A site could support three legally permissible and physically possible uses, all financially feasible. What decides among them?
Correct Answer
D) The use producing the greatest land value
Why this is correct: The fourth and final test in highest and best use analysis is 'maximum productivity.' For a vacant site, this means identifying the use that yields the highest residual land value—the value remaining after accounting for all costs of development and a reasonable profit for the entrepreneur. Why the other choices are wrong: 'The use the current owner intends to pursue' is wrong; HBU is an objective market test, not subjective intent. 'The use requiring the smallest capital outlay' is incorrect; the most profitable use may require a larger investment. 'The use most common in the surrounding area' is wrong; prevalence is evidence for financial feasibility, but the decisive test is maximum productivity. Exam tip: Remember the four tests in order: legally permissible, physically possible, financially feasible, maximally productive.
Why This Is the Correct Answer
Why this is correct: The fourth and final test in highest and best use analysis is 'maximum productivity.' For a vacant site, this means identifying the use that yields the highest residual land value—the value remaining after accounting for all costs of development and a reasonable profit for the entrepreneur. Why the other choices are wrong: 'The use the current owner intends to pursue' is wrong; HBU is an objective market test, not subjective intent. 'The use requiring the smallest capital outlay' is incorrect; the most profitable use may require a larger investment. 'The use most common in the surrounding area' is wrong; prevalence is evidence for financial feasibility, but the decisive test is maximum productivity. Exam tip: Remember the four tests in order: legally permissible, physically possible, financially feasible, maximally productive.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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