An older office building has a market value as improved of $640,000. The land as though vacant, at its highest and best use, is worth $700,000, and razing and clearing the building would cost $85,000. What is the better-supported highest and best use as improved?
Correct Answer
B) Continue the existing use, because land net of demolition, $615,000, is below $640,000
Demolition is economically appropriate when the land as if vacant is worth more than the improved property, but the cost of demolition must be counted. Here the land nets $700,000 - $85,000 = $615,000 after clearing, which is below the $640,000 improved value, so continued use is better supported. Options A and C compare the land value with the improved value without deducting demolition cost, and option D wrongly treats the as-vacant value as irrelevant to the decision.
Why This Is the Correct Answer
Option B is correct because the land is worth only $700,000 - $85,000 = $615,000 once the building is cleared, which is less than the $640,000 the property is worth as improved. The existing building still adds value over a cleared site, so continuing the existing use is better supported.
Why the Other Options Are Wrong
Option A: Demolish, because the $700,000 land value exceeds the $640,000 improved value
Option A compares the $700,000 land value with the $640,000 improved value but leaves out the $85,000 cost of razing. A buyer would pay for the land only after paying to clear it, so the relevant figure is $615,000.
Option C: Demolish, because the building now contributes a negative $60,000 to the property
Option C says the building contributes a negative $60,000 ($640,000 - $700,000). That comparison ignores the $85,000 demolition cost; against the net land value of $615,000, the building adds $25,000.
Option D: Continue the existing use, because land value as vacant has no bearing on an improved property
Option D says land value as vacant has no bearing on an improved property. The demolition decision is made by comparing the improved value with the as-vacant land value net of removal cost, so the land value is central to it.
Net the land, then compare
Before deciding to tear a building down, subtract the wrecking bill from the land value and see whether that net figure still beats the property as it stands.
How to use: Use this check on any question that pits land value as vacant against value as improved.
Exam Tip
Look for a demolition or site-clearing cost in the stem and deduct it before comparing. Many wrong options compare gross land value with improved value.
Common Mistakes to Avoid
- -Comparing gross land value with improved value
- -Reporting a negative building contribution without deducting demolition cost
- -Treating as-vacant land value as irrelevant to an improved property
Concept Deep Dive
Analysis
The question tests the demolition-versus-continued-use decision in the as-improved analysis. The land value as though vacant is compared with the value as improved, but only after subtracting the cost of removing the existing improvements. Two steps are needed: net the land value, then compare.
Background Knowledge
Improvements contribute value only while the improved property is worth more than the land as though vacant. When land value, net of the cost to clear the site, exceeds the improved value, demolition and redevelopment become economically appropriate, a process economists call land use succession.
Real-World Application
In a rezoned corridor, an appraiser values an aging office building that a buyer wants to replace. The site would sell for more than the building if empty, but asbestos abatement and demolition costs push the net land value below the value as improved, so the appraiser concludes continued use for now.
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