HBU Question - Rural Agricultural RA Zoning

[Braun22]

Good Afternoon. I have a question regarding HBU which I could not find guidance in the USPAP manual.

I have a single family home located in a Rural Agricultural zoned area. It has between 15-20 acres and outbuildings which is typical for the area. One outbuilding, a 5000+ sf workshop, houses the owners LLC business which has machinery. The owner is getting a home equity loan to move the business from his residence as the business has grown substantially. The client is asking for the 5000+ sf workshop to be appraised as empty. Is this a USPAP violation if I use the hypothetical condition that all the interior machinery will be removed from the workshop? Do I need to add a cost to cure? Also, in terms of HBU, and being zoned Rural Agricultural, the zoning reads:

"Rural Agricultural:
This district is developed to provide for a minimum level of land use regulations appropriate for outlying areas of the county. These outlying areas typically consist of rural single-family housing, larger tracts of land used for agricultural purposes, and instances of non-residential uses intermingled. Multifamily uses are discouraged in this district. This district would provide for protection from the most intensive land uses while containing provisions for a variety of home-based business opportunities and other non-residential uses deemed appropriate through a special use permit process. It is the intent of this district to rely upon development standards to protect residences from potential adverse impacts of allowed nonresidential uses. The most intensive land uses would not be allowed in this district."

This is a home-based business so it is legally conforming as a residence and business. In regards to HBU, I am not sure how to view this as it is a home-based business and not sure of the special use permit process. I cannot locate other properties with both a residence and business; and am not a certified general appraiser. Does this end up being a forced choice between solely residential or solely commercial? I can find comparables if there is no residence on the parcel and could use a cost to raze the house, although this brings it up into the category of general appraiser so I may need to resign from the assignment. I can also find other residential properties, but will not be able to bracket the total outbuilding square footage. Does anyone have experience with this type of request. The client wants Market Value, although I haven't written them about my concerns with HBU yet. I wanted to ask other, more experienced, appraisers before moving forward. I don't think that this would fall under Interim Value or Value In Use as it's a Hypothetical Condition value so that adds more complexity to how I should look at this. Thank You.

 

[George Hatch]

Is this a USPAP violation if I use the hypothetical condition that all the interior machinery will be removed from the workshop? Do I need to add a cost to cure? Also, in terms of HBU, and being zoned Rural Agricultural, the zoning reads:​

We don't appraise properties, per se; we appraise property rights which in the case of conventional mortgage lending assignments will almost always be limited to the realty interests and which would explictly exclude the non-realty rights (such as the borrower's machinery and business interests). If a mortgage lender gets this property back they can only assume they'll get the realty, not the machinery.

So there is no hypothetical involved. You're only valuing the realty, same as any other house which might currently be occupied and thus is also currently furnished - they're also going to be vacant when the sale closes unless there are additional non-realty interests added into the sale.

This is a home-based business so it is legally conforming as a residence and business.​

In HBU parlance the operative term is "legally permissible", which includes uses allowed by right and uses allowed by "permitting process"; those being two different metrics. If a non-conforming use is otherwise allowed to continue by variance or bribery or by predating the current zoning those are all additional examples of being permissible.

One question you might need to find the answer for is whether/not the workshop can be rented out to a commercial/industrial tenant. If so then you're getting into an income approach and getting away from residential use/occupancy. In this case, the workshop might be permissible for a home business use, but only for the owner.

I don't think that this would fall under Interim Value or Value In Use as it's a Hypothetical Condition value so that adds more complexity to how I should look at this.​

The client doesn't just "want" Market Value, they are required to get it. If an appraiser were to add an opinion of Interim Value or Value in Use those would be supplemental to the MV opinion, not replacements for it. In any case, your assignment doesn't involve any of the above. What you see is what you get: What's the Market Value of the SFR+worksop.

Now all RE is local, so what happens in your area may vary from what happens in other areas. But in my region we sometimes see SFRs that sell with the oversized garage or agricultural building of workshop. A couple years back I appraised a property that includes a really nice/new 1200sf home + 16,000sf metal building + 20ac of avocados. In that case the zoning did not allow the industrial building (20ft interior truss + 8 roll-up doors) to be rented out, so the comps for that building were not industrials on industrial lots. All I could compare it to were properties that had an ag building or barn on them, of which there were also a few of those in the area, albeit not with 16,000sf structures.

