Basic Appraisal Procedures
Land/Site Considerations for Highest and Best Use 7-3
Property rights appraised
Part of the determination to be made by the appraiser is what property rights are to be
included in the highest and best use analysis. Here is a brief review of the subject of
property rights as they pertain to vacant land.
Bundle of Rights and Interests
The bundle of rights theory holds that the ownership of real property may be compared
to a bundle of sticks where each stick represents a distinct and separate right or privilege
of ownership. These rights, inherent in ownership of real property and guaranteed by
law but subject to certain limitations and restrictions, include the right to occupy and
to use real property, to sell it in whole or in part, to bequeath it, to lease it, or to transfer
by contract for specified periods of time the benefits to be derived by occupancy and use
(beneficial interests), or to do nothing at all with it. It is not enough to just consider
the ownership of the property in fee simple. If any of the full bundle of rights is not
in the appraised value, this must be prominently disclosed in the appraisal report.
Elements in Highest and Best Use Analysis
To estimate the highest and best use of a site, the appraiser utilizes the four tests of
highest and best use. The projected use must meet all four of these tests:
7.1
7.2
1.
2.
3.
4.
Physically possible
Legally permissible
Financially feasible
Maximally productive
Each potential use of a property is considered by the appraiser in terms of these four
tests. If a proposed use fails to meet any of the tests, it is discarded and another use is
reviewed. The highest and best use meets all four tests.
When you fly over the United States, you will observe great tracts of vacant land.
Vacant means that there is nothing on the land. It is not timberland or farm land. Most
likely, if you were to appraise this land, you would conclude that it is not ready to be
developed and nothing can be done that will meet the four tests of highest and best use.
The reality is that most vacant land is not ready to be developed and the highest and
best use is to hold it as an investment for future development.
Physically Possible
The use of a site must be physically possible. Uses might be limited by the physical
characteristics of a site, such as size, frontage, topography, soil and subsoil conditions
and climate.
Physical Characteristics
Every appraisal of vacant land/site must contain an accurate, physical description of
the site being appraised. The appraisal report must state the assumptions that have
been made about the physical characteristics of the property in the absence of precise
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Land/Site Considerations for Highest and Best Use
Basic Appraisal Procedures
information. Because of the importance of physical characteristics as part of the land/
site highest and best use analysis, it is repeated here in condensed form.
Size and Shape of Parcel of Land (Site)
-- Width: Although width and frontage are often used synonymously, they have two
distinct meanings. Width is the distance between the side lines of a lot. When a lot is
irregular in shape, the term average width is often used. Another important measurement
is width at the building line. Many zoning regulations specify a minimum width at this
point, which is required in order to permit the use of the site for construction of a
particular type of improvement.
-- Frontage: The length of boundaries that abut a thoroughfare or access way is called
the frontage. In the valuation of residential lots, care must be exercised in using front
footage as the unit of comparison for residential lots. Once a lot meets the standard size
acceptable in the neighborhood, excess frontage does not always add proportionately
to the value of the lot. Frontage is usually a key factor in the value of waterfront
properties, such as beach front or lake front homes or residential lots.
-- Depth is considered together with the width and frontage of a lot. Most residential
neighborhoods have a standard acceptable lot depth so that lots with less depth sell for less,
and lots with excess depth sell at a premium. The penalty or premium paid for extra depth,
however, is rarely directly proportionate to the actual square footage involved.
-- Shape: The shape of a lot affects the value of the lot differently from one neighborhood
to another. In some areas, irregularity of shape may decrease value; in other areas, as
long as the lot is suitable for a house, little difference appears to exist between the value
of regularly and irregularly shaped lots. If the irregular lot shape results in increased
construction costs, however, it would probably decrease the value of the lot. The value
of irregularly shaped parcels is usually indicated in dollars per square foot of area or
in dollars per acre.
-- Size: If value were directly related only to size, the unit of comparison (such as
square feet or acre) for lot values would always be value per square foot or value per
acre. However, frontage, width, depth, corner influence, and shape interplay with size
to affect value.
Plottage
7.3
Plottage value is the increase in unit value resulting from improved utility when
several plots are combined to form a larger one. To accommodate a substantial
building development, several plots may be assembled, often from different owners.
This procedure usually entails extra costs, and key parcels may need to be purchased
for more than their individual land value, either because they are already improved or
because of a buyer’s negotiating disadvantage. Once assembled into a single ownership,
the land is said to have plottage value.
