Site Valuation: Highest & Best Use and Methods

Okay, here’s a detailed scientific content outline for a chapter entitled “Site Valuation: Highest & Best Use and Methods” within a training course called “Property Appraisal: Site & Building Analysis.”

Chapter Title: Site Valuation: Highest & Best Use and Methods

I. Introduction

• Brief overview of site valuation in the context of property appraisal.
• Importance of accurate site valuation.
• Why is site value important? The cost approach, building residual technique, and legal requirements
• Preview of chapter content: highest and best use (HBU) and common site valuation methods.

II. Highest & Best Use (HBU): Theoretical Foundations

• A. Definition and Core Principles

  • Formal definition of Highest and Best Use: “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.” (Refer to The Appraisal of Real Estate, 15th ed.)
  • The four tests of HBU:
    • 1. Legally Permissible:
      • Zoning regulations:
        • Definition and types (residential, commercial, industrial, mixed-use).
        • Setback requirements.
        • Height restrictions.
        • Density limits.
        • Environmental regulations (e.g., wetlands protection).
        • Historic district designations.
      • Private restrictions (deed restrictions, easements).
      • Building codes (safety standards).
    • 2. Physically Possible:
      • Site size, shape, topography, soil composition, geology.
      • Accessibility (roads, utilities).
      • Environmental factors (flood zones, earthquake risk).
      • Example: Can a high-rise building be constructed on a sloped site with unstable soil?
    • 3. Financially Feasible:
      • Market demand analysis:
        • Supply and demand for various property types in the area.
        • Vacancy rates.
        • Absorption rates.
      • Cost-benefit analysis:
        • Construction costs.
        • Operating expenses.
        • Potential revenue.
        • Discounted cash flow (DCF) analysis (see section IV).
      • Example: Would a proposed retail development generate enough income to justify the construction costs?
    • 4. Maximally Productive:
      • The use that generates the highest net return (profit) or value.
      • Consideration of all financially feasible uses and comparison of their potential profitability.
      • Example: Comparing the potential return from a residential development versus a commercial development on the same site.

• B. The Principle of Anticipation

  • The concept that value is based on the expected future benefits of ownership.
  • Importance of forecasting market trends and potential changes in zoning regulations or economic conditions.
  • How the principle of anticipation can affect interim use decisions.

• C. HBU as if Vacant vs. HBU as Improved

  • HBU as if Vacant: Considering the site as if it were unimproved and ready for any legal, physical, and financially feasible development.
  • HBU as Improved: Considering the existing improvements and whether they contribute to value or detract from it.
  • The key decision: Is it more valuable to continue the current use or to redevelop the site?
  • Concept: The Value of the improved property cannot be less than the cost to demo the existing improvements and build new, plus profit.
  • Consider demolition costs.
  • Example: Calculating whether it is more profitable to renovate an existing building or to tear it down and build a new one.
• Example using data from the PDF.
• Discuss interim use, legal nonconforming use, and related information from the PDF.

• D. Legal Nonconforming Use

  • Legality
  • When the Use Can Change
  • Expansion Rules
  • How to use this information to determine HBU

• E. Principle of Consistent Use

  • The requirement that both the land and improvements be valued based on the same HBU.
  • Example: In a cost approach appraisal, the land value must reflect the same use as the proposed or existing improvements.

III. Considerations for Unique Site Characteristics

• A. Excess Land vs. Surplus Land

  • Definitions and distinctions.
  • Valuation of excess land: Can it be sold off separately? What is its HBU?
  • Example of a large lot with a small house on it, where the excess land could be subdivided.

• B. Plottage Value

  • The increase in value when combining two or more smaller parcels into a larger, more usable site.
  • Considerations: costs associated with consolidating the parcels (legal fees, demolition).
  • Example: Combining several small residential lots to create a site suitable for a larger apartment building.

IV. Site Valuation Methods: Principles and Applications

• A. sales comparison❓ Approach

  • Most reliable method when sufficient data is available.
  • Identify comparable sales of vacant land.

  • Steps:

    • Data Collection: Obtain sales data on several similar sites sold recently.
    • Verification: confirm the facts of the sale.
    • Select relevant units of comparison (price per square foot, front foot, acre, etc).
    • Identify the “Elements of Comparison”.
    • Adjustment Process: Adjust comparable sale prices for differences in the elements of comparison (always adjust the comparables to the subject):
      • Real Property Rights Conveyed: Fee simple vs. leasehold.
      • Financing Terms: Cash vs. seller financing. Discount below-market financing to cash equivalency.
      • Conditions of Sale: Arm’s length transactions vs. distressed sales (foreclosures).
      • Market Conditions: Adjust for changes in market values between the date of sale and the date of appraisal.
      • Location: Adjust for differences in desirability. (See Figure 6-6 from PDF)
      • Physical Characteristics: Size, shape, topography, soil, access, environmental conditions. (See Figure 6-6 from PDF)
      • Economic Characteristics: Zoning, development restrictions, utility availability. (See Figure 6-6 from PDF)
    • Reconciliation: Synthesize the adjusted values of the comparables to arrive at an indicated value for the subject site.