As for how to do it, you can look for prior sales in similar areas of SFR+workshop combos and see how they have compared to SFRs on the same sized lots but without the workshop. All you're doing is trying to develop an adjustment factor for the contributory of the workshop; you're not trying to find direct comparables for your Sales Comparison Grid. So, develop the adjustment factor for the amenity and import that into your SC grid to apply to the otherwise similar SFR sales.

Another parallel might be SFRs with equestrian or agric. structures. The question you're trying to answer here is "what does the additional utility add to the value of the whole?"

 

[Mark K]

I'd look at it as a SFR with accessory building, nothing more. They are fairly common in my Agr/Res area. The question, in my mind, is it a commercial/industrial building or a simple 'outbuilding/pole barn, etc.'? If its been built to commercial/industrial standards, that one thing. If a basic accessory building with commercial/industrial machinery inside, that another. Just because someone's using a pole barn for a comm/indust use doesn't mean its a comm/indust building. I've encountered many light indust/manuf uses in acc buildings behind someone's home. The buildings were nothing more that basic pole barns used for welding, repairing ATVs, etc. One house had abut 6 cars in the drive and each room was used for assembling small electronic devices. It was still just a SFR since there were no modifications to the building, not a comm/light manuf property.

I don't see any problem doing what the client requests. From what I read, you might be overthinking this. Its a SFR with acc building and you're confusing/intermingling the improvements with the current use.

 

[Braun22]

Thank you both as the answers were extremely helpful.

"In HBU parlance the operative term is "legally permissible", which includes uses allowed by right and uses allowed by "permitting process"; those being two different metrics. If a non-conforming use is otherwise allowed to continue by variance or bribery or by predating the current zoning those are all additional examples of being permissible. One question you might need to find the answer for is whether/not the workshop can be rented out to a commercial/industrial tenant. If so then you're getting into an income approach and getting away from residential use/occupancy. In this case, the workshop might be permissible for a home business use, but only for the owner." - This helps substantially. I neglected to mention that there were employees working in the workshop. I don't think this would change anything in terms of usage moving forward, but my concern is that it may perhaps be seen as a commercial appraisal, and again, I am not certified for commercial appraisal. I am waiting to hear back from the county regarding what zoning will allow with the building moving forward.

"is it a commercial/industrial building or a simple 'outbuilding/pole barn'" - It is a stick building with metal siding and upgraded electrical and a very large dust collector with hopper which was on the outside of the building, probably 15 feet tall. The owner said that it would be moved.

 

[sputnam]

It's not a USPAP violation to utilize a hypothetical to appraise as if the building is empty.. however, it may not be necessary. If your assignment is to appraise the real estate then, the contents of the building are irrelevant. An HC isn't needed.

 

[Braun22]

Is this a USPAP violation if I use the hypothetical condition that all the interior machinery will be removed from the workshop? Do I need to add a cost to cure? Also, in terms of HBU, and being zoned Rural Agricultural, the zoning reads:​

We don't appraise properties, per se; we appraise property rights which in the case of conventional mortgage lending assignments will almost always be limited to the realty interests and which would explictly exclude the non-realty rights (such as the borrower's machinery and business interests). If a mortgage lender gets this property back they can only assume they'll get the realty, not the machinery.

So there is no hypothetical involved. You're only valuing the realty, same as any other house which might currently be occupied and thus is also currently furnished - they're also going to be vacant when the sale closes unless there are additional non-realty interests added into the sale.

This is a home-based business so it is legally conforming as a residence and business.​

In HBU parlance the operative term is "legally permissible", which includes uses allowed by right and uses allowed by "permitting process"; those being two different metrics. If a non-conforming use is otherwise allowed to continue by variance or bribery or by predating the current zoning those are all additional examples of being permissible.

One question you might need to find the answer for is whether/not the workshop can be rented out to a commercial/industrial tenant. If so then you're getting into an income approach and getting away from residential use/occupancy. In this case, the workshop might be permissible for a home business use, but only for the owner.

