At one effective date, continued office use has a supported whole-property value of $2.8 million. On the same present-value and risk basis, retail redevelopment has a completed-value indication of $4.2 million and all conversion costs and required return allowances totaling $2.5 million. No other alternative produces more value. Which listed alternative has the higher net value?
Correct Answer
C) Continue current office use
Continued office use is worth $2.8 million. The stipulated retail alternative leaves $4.2 million−$2.5 million=$1.7 million. Continuing office use has the higher value among these specified alternatives. Do not add a new completed-property value on top of land value that already reflects the same development potential.
Why This Is the Correct Answer
Option C is correct because continued office use has a supported value of $2.8 million, which exceeds the retail alternative's net of $4.2 million - $2.5 million = $1.7 million. Both figures are on the same present-value and risk basis, so they can be compared directly. Since no other alternative produces more value, continued office use has the higher net value.
Why the Other Options Are Wrong
Option A: Hold as vacant land
Option A, hold as vacant land, is not shown to produce more than $2.8 million, and the stem states no other alternative produces more value. Demolition or leaving the site vacant makes economic sense only when land value as if vacant exceeds the value of the improved property, which is not the case here.
Option B: Demolish and build retail
Option B, demolish and build retail, nets $4.2 million - $2.5 million = $1.7 million after all conversion costs and required returns. Choosing it means comparing the gross $4.2 million to $2.8 million and ignoring the costs; the correct comparison is $1.7 million versus $2.8 million.
Option D: Renovate the existing building
Option D, renovate the existing building, has no value indication in the facts, and the stem states no other alternative produces more value than those given. Nothing supports ranking renovation above the $2.8 million continued office use.
Net, Not Gross
Compare what each use leaves after its costs: $4.2 million gross minus $2.5 million costs leaves $1.7 million, which loses to $2.8 million.
How to use: Use 'net, not gross' whenever a redevelopment option shows a large completed value.
Exam Tip
Before choosing the use with the biggest completed value, subtract the conversion costs and required returns and compare the net figures on the same basis.
Common Mistakes to Avoid
- -Comparing gross completed value to current value without deducting costs
- -Ignoring entrepreneurial or required return allowances
- -Double counting by adding completed value to land value that already reflects development potential
Concept Deep Dive
Analysis
This question tests comparing alternative uses on a net-value basis. Continued office use is worth $2.8 million, while retail redevelopment nets $4.2 million minus $2.5 million of conversion costs and required returns, or $1.7 million. The stem also states that no other alternative produces more value, so continued office use ranks highest among those listed.
Background Knowledge
Highest and best use analysis compares alternative uses on a consistent basis, deducting the costs and required returns needed to achieve each one. An improved property's existing use continues as long as its value exceeds the land value as if vacant less the cost of removing or converting the improvements. Adding a completed-property value on top of a land value that already reflects the same development potential double counts.
Real-World Application
A developer pitches converting an older office building to retail with a striking completed value. The appraiser deducts demolition, construction, and required profit allowances and finds the net falls well below the value of the office building as it stands, so the current use remains the highest and best use as improved.
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