Residential Land with Commercial Highest & Best Use

[The Warrior Monk]

David, just keep in mind, we are not appraising the FUTURE zoning. TODAY, the date of the report, the zoning is residential therefore, the subject property cannot by definition be a commercial HBU... maybe tomorrow when they change the zoning...but TODAY...it is still residential as HBU. That is not what exists today although it may exist tomorrow.

Property with a likelihood of zoning change doesn't have the same value as one that doesn't. I would have difficulty stating the HBU of a property is residential, to be improved with a 3,000 sq.ft. residence, when in 3 years there is a strong possibility of a 15,000 sq.ft. office building being built on the property.

Determining whether or not there is a real possibility of a zone change depends on a whole host of factors. Sometimes it is highly imiprobable, sometimes is is almost a certainty. It's the ones inbetween that are very difficult, because the price paid for a property is somewhere between the residential and commercial values.

 

[Rhombar]

I have been asked to appraise a lot that is currently zoned residential but with a highest & best use as a commercial lot. It is currently listed as a commercial lot and several similar lots in the immediate area have been rezoned from residential to commercial zoning.

Therefore, I plan on appraising this lot against other similar commercially zoned lots but with a hypothetical assumption that it can be rezoned to a commercial zoning.

Sound right?

You can appraise a property with a H&BU different than zoned. It would be a hypothetical. The test for hypothetical in eminent domain cases locally is it must be imminent.

You said you had sales of lots nearby that used to be residential but had been rezoned. Look at what they sold for while still residential and what they sold for after they were zoned commercial. The price paid while residential with the intent to rezone commercial should be near your value. The difference between that and the price commercial would represent the zoning change cost plus absorption plus developers profit plus maybe a little more.

You can test the two prices that way and maybe come up a little bit from what was paid residential on the others if it is trending commercial.

 

[Lookingat50]

Since I am appraising it's "market value", I am convinced the best utility (ie HBU) of the property is what dictates that value. It's current zoning as residential should not dictate it's value given it's HBU as commercial which is not debatable on this property-its an older rural/res area now surrounded by new commercial activity like Walmart... and after talks with town zoning, a very realistic scenario. It is also currently listed for sale as a commercial lot - albeit at an inflated price in my opinion.

I am convinced my comps should reflect similar HBU as my subject with a hypothetical assumption it could be rezoned from residential to commercial - which is what has been done with my comps.

The hypothetial assumption may pose a risk for the bank, but not me. It allows me to predict it's "market value" based on it's "highest & best use".

 

[The Warrior Monk]

The hypothetial assumption may pose a risk for the bank, but not me. It allows me to predict it's "market value" based on it's "highest & best use".

FWIW, it's not hypothetical "assumption," but rather hypothetical condition.

Since the client is a bank, there is a good chance you are dealing with a Federally Related Transaction (FRT). As a result, you will need, at a minimum, the "as is" value of the property, as well as the appropriate licensure (i.e., certified general) to appraise the property.

The lender may request the property to be appraised under the hypothetical condition that the zoning is different than the current zoning, but that will be in addition to the "as is" value.

 

[Vernon Martin]

I am convinced my comps should reflect similar HBU as my subject with a hypothetical assumption it could be rezoned from residential to commercial - which is what has been done with my comps.

The hypothetial assumption may pose a risk for the bank, but not me.

What may be risky for the bank may be risky for you in today's legal climate. The FDIC, for instance, is using a large law firm to prepare cases against appraisers tied to loan losses in failed institutions.

In choosing comparable sales, maybe you should first focus on other residential lots with the same potential for rezoning. Their sales prices should be able to tell the rezoning story that you're trying to tell.

If there are no supporting residential lot sales, maybe you should still pause before choosing commercial lot sales. If the subject lot does not get rezoned, and the bank takes a loan loss, you may find yourself in a hot seat.

Just trying to keep you out of trouble here.

 

[Terrel L. Shields]

In choosing comparable sales, maybe you should first focus on other residential lots with the same potential for rezoning.

Exactly... Residential properties near a hospital may have potential for development as offices for doctors, etc. but if the hospital packs up and moves (3 of our local ones have), then those offices are a mile plus away from the hospital.

And, I still am convinced that the "As is" zoning is a factor in determining if the current use is the HBU... it may be an interim use until it converts to something else and that is easily added to your analysis. BUT it is NOT commercial yet.

 

[Vernon Martin]

Don't forget, too, that it still takes time and money to get rezoned, so if you absolutely must use commercial comps, you should make appropriate adjustments to get to an "as is" value.

 

[The Warrior Monk]

In choosing comparable sales, maybe you should first focus on other residential lots with the same potential for rezoning. Their sales prices should be able to tell the rezoning story that you're trying to tell.

I can't emphasize enough that it is essential the appraiser determine at what stage the property approval was at when the property transferred...e.g., pre-approval, post-approval, or pending approval. We often find large differences in price of vacant (or underimproved) commercial properties, and it is almost always linked to the types of, or lack of, approvals that a particular property had.

 

[Michigan CG]

This assignment is the perfect example of someone getting in over their head. There are so many things that some appraisers are not exposed to and they have no clue about the possibilities and how to properly appraise the property.

There are so many that say "it is just a land appraisal"....many do not know what they are signing up for when taking these assignments.

The smartest appraisers are the ones who know when to turn down an assignment.

 

[Mountain Man]

Sounds like interim use, and this appraisal is not fit for a residential form. So, unless you are familiar, work with someone who is.