Corner Influence
Historically, because a corner location provides more light and air and may afford
more prominence on a particular street, it was thought to have more value. However,
a corner lot also has less privacy and often is taxed at a higher rate. It also may be
subject to more noise and passing traffic. The appraiser must make a judgment, based
on the specific lot and its market, if a corner location adds or detracts from the value.
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Land/Site Considerations for Highest and Best Use 7-5
Cul-De-Sac Influence
Lots located at the end of dead-end streets that have cul-de-sacs for turnarounds also
may have different values from similar lots without the cul-de-sac influence. Again, no
universal rule applies, and the appraiser must look to the market for evidence of the
effects of a specific location on value.
Contour and Topography
Sites tend to have lower value if they are costly to improve because of extreme
topographical conditions. A lot higher or lower than the abutting street level may create
additional costs to correct poor drainage, erosion, or accessibility problems. Frequently,
however, difficult conditions are offset by advantages recognized in the market, such
as a scenic view or extra privacy. Another factor to be considered is the amount of site
work required to make the site buildable. If there is bedrock, excess excavation costs
may be incurred. In some cases, a site may require fill, or it may have excess fill that
can be sold.
Surface Soil
In many areas, the soil’s ability to support a lawn and landscaping is an important
factor in the marketability of the property. The appraiser should note whether the soil
appears to be suitable and typical of the market area. Naturally sandy or rocky soil may
require the extra expense of purchased topsoil to support future lawns and landscaping.
A soil test is often desirable. Without one, the appraiser should point out that they did
not have the results of a soil test and that the value estimated in the appraisal is based
on assumptions made as to the physical characteristics of the soil, and that the value
estimate as given may be substantially different if these assumptions do not reflect the
actual conditions of the site.
Subsoil
The character of subsoil definitely affects the cost of preparing a site for building; it can
also influence the design of the structure that can be erected on the site. If bedrock
must be blasted, or if the soil is unstable, the cost of improvements is increased. Soil
conditions are usually determined by an engineering study of the bearing quality of the
soil and its suitability for foundations. Extra expense is incurred for foundation walls
and the sinking of pilings, if a site must be filled in.
Subsurface Hazards
Underground tunnels can present a hazard in mining districts. The appraiser must
include a consideration of such possibilities in a thorough site analysis.
Landscaping
Natural trees and shrubs are usually considered part of the land itself. Landscaping is
treated separately by most appraisers as a site improvement.
Drainage
Some method must be provided to drain the site of surface and storm water. It may
be a simple swale that channels the water off the surface of the lot to the street or into
some natural drainage. When the lot is level or slopes away from the water disposal
area, storm sewers must be constructed.
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Land/Site Considerations for Highest and Best Use
Basic Appraisal Procedures
Available Utilities
-- Water: Every property requires an adequate supply of water of acceptable quality.
Water can be obtained from a municipal or private company or from a well. Common sense and
the FHA Minimum Property Standards require that when a public water supply is available, it
should be used. When water is supplied by a public or publicly regulated company, the
appraiser usually need only check on its availability at the site, including whether there
is sufficient pressure. When the water is supplied by a smaller, unregulated company,
this must be reported and the dependability of the supply must be analyzed.
When appraising vacant land not on a public water supply, the appraiser should check
surrounding properties where wells have been dug to determine the probability of an
adequate water supply being found for the subject property. It must be clear in the
appraisal report that the value estimate is based on the assumption that an adequate
safe water supply will be available.
-- Sewers: Few will argue the substantial advantage of being connected to a municipal
sewer system. If no public sewer exists, a percolation test must be made to determine
if the soil can absorb the runoff from a septic system. It must be made clear in the
appraisal that the value estimate is based on the assumption that an adequate sewerage
disposal will be possible.
-- Installation of Public Utilities to the site: Included in the value estimate of a site is
the cost of bringing water, electricity, gas, telephone, and storm and sanitary sewers to
the site. Recent additions to this list of services which are important in many markets
is cable television, and high-speed Internet access.
Access
-- Streets and Alleys: A site cannot be used unless there is some type of usable access.
It may be a right-of-way over abutting property or a private driveway or street. Access
may also take the form of a public street or alley. Substandard access detracts from a
site’s value.
-- Street Improvements. The description of a site should also include information about
street improvements, such as the width of the street, how it is paved, and the condition of
the pavement.
Views The view enjoyed from a property may substantially affect its value. Lots in the same
neighborhood identical in all respects except location and orientation have markedly
different values which are directly attributable to the effect of superior views.
