Three legal, physically possible uses of a vacant site are each financially feasible and carry similar risk and timing. Completed property value, construction cost and market entrepreneurial incentive are: retail $2,400,000, $1,700,000 and $150,000; office $3,100,000, $2,380,000 and $270,000; apartments $2,750,000, $1,950,000 and $180,000. Which residual land value indicates the highest and best use as though vacant?
Correct Answer
D) $620,000
Land value for each use is the completed property value minus the full cost of producing the improvements, including entrepreneurial incentive: retail $550,000, office $450,000 and apartments $620,000. The maximally productive use is the one with the highest land value, apartments at $620,000. Picking the office for its highest completed value, averaging the three residuals, or ranking by residual as a percentage of value gives the wrong answers.
Why This Is the Correct Answer
Option D is correct because apartments leave the highest residual land value: $2,750,000 - $1,950,000 - $180,000 = $620,000. Retail leaves $550,000 and office $450,000, so with similar risk and timing the apartment use is maximally productive.
Why the Other Options Are Wrong
Option A: $450,000
Option A, $450,000, is the office residual ($3,100,000 - $2,380,000 - $270,000), chosen because the office has the largest completed value. A larger building does not mean a larger land value once its higher cost is deducted.
Option B: $540,000
Option B, $540,000, averages the three residuals: ($550,000 + $450,000 + $620,000) / 3. The highest and best use is a single most productive use, not an average of the alternatives.
Option C: $550,000
Option C, $550,000, is the retail residual, chosen because its residual is a slightly higher share of completed value (22.9% versus 22.5%). Land value is compared in dollars, and apartments produce $70,000 more land value ($620,000 - $550,000).
Value minus cost equals land
For each use, write completed value, subtract every cost of building it including the developer's incentive, and circle the largest remainder.
How to use: Use this subtraction for every candidate use before comparing them on any HBU calculation question.
Exam Tip
Compare residual land values in dollars, not completed values or margins. Check that entrepreneurial incentive is deducted with the construction cost.
Common Mistakes to Avoid
- -Choosing the use with the highest completed value
- -Leaving entrepreneurial incentive out of development cost
- -Ranking uses by profit percentage instead of dollar land value
Concept Deep Dive
Analysis
The question tests the maximally productive step: among feasible uses, the one producing the highest land value wins. Each use's land value is found by subtracting the full cost of producing the improvements, including entrepreneurial incentive, from the completed value. The comparison is of dollar land values, not completed values or profit percentages.
Background Knowledge
Land value under a given use can be estimated by subtracting the full cost of producing the improvements from the total property value of that use, or by capitalizing the residual income to the land. The highest and best use as though vacant is the feasible use that produces the highest land value on a risk-adjusted basis.
Real-World Application
An appraiser valuing a vacant infill parcel models three development schemes from local rents, sales and cost data. The office scheme has the highest finished value, but after construction cost and developer incentive the apartment scheme leaves the most for the land and becomes the highest and best use.
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