  • Mathematical Representation of adjustments:

    • Adjusted Sale Price = Sale Price +/- (Dollar Adjustment)
    • Adjusted Sale Price = Sale Price * (1 + Percentage Adjustment)
  • Experiment Example: Design a thought experiment to illustrate the Sales Comparison Approach. Consider a subject lot, then find three comparable sales. Detail the differences between the subject and each comparable and illustrate how adjustments are made.

• B. Allocation Method

  • Based on the typical ratio of land value to total property value in a given area.
  • Equation: Land Value = Total Property Value * (Land Value Ratio)
  • How to determine the appropriate ratio (market research).
  • Limitations: Assumes uniformity in land values, ignores specific site characteristics.
  • Use cases: preliminary valuation, mass appraisal for tax assessment.

• C. Extraction Method

  • Estimating land value by subtracting the depreciated cost of improvements from the total property value.
  • Equation: Land Value = Total Property Value – Depreciated Cost of Improvements
  • Depreciation estimation methods (cost approach).
  • Limitations: Accuracy depends on the reliability of the depreciation estimate; best suited for older properties where the improvements have significantly depreciated.

• D. Development Method (Subdivision Analysis)

  • Used to value raw land for potential subdivision and development.
  • Steps:
    • Estimate the number of lots to be created.
    • Project the sale price for the lots when developed.
    • Estimate the costs associated with developing the land (infrastructure, marketing, legal fees).
    • Determine the Market rate of Return for projects of this type.
    • Discount all future cash flows to their present value using an appropriate discount rate (reflecting risk and time value of money).
  • Mathematical representation using Discounted Cash Flow (DCF):
    • Present Value (PV) = CF1 / (1+r)^1 + CF2 / (1+r)^2 + … CFn / (1+r)^n
      • Where CF = Cash Flow, r = discount rate, n = year
  • Use Cases: Subdivided Land, Single Family land that is “Underimproved”
  • Experiment Example: Create a hypothetical subdivision project. Estimate lot sales, development costs, and discount rate. Calculate the land value using DCF.

• E. Land Residual Technique

  • A method to value the land component when the value of the improvements can be determined and the overall income generated by the property can be estimated.

  • Steps:

    • Project the Property’s Income
    • Determine the Improvement Value
    • Select Appropriate Capitalization Rates for Land and Improvements.
    • Calculate the income attributable to the improvements: Income (Improvements) = Improvement Value * Improvement Cap Rate
    • Calculate the income attributable to the land: Income (Land) = Total Income – Income (Improvements)
    • Capitalize the income attributable to the land to determine land value: Land Value = Income (Land) / Land Cap Rate

  • Limitations: Requires accurate estimates of income and expenses. The most conservative approach for selecting a rate is to find a similar ground lease.

• F. Ground Rent Capitalization

  • Used when the land is subject to a ground lease (where the tenant owns the building, and the landowner owns the land).
  • Equation: Land Value = Ground Rent / Capitalization Rate
  • Selecting the appropriate capitalization rate (market research on comparable ground leases).
  • Considerations: Lease terms, renewal options, rental rate escalations.

• G. Depth Tables

  • Illustrate how to front portion of a site tends to be worth more than the rear.
  • Apply a percentage to the front vs rear portion of a site to determine overall value.
  • Considered a ball park number, not reliable because they do not take into account use.
  • Review Example from the PDF, and discuss why this is not a standard of value.

V. Reconciliation and Final Value Opinion

• Review of all valuation methods used.
• Weighting the reliability of each method based on data availability and market conditions.
• Reaching a final, supportable opinion of site value.
• Emphasize the importance of documentation and clear explanations.

VI. Conclusion

• Recap of key concepts: HBU and the six common site valuation methods.
• Importance of combining sound judgment with reliable data for accurate site valuation.

VII. Chapter Quiz

• Multiple-choice questions covering definitions, principles, and application of site valuation methods.
• Problem-solving questions requiring calculation of site value using different methods.

VIII. Appendix (Optional)

• Glossary of terms.
• Sample data sheets for recording comparable sales.
• Example of a discounted cash flow spreadsheet for subdivision analysis.

Important Considerations:

• Real-World Examples: Use relevant examples throughout the chapter to illustrate each concept and method.
• Visual Aids: Diagrams, charts, and photographs will significantly enhance understanding.
• Mobile App Information: While not directly❓ “scientific,” including some key mobile apps and resources could be useful to your target audience. Focus on apps that can aid in data collection and market analysis.

This outline provides a scientifically sound and comprehensive framework for your chapter. By incorporating real-world examples, clear explanations, and relevant equations, you will provide your students with a solid foundation in site valuation. I used your PDF to add to the content. I can help you write out each point if needed.