Hazards
Sometimes hazards exist in a neighborhood that reduce the value of a property. An
appraiser must learn whether the site is in an identified flood hazard area. The effect
on value must also be considered and reported in the appraisal. Other hazards that
should be investigated include potential mud slides, earthquakes, dangerous ravines
and bodies of water, or any unusual fire danger.
Nuisances
A variety of services contribute to the value of a site when they are in the neighborhood
but detract from value when they are too close to the property. For example, a fire
Basic Appraisal Procedures
Land/Site Considerations for Highest and Best Use 7-7
house, public school, stores, restaurants, hospital, medical offices and gas stations
are desirable nearby but not immediately adjacent to residential property. Industries,
large commercial buildings and offices, noisy highways, utility poles and high tension
wires, motels and hotels, funeral parlors, and vacant houses all generally detract from
property values when they are located in a residential neighborhood.
Excess Land
Excess land is that portion of a property that is not necessary for the proposed
improvements. Assuming that the excess land is marketable or has value for future
use, its market value as vacant land constitutes an addition to the estimated value of
the economic entity. Therefore, excess land is typically valued separately.
Use of Nearby Lots
The use of the immediately adjacent lots is of great importance to the value of a property.
Economic obsolescence may be caused by neighboring uses.
Abutting and Nearby Streets - Traffic Flow
Abutting and nearby streets may be in the older grid pattern or the newer style of deadend or limited access streets. Some streets in a neighborhood will become thoroughfares
and suffer from heavier traffic flow, which is usually a negative factor. Access by a back
alley or a special service road may add to or detract from value.
Transportation
The value of a property is often affected by the availability of public transportation.
Access to systems such as San Francisco’s BART rapid transit increase values in the
area. Easy access by automobile and trucks is considered normal.
Legally Permitted
Each use must be tested first to see if it is legally permitted on the site. Public
(legal) restrictions consist of zoning regulations, building codes, environmental
regulations and other applicable ordinances. Private restrictions are limitations that
run with the land and are passed from owner to owner. Generally, they are imposed by
the developer of the tract who attempts to preserve the value of the entire development
by restricting what can be done with individual lots. Easements, encroachments,
party-wall agreements and the like also restrict the development of a site.
A gas station, for example, may appear to be the highest and best use for a level corner
lot at the intersection of two major traffic arteries. The appraiser cannot consider this
to be the highest and best use of this site unless it is legally permitted by the zoning
regulations currently in effect, or there is a high degree of probability that existing
zoning can be changed within the near future to permit such development.
Public and Private Restrictions
The following is a summary of the public and private restrictions that must be considered
when testing a proposed highest and best use to determine if it is the highest and best
use of the land/site:
-- Zoning is part of the police power of the government. Zoning gives the public the
right to control the uses of private property for the benefit of the entire community.
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Land/Site Considerations for Highest and Best Use
Basic Appraisal Procedures
Any reasonable probability of a zoning change must be considered. If the highest and
best use of a site requires a zoning change, an appraiser must investigate the probability
of such a change. An appraiser may obtain pertinent information by interviewing
planning and zoning staff or elected officials. An appraiser may also consult a study of
patterns of zoning changes to draw conclusions about the likelihood of a change in a
particular instance. If a highest and best use recommendation relies on the probability
of a zoning change, that probability must be supported by three elements. These are
physical practicality, economic feasibility, and political probability.
-- Building Codes are specific restrictions that, like zoning regulations, are based on
the police power. They provide design control of permitted buildings and delineate
the types of materials that may be used. In addition to a general building code, many
communities have separate electric and plumbing codes.
-- Deed Restrictions are limitations placed on the use of land by a property owner and
will run with the title to the land as it passes on to future owners. Deed restrictions are
contractual and are usually imposed by the deeds used to convey title. It usually takes
a civil court action to enforce or remove a deed restriction.
-- Easements are rights extended to non-owners of the fee for ingress and egress over
property usually for specific purposes, such as access to a roadway or beach. Other
easements give non-owners the right to use the air over the property or subsurface
rights for utility installations, soil removal, flood control or mineral deposits.
-- Encroachments: There are two types of encroachments. Either the improvement
may extend over the property line onto abutting properties, or the improvements on
abutting properties may encroach onto the subject site.
The appraiser is not expected to make a survey to determine if there are any
encroachments. Normally, a statement in the limiting conditions section of the report
declares that the assumption is that there are no encroachments. However, as with
easements, if an encroachment is evident, it must be reported in the appraisal and care
must be taken not to mislead a potential user of the appraisal as to the effect of such
encroachment.