I don't think that this would fall under Interim Value or Value In Use as it's a Hypothetical Condition value so that adds more complexity to how I should look at this.​

The client doesn't just "want" Market Value, they are required to get it. If an appraiser were to add an opinion of Interim Value or Value in Use those would be supplemental to the MV opinion, not replacements for it. In any case, your assignment doesn't involve any of the above. What you see is what you get: What's the Market Value of the SFR+worksop.

Now all RE is local, so what happens in your area may vary from what happens in other areas. But in my region we sometimes see SFRs that sell with the oversized garage or agricultural building of workshop. A couple years back I appraised a property that includes a really nice/new 1200sf home + 16,000sf metal building + 20ac of avocados. In that case the zoning did not allow the industrial building (20ft interior truss + 8 roll-up doors) to be rented out, so the comps for that building were not industrials on industrial lots. All I could compare it to were properties that had an ag building or barn on them, of which there were also a few of those in the area, albeit not with 16,000sf structures.

As for how to do it, you can look for prior sales in similar areas of SFR+workshop combos and see how they have compared to SFRs on the same sized lots but without the workshop. All you're doing is trying to develop an adjustment factor for the contributory of the workshop; you're not trying to find direct comparables for your Sales Comparison Grid. So, develop the adjustment factor for the amenity and import that into your SC grid to apply to the otherwise similar SFR sales.

Another parallel might be SFRs with equestrian or agric. structures. The question you're trying to answer here is "what does the additional utility add to the value of the whole?"

After numerous calls, I have found that the county requires a zoning change to rent out a building as commercial, and permits for a resident to use their own building as commercial; so am I correct to view it as you've said, non-conforming in regards to being legally permissible? I could not locate permits for the workshop, and one looks very close to the property line so will write in an EA.

 

[Mark K]

There is often a gray area between a home occupation and commercial use. I suspect the owner could argue home occupation but if he's moving the business, its a moot point. Our zoning ordinance has specific allowances for Home Occupations as compared to commercial use.

What's the EA for? Assuming the improvements are located within the property lines?

Also, non-conforming? What's non-conforming, the business use or the improvements? What are you appraising?

 

[N43WT]

"Does anyone have experience with this type of request."

Yes. Your client may want to see some commentary with regards to if the shop/business affect the marketability of the subject.

 

[Dublin ohio]

After numerous calls, I have found that the county requires a zoning change to rent out a building as commercial, and permits for a resident to use their own building as commercial; so am I correct to view it as you've said, non-conforming in regards to being legally permissible? I could not locate permits for the workshop, and one looks very close to the property line so will write in an EA.

Does zoning address home based business directly or do all home based businesses require a special or conditional use permit. It would seem to me that there would be a definition of home based business. Most rural areas I appraise in define home based businesses in one way or another.

 

[Braun22]

There is often a gray area between a home occupation and commercial use. I suspect the owner could argue home occupation but if he's moving the business, its a moot point. Our zoning ordinance has specific allowances for Home Occupations as compared to commercial use.

What's the EA for? Assuming the improvements are located within the property lines?

Also, non-conforming? What's non-conforming, the business use or the improvements? What are you appraising?

EA - Yes, the EA is for the location of the workshop close to property lines.

Legal non-conforming - The use of the workshop for the business, I believe, is legal non-conforming so wanted to make sure that I am looking at this correct due to the gray area with regards to commercial use and highest and best use... and, again, my not being a certified general appraiser is one of the reasons I ask. According to the county, the shop cannot be rented out unless there were a zoning change to commercial or industrial, so the use to anyone else is not legally permissible. An owner must occupy the residence to use the workshop for commercial use and must have a business permit to do so (which I couldn't find online). Again, being that this is a gray area, I wanted to ask those of you with more experience for guidance. I have appraised multiple properties with residences on acreage with workshops/outbuildings, but the use of this workshop for the business has me wanting/needing to gain as much information as possible to gain competency.

The residence, land/acreage, and outbuildings are normal for the area. The outbuilding size, however, is larger than normal for the area with the only property I can within 25 miles to bracket it being poultry houses.