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Cost Approach Vacant Land HBU

Discussion in 'Commercial/Industrial Appraisals' started by Wyoming, Sep 27, 2011.

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  1. Wyoming

    Wyoming Sophomore Member

    0
    Jun 10, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    Wyoming
    I am a residential appraiser and occasionally have to deal with HBU in regards to residential properties that are on business zoned sites. However, my question is kind of the opposite of that situation.
    My hypothetical problem/situation is as follows:
    Assume land in an area is worth twice as much when it is zoned commercial as when it is zoned residential. A business is located on residentially zoned land and its use is only allowed because it is grandfathered. Current zoning would require this business to be located on a commercially zoned site if it were to be built new. So the question is what type of vacant land (residential or commercial) should be used in developing the cost approach? My thoughts are that since the cost approach is based on the principle of substitution, commercial land would be appropriate. Thanks for any input you all can provide.
     
  2. Howard Klahr

    Howard Klahr Senior Member

    80
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Check out the principle of consistent use - land must be valued based on the same use as the improvements
     
  3. Terrel L. Shields

    Terrel L. Shields Elite Member
    Gold Supporting Member

    253
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    Since the commercial building cannot be rebuilt (unless zoning changes), the appropriate issue is value the land as COMMERCIAL, but the difference in value...from RESIDENTIAL land likely will have to come off the improvements as a functional obsolescence...or you might consider it a locational obsolescence (External) ...i would prefer the former.

    I see something like this when a commercial building (like a truck shop) is built in a rural area. They may have even gave a commercial land price for the property (because it is often a small site in an area where larger sites are the norm) and build a commercial building. But when they try to sell the building, it has to sell for a discount over the physical depreciation. It's misplaced.
     
  4. Wyoming

    Wyoming Sophomore Member

    0
    Jun 10, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    Wyoming
    Thank you for the input.
     
  5. George Hatch

    George Hatch Elite Member

    96
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    California
    It's the difference between market value vs value-in-use, the distinction being the contributory value of the improvements (and use).

    We value improvements to the extent that they add to the whole, which IMO includes any profit or loss attributable to successfully getting the non-conforming use.


    The question isn't just limited to parcels with different zoning but commonly also comes up when the existing improvements are non-conforming in other ways such as an overimprovement for the site as if vacant. That happens a lot in my region with apartment projects or with properties that lack the requisite onsite parking requirements.

    Analyzing for various elements of profit and loss is the weak spot in the Cost Approach anyway. In my view this is just another example of that.
     
  6. Calvin the Airedale

    Calvin the Airedale Elite Member
    Gold Supporting Member

    0
    Aug 17, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
    What would be the highest and best use of the site as if vacant? What is the value of the site for that use? What is the value of the improved property under its current use? Does the value of the improved property exceed the value of the site as if vacant and devoted to its HBU as vacant? If so, the current use is the H&BU as improved.

    The definition of "consistent use" from the Dictionary of RE Appraisal, 4th Edition:

    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. The concept of consistent use must be addressed when properties are devoted to temporary interim uses. Improvements that do not represent the land's highest and best use but have substantial remaining physical lives may have an interim use of temporary value, no value at all, or even negative value if substantial costs must be incurred for their removal.
     
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