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Land Use Potential: Vacant & Improved
Chapter: land❓ Use Potential: Vacant & Improved
Introduction
This chapter delves into the crucial aspect of land use potential within the framework of Highest and Best Use (HBU) analysis. We will explore how to determine the most productive use of a parcel, considering both vacant land and properties with existing improvements. This involves a rigorous evaluation of physical, legal, economic, and temporal factors, as well as relevant scientific theories and principles.
1. Physical Possibilities of Land as Though Vacant
A. Site Characteristics: The physical attributes of a vacant parcel impose initial constraints on its potential uses. These include:
1. **Size and Shape:** Irregularly shaped parcels (high perimeter-to-area ratio) often incur higher development costs and reduced utility compared to regularly shaped parcels of equal area. This can be quantified using shape indices:
* Shape Index (SI) = P / (2 * sqrt(π * A))
Where: P = Perimeter, A = Area. A lower SI indicates a more compact, efficient shape.
2. **Topography:** Steep slopes may necessitate extensive grading, increasing development costs. Slope stability analysis, using soil mechanics principles, is vital to ensure safe construction.
* FS = (c' + (γ - ru*γw) * z * cos²(β) * tan(φ')) / (γ * z * sin(β) * cos(β))
Where:
FS = Factor of Safety
c' = Effective cohesion
γ = Unit weight of the soil
ru = Pore pressure ratio
γw = Unit weight of water
z = Depth
β = Slope angle
φ' = Effective angle of internal friction
3. **Soil Composition:** Soil bearing capacity affects foundation design and costs. Geotechnical investigations (e.g., Standard Penetration Test, SPT) are essential to determine soil properties.
* qall = qult / FS,
Where:
qall = Allowable bearing capacity
qult = Ultimate bearing capacity
FS = Factor of Safety
4. **Availability of Utilities:** Proximity to utilities (water, sewer, electricity, gas) significantly impacts development costs. Cost-benefit analyses are necessary to assess the feasibility of extending utilities to remote sites.
B. Accessibility and Visibility: These factors are particularly critical for commercial properties.
1. **Traffic Flow:** High traffic volume is generally desirable for retail, but excessive congestion can deter access. Traffic impact studies and queuing theory models are employed to analyze traffic flow and accessibility.
2. **Curb Cuts:** Number and placement of curb cuts directly affect site accessibility.
3. **Visibility:** Excellent visibility from major roadways is a significant advantage. View shed analysis can be used to determine the visual impact of potential developments.
C. Environmental Considerations: Soil and groundwater contamination can severely limit land use options and necessitate costly remediation. Environmental site assessments (Phase I and Phase II) are crucial to identify potential environmental liabilities.
2. Legal Permissibility and Regulatory Constraints
A. zoning❓ Ordinances: Zoning regulations dictate permissible land uses, density, setbacks, height restrictions, and other development standards. A thorough understanding of the applicable zoning codes is essential.
B. Land Use Limitations: Land use limitations are inherent in applicable codes, ordinances, and regulations.
C. Easements and Restrictions: Easements (e.g., access, utility) and restrictive covenants can limit development options. Title searches and legal review are necessary to identify any such encumbrances.
D. Environmental Regulations: Wetlands protection, endangered species habitat, and other environmental regulations can impose significant restrictions on land use.
3. location analysis❓❓ and Economic Demand
A. Market Area Analysis: Understanding the demographic, economic, and competitive landscape of the market area is critical. This includes analyzing population growth, income levels, employment rates, and consumer spending patterns.
B. Linkages to Demand: Identifying the sources of demand for potential land uses is crucial. This involves analyzing the target market, identifying key demand drivers, and assessing the competitive environment.
C. Growth Patterns: Understanding the direction and rate of growth in the market area is essential for forecasting future demand. Geographic Information Systems (GIS) can be used to analyze land use change patterns and identify areas with high growth potential.
4. Distinguishing Physical Use from User Motivations
It is important to differentiate between the physical use of land and the motivations of owners or users.
Conservation, preservation and assemblage are not uses of land. Speculation refers to the acquisition of property motivated by the expectations of realizing a profit from a rise in price.
5. Financial Analysis of Alternative Uses of Land as Though Vacant
A. Residual Land Value: This is a crucial metric for evaluating the financial feasibility of alternative land uses. It is calculated by deducting the total development costs (including construction, financing, marketing, and entrepreneurial profit) from the estimated market value of the completed project.
* RLV = MV - TDC
Where: RLV = Residual Land Value, MV = Market Value (of completed project), TDC = Total Development Costs.
B. Discounted Cash Flow (DCF) Analysis: DCF analysis is used to determine the present value of future cash flows generated by each alternative land use. This involves projecting revenues, expenses, and capital expenditures over the project’s life cycle and discounting them back to the present using an appropriate discount rate.
* PV = ∑ (CFt / (1 + r)^t)
Where: PV = Present Value, CFt = Cash Flow in period t, r = Discount Rate, t = Time period.
