A site's zoning permits a use that the market does not currently demand. What follows?
Correct Answer
D) The use fails the financial feasibility test for now
Why this is correct: Highest and best use (HBU) analysis applies four tests in sequence: legal permissibility, physical possibility, financial feasibility, and maximum productivity. A use that is legally permitted (zoning) but lacks current market demand fails the financial feasibility test. HBU is based on what is reasonably probable and financially viable as of the appraisal date, not merely what is allowed by law. Why the other choices are wrong: "The permitted use is the highest and best use by law" confuses legal permissibility with the full HBU conclusion; it is only the first test. "The site must be rezoned before it can be appraised" is incorrect; an appraisal is based on existing conditions, including current zoning. "The zoning should be disregarded in the analysis" is wrong; zoning is a critical constraint and must be considered. Exam tip: Remember the four HBU tests in order: Legal, Physical, Financial, Maximum. A use must pass all four.
Why This Is the Correct Answer
Why this is correct: Highest and best use (HBU) analysis applies four tests in sequence: legal permissibility, physical possibility, financial feasibility, and maximum productivity. A use that is legally permitted (zoning) but lacks current market demand fails the financial feasibility test. HBU is based on what is reasonably probable and financially viable as of the appraisal date, not merely what is allowed by law. Why the other choices are wrong: "The permitted use is the highest and best use by law" confuses legal permissibility with the full HBU conclusion; it is only the first test. "The site must be rezoned before it can be appraised" is incorrect; an appraisal is based on existing conditions, including current zoning. "The zoning should be disregarded in the analysis" is wrong; zoning is a critical constraint and must be considered. Exam tip: Remember the four HBU tests in order: Legal, Physical, Financial, Maximum. A use must pass all four.
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