (timing issue)Can the current improvements be remodeled, renovated or converted, or demolished in the future?If remodeling, renovation, conversion or demolition, what is the time frame?11Land Use AlternativesProposed PropertiesNature of the AnalysisIf the assignment is to value the property at a proposed use, a detailed marketability study of that use is required.Extent of the AnalysisEven when new, the proposed improvement may not be the highest and best use of the land as though vacant.Alternative uses should be consideredA detailed marketability study of each alternative use may be required (fundamental analysis)12Testing Highest and Best AlternativesCriteriaPhysically PossibleWhat uses can be constructed on the site?What alterations are physically possible?Legal PermissibilityExisting restrictions as vacantExisting restrictions as improvedCan existing restrictions be changed to allow more intense use?Will deed restrictions increase the property’s market appeal?What legal attributes give the subject a market advantage?13Testing Highest and Best AlternativesCriteria, continued . . . Financial FeasibilityConsidering Risk and all costs to create and maintain the use - -What uses, as though vacant, produce a positive return to land?What uses, as improved, result in a positive present value?Maximum ProductivityWhich use results in the highest present value?For Vacant Land: ideal development specified in terms of density and styleFor Improved Property: the improvement remains as-is, is added to, is remodeled or renovated, converted to another use or demolished.14Reasonably Probable and Adequately Supported Aspects of Highest and Best UseTheoryTo select use alternatives that should be testedTo judge the appropriateness of conclusions from the application of each of the highest and best use criteriaProblemDetermining reasonable probability and adequate support is left to the analyst’s judgmentInitial AssessmentBased on market acceptabilityOnly practical to investigate alternative uses for land or improvements when a reasonable probability exists for potential alternative uses15Reasonably Probable and Adequately Supported Aspects of Highest and Best UseZoningAt