-- Environmental Restrictions are controls on land use that are becoming more
common and more important to appraisers. Environmental restrictions, like zoning
regulations, appear to be based on the police power of government, although some of
the laws are still being tested in the courts. Appraisers must be familiar with current
environmental developments that affect value, including wetland controls, flood
hazard area designations and other land use restrictions.
7.4
-- Riparian Rights are the rights of owners whose land abuts a body of water (lake, river,
stream, ocean, etc.) with respect to the use of the water. Riparian rights may include
the right to construct piers, boathouses and other improvements over the water or may
be for use of the body of water for fishing and recreational purposes or for irrigation.
Riparian rights may have a significant effect upon the value of the land and must be
carefully considered where they apply.
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Land/Site Considerations for Highest and Best Use 7-9
Financially Feasible
A realistic assessment of market demand for a proposed use is a critical factor. For
example, acreage may be available that is zoned for single-family residential use of
a certain concentration, served by all utilities and with good proximity and access;
however, similar subdivisions already in the market have remained unsold for some
time. There is no need for the addition of such lots; even though the property meets the
first two tests, it fails the test of financial feasibility.
Thus, market demand acts to create highest and best use. In reviewing proposed
alternative uses, the appraiser must consider the demand for each use and the other
available competitive land suitable for that use, which constitutes the supply. These
factors must be weighed in the economic analysis. All physically possible and legally
permitted uses that fail to meet the test of being financially feasible are discarded.
The remaining uses must produce some net return to the property.
Many economic factors have already been discussed in the regional data section,
market area, and neighborhood analyses. Some economic factors apply specifically to
the individual land/site under appraisal rather than to larger areas.
Prices of Nearby Lots
The price of nearby lots offered for sale has at least a short term effect on the value
of a site. The principle of substitution would limit the price paid for the subject
land/site to that paid for similar lots in the neighborhood, at least until the supply
is exhausted.
Tax Burden Compared to Competitive Lots
If assessments are not uniform, lots with excessive tax burdens are depressed in value,
at least temporarily, by the excess levy. The reverse would also be true. Land/sites that
are under assessed might be expected to bring a premium.
Utility Costs If location necessitates incurring extra costs to bring utilities to a land/site, the market
may recognize a parallel decrease in the value of the land/site.
Service Costs
Some parcels of undeveloped land are not eligible for municipal services, such as garbage
collection or snow plowing, because they are not on public streets. The fact that these
services must be purchased privately would decrease the value of the land, if competitive
land had such municipal services.
Maximally Productive
The fourth test is essentially a test for maximum return. The appraiser is seeking
the most profitable (maximally productive) among all physically possible, legally
permitted, and financially feasible uses. The Appraisal of Real Estate, 12th Edition,
summarizes the process of determining the highest and best use as follows:
“The test of maximum productivity is applied to the uses that have passed the first
three tests. Additional analysis of the market forces of supply and demand may
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Land/Site Considerations for Highest and Best Use
Basic Appraisal Procedures
aid in the process of elimination. The test addresses not only the value created
under the maximally productive use but also the costs to achieve the value, if
any, such as demolition and removal of structures, environmental remediation
costs, and zoning changes. Of the financially feasible uses, the highest and best
use is the use that produces the highest residual land value consistent with the
market’s acceptance of risk and with the rate of return warranted by the market
for that use. To determine the highest and best use of land as though vacant,
rates of return that reflect the associated risks are often used to capitalize
income from different uses into their respective values. The use that produces
the highest residual land value is the highest and best use…
The potential highest and best use of the land is usually a long-term land use that
is expected to remain on the site for the normal life of the improvements. Normal life
expectancy depends on building type, quality of construction, and other factors. The
stream of benefits (income and amenities) produced by buildings reflects a careful
consideration, and usually very specific land use programs.” 3
The Ideal Improvement
7.5
The final goal of a highest and best use analysis of the land/site usually is to determine
if there is an ideal improvement to be built on the land/site at this point in time, or
whether the highest and best use is to continue to leave it vacant and to hold it for
future development.
The following section lists a variety of potential improvements to be tested for being the
highest and best use of the land/site. It is not an all-encompassing list. It is intended
to be a starting point for the appraiser’s search for the most productive use of the
property.
The list is broken into two categories, residential improvements and other types of
property. The authors have added guidelines for appraisers to consider whenever they
use one of these improvements as the proposed highest and best use of the subject
land/site.
3
The Appraisal of Real Estate, 12th Edition, Appraisal Institute, Chicago, IL 2001