In analyzing a proposed development, an appraiser measures costs and value as of the same date, and there are no offsetting benefits. Which fact directly shows the proposal fails the financial-feasibility test?
Correct Answer
C) Building costs exceed the completed project's value
When development costs alone exceed the completed value as of the same date, the proposal cannot cover those costs and the required return on those facts. Soil, zoning or surrounding uses may also affect feasibility indirectly; they