Not Another Highest and Best Use!

[Thebookdoesnthaveit]

Ok, big debate over here in my office. Here are the facts...

1. Property is improved with a single-family residence and a light industrial building.

2. The property is located within the single-family zoning designation. (No commercial, No light industrial, nothing else permitted.)

3. The light industrial building was constructed prior to the new development regulation and has a conditional use permit (CUP), making the industrial building a legally, non-conforming use.

The debate is that one appraiser thinks the land value "as vacant" should take into consideration the existence of the CUP and therefore, the land comps would include sites with some sort of dual use. I think the land is valued "as if vacant" and the CUP would not come into play. Therefore, I think the land value as vacant would require the selection of vacant sites with a residential use only.

What's your opinion???

 

[CANative]

Agree with you. The reason the industrial building can stay is because it was built prior to the current zoning ordinance. If the property were vacant one could not build that structure (I'm intentionally leaving out "rebuild if destroyed" scenarios.)

Are you going to have "consistent use" issues?

 

[PropertyEconomics]

This is most probably an instance where Highest and Best Use as vacant and as improved differ .... I do agree the underlying land has value as a residential site, "as vacant"... the question is does the CUP add value to the land "as improved"?

A very interesting property analysis.

 

[George Hatch]

We appraise property rights.

In this case the property rights appraised include a permissible use that the adjacent properties without the CUP don't have.

We often run into the same problem with properties that have older existing multi-family improvements that represent an overimprovement for the site as if vacant. Those property rights include the permissibility of the more intensive uses regardless of the underlying zoning or development criteria that would apply if that site was (hypothetically) vacant.


If the price/unit of a multi-family property can be broken down into physical segments, that aggregate indicator includes a site component and an improvements component. Moreover, unless the site is significantly underimproved the contributory value of the site segment is based on its actual usage - as in how many units are actually on that site; not on how many units are allowed on that site as if vacant.

If we've got two adjacent properties with existing apartment improvements (which I'm using because it's the easy illustration) onsite that are exactly the same - same lot sizes, same zoning, same building, same unit size, same condition, etc) but one parcel has 8 units and the other has 7 units, the latter will invariably be valued in the market at 12.5% less if everything else is equal. And that price/unit is inclusive of the contributory site value for each of those units, regardless of how many units would be allowed if the site were vacant.


If you're going to quantify the land+improvements in a Cost Approach (not that anyone does those in such situations any more) you'd have to attribute the value to either land or improvements, and if its the land that's being *permissibly* used then that seems fairly self-evident to me.

IMO.

 

[Amy Perkins]

The main issue is whether it could be rebuilt if destroyed. Call the zoning counter and ask them if they would be able to rebuild it if destroyed. If it can be rebuilt, provided that it maintains the same footprint, then it should be valued as industrial. If it would not be allowed to be rebuilt, then the highest and best use is residential. I would start out with, per John Smith at the zoning counter, the subject can/cannot be rebuilt should it be destroyed. Therefore it is/is not valued as industrial land.

 

[George Hatch]

I disagree. The main issue is identifying who the typical (reasonably informed) buyer would be for the property and whether they'd pay more for it in the current use or in some other use. Do the improvements and does the current use add to the value of the whole?

The permissibility to rebuild isn't just relevant to a mortgage lender, but also to any potential buyer that's aware of the issue. But it's far from the dominant attribute of effect on value and marketability - and that's our job. HBU conclusions are not dependent on the intended use of the appraisal or on the client's decision criteria, but go with the property itself.

Just the fact that the property has been in this use with this CUP for however long it's been here indicates the utility of the use to at least the current owners. That didn't become irrelevant to them upon discovery that in the unlikely event of destruction they wouldn't be able to rebuild.

 

[Terrel L. Shields]

If it is like much of our grandfathered such buildings, then if it is 50% destroyed it cannot be rebuilt. I would say the land value is residential, the residence suffers not, and the industrial building will have some external issue as being unable to expand or rebuild. Ex. Obsolescence.

 

[George Hatch]

My guess is that unless the underlying site value as vacant economically justifies the redevelopment of the site the existing use will continue to have some contributory value - and on that basis that site value as if vacant isn't that significant to the valuation. The hypothetical Value "subject to being vacant" becomes moot if the "as is" value exceeds it.

I'll bet it we looked at the sales of 100 of these - and barring a jurisdiction forcing it - that not one gets redeveloped unless and until the underlying value for the residential use economically justifies it.

 

[Amy Perkins]

Well around here they would probably have the right to rebuild. But you never know what those zoning counter people will tell you. If they could not rebuild you would have to say the highest and best use is the interim use until the building is fully depreciated or destroyed.

 

[Amy Perkins]

The thing is that if it is for a refinance, if it burns down the insurance will pay for the fire, but they will not recover the loss of land value. The difference between the industrial land and the residential land is a risk that your appraisal is not considering in the scope of work.