A site's highest and best use changes from residential to commercial. What normally happens to its value?
Correct Answer
A) It rises if commercial use returns more to the land
Why this is correct: Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive. If commercial use becomes the HBU and is expected to generate a higher residual return to the land than residential use, the land value will rise to reflect that greater productivity. Why the other choices are wrong: "It falls because commercial buyers are fewer" is wrong; value is based on productivity, not merely the number of potential buyers. "It stays the same, since the land is unchanged" is wrong; value is based on economic potential, not just physical attributes. "It cannot be determined without an income study" is wrong; while analysis is needed, the principle is that value rises with more productive use. Exam tip: Land value is a residual of the highest and best use's productivity.
Why This Is the Correct Answer
Why this is correct: Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive. If commercial use becomes the HBU and is expected to generate a higher residual return to the land than residential use, the land value will rise to reflect that greater productivity. Why the other choices are wrong: "It falls because commercial buyers are fewer" is wrong; value is based on productivity, not merely the number of potential buyers. "It stays the same, since the land is unchanged" is wrong; value is based on economic potential, not just physical attributes. "It cannot be determined without an income study" is wrong; while analysis is needed, the principle is that value rises with more productive use. Exam tip: Land value is a residual of the highest and best use's productivity.
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?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam