Zoning permits immediate development of a site, but supported current and reasonably forecast revenues for that proposal do not cover its development costs and required return. What follows for that immediate proposal?
Correct Answer
D) The use fails the financial feasibility test for now
Legal permission alone does not establish financially feasible immediate development. Under the stated absence of sufficient supported revenues, the immediate proposed use fails feasibility. A different holding period or future use would need its own support rather than assuming rezoning is required.
Why This Is the Correct Answer
Option D is correct because financial feasibility requires that a use produce enough return to justify its costs. With supported current and forecast revenues falling short of costs and required return, the immediate proposal fails this test. Legal permission alone does not make it feasible.
Why the Other Options Are Wrong
Option A: The permitted use is the highest and best use by law
Option A says the permitted use is the highest and best use by law. Legal permissibility is only one test; highest and best use is the most productive use among financially feasible uses, and this proposal is not feasible now.
Option B: The site must be rezoned before it can be appraised
Option B says the site must be rezoned before it can be appraised. A site can be appraised under its current zoning; the shortfall in revenues does not create a rezoning requirement.
Option C: The zoning should be disregarded in the analysis
Option C says the zoning should be disregarded in the analysis. Zoning is part of the legally permissible test and remains relevant; the issue here is financial feasibility, not whether zoning applies.
Allowed is not affordable
Zoning says a use is allowed; financial feasibility asks whether it pays.
How to use: Use this to separate the legal test from the feasibility test.
Exam Tip
When revenues fall short of costs plus required return, the use fails financial feasibility even if zoning allows it.
Common Mistakes to Avoid
- -Treating legally permitted use as automatically the highest and best use
- -Ignoring zoning when a use is not feasible
- -Assuming rezoning is required before appraisal
Concept Deep Dive
Analysis
This question tests the financial feasibility test of highest and best use. A use can be legally permissible yet fail financial feasibility if supported revenues do not cover development costs and the required return. The immediate proposal therefore fails feasibility for now.
Background Knowledge
Highest and best use analysis applies four tests: legally permissible, physically possible, financially feasible and maximally productive. A use that cannot generate enough value to cover its costs and a required return is not financially feasible. A different use or a later timing may need separate analysis and support.
Real-World Application
A site is zoned for a fourplex, but current rents and construction costs show the project would not earn a market return. The appraiser concludes immediate development is not financially feasible and considers holding the site for future development or an interim use.
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Previous Question
Verified sales of competitive downtown residential lots were negotiated and analyzed primarily by site area, with no material frontage or density differences. Which unit of comparison most directly reflects this market's practice?
Next Question
The subject is a vacant site of 19,500 square feet. Three recent sales of vacant parcels with a similar highest and best use are: Comp A, $900,000 for 18,000 square feet; Comp B, $1,040,000 for 20,000 square feet; Comp C, $1,188,000 for 22,000 square feet. No other adjustments are needed. Based on the mean of the three sales' prices per square foot, what is the indicated land value?