C. Timing of Use: Some alternative uses may not be financially feasible in the short term but may become viable in the future due to changes in market conditions. Land residual analysis should consider potential future uses and their associated timing.
6. Maximum Productivity of Land as Though Vacant
A. Highest Residual Land Value: The HBU of land as though vacant is the use that produces the highest residual land value.
B. Capitalization of Residual Income: Capitalizing the residual income to the land, considering the associated risks, is an alternative approach. The capitalization rate is derived from market research and reflects the returns applied to similar alternative uses.
C. Comparable Sales Data: Analyzing sales of comparable land parcels with similar HBU conclusions is another method to assess which alternative is maximally productive.
7. Conclusion of Highest and Best Use of Land as Though Vacant
The ideal improvement should meet the following criteria:
- Supported by Market Analysis
- Takes Maximum Advantage of Potential Market Demand
- Conforms to Market Standards
- Specificity in Conclusion
8. Alternative Uses of the real estate❓ as Improved
A. Considerations: When evaluating a property with existing improvements, appraisers consider several alternative uses:
1. **Continue Current Use:** Retain existing improvements.
2. **Convert/Renovate:** Alter existing improvements.
3. **Interim Use:** Use existing improvements as an interim use.
4. **Demolish and Redevelop:** Demolish existing improvements and redevelop the site.
B. Demolition Analysis: Comparing the value of the property as improved to the value of the site as though vacant (less demolition costs) determines whether demolition is economically feasible.
C. Modification Analysis: If demolition is ruled out, conversion, renovation, or alteration options are tested. For any modification to be financially feasible, the change must add at least as much value to the property as it costs.
D. Current Use Analysis: If all other alternatives are eliminated, and the current use remains financially feasible and yields the highest value, then the current use is the HBU of the property as improved.
E. Consistent Use: Valuing land based on one use while valuing improvements based on another is incorrect.
9. The Application of Highest and Best Use Analysis
The traditional four tests of highest and best use are theoretically applied to the subject property from two perspectives:
- the land as though vacant
- the property as improved.
Conclusion
Determining the land use potential of vacant and improved properties requires a rigorous, multi-faceted analysis that considers physical, legal, economic, and temporal factors. By applying the scientific principles and methodologies outlined in this chapter, real estate professionals can make informed decisions that maximize property value and contribute to sustainable development.
Chapter Summary
Land Use Potential: Vacant & Improved
This chapter explores the crucial concept of land use potential within the framework of highest and best use analysis, focusing on both vacant land and improved properties. The analysis begins with an examination of legal restrictions on development, emphasizing the need to investigate the probability of zoning❓ changes and the associated economic demand, timing, and costs.
For vacant land (or improved sites analyzed as though vacant), the chapter highlights the significance of physical characteristics such as site size, shape, frontage, topography, soil composition, availability of utilities, environmental factors, and accessibility. These factors constrain the range of physically possible uses, and their impact is analyzed through property productivity analysis, which also incorporates legal and locational characteristics. location analysis❓ identifies the area’s land uses with the greatest economic demand by addressing the subject property’s fit within the overall growth pattern and by comparing the location of the subject property to the competition at the present time and in the future
The concept of highest and best use pertains to the physical use of land, as distinguished from the motivations of owners or users, such as conservation or assemblage, which are motivations for acquiring the property rather than uses of the real estate. Land held primarily for future sale is considered a speculative investment, which describes a motivation rather than a use.
Financial feasibility analysis narrows the pool of legally permissible and physically possible uses by evaluating the present residual land value❓ for current development. Timing is a crucial consideration, as some uses may not be currently feasible but could become so in the future. The highest and best use among the financially feasible options is the one that yields the highest residual land value, determined by deducting the cost of improvements from the completed property value. This can be assessed through various methods, including capitalizing residual income or comparing comparable land sales data.
If a new improvement is appropriate for the highest and best use of a vacant parcel, the ideal improvement should be supported by market and financial analysis, maximize market demand, and conform to market standards. The ideal improvement aids in estimating depreciation in the cost approach to valuation. The ideal improvement should be specific, e.g., in the level of the number of stories or number of units built.
The analysis then shifts to alternative uses of improved properties, considering whether to: 1) retain the existing improvements and continue the current use; 2) convert, renovate, or alter the existing improvements; 3) retain the existing improvements as an interim use; or 4) demolish the existing improvements and redevelop the site.
Demolition is considered if the property’s value as improved is less than the value of the site as though vacant minus demolition costs. Modifications, such as conversion, renovation, or alteration, must add at least as much value as their costs. The current use is the highest and best use if all alternative uses are eliminated, and the current use remains financially feasible without modification and retains the highest value of the alternative uses. Deferred maintenance should be addressed for the current use to achieve the best competitive position in the marketplace.
The principle of consistent use dictates that land and improvements cannot be valued based on different uses. The property is valued as vacant and available for its highest and best use. The future economic performance of the existing improvements is the core concern in analyzing the alternative uses of the property as improved. The process of highest and best use analysis is effectively organized into eight steps that amplify the process of market and marketability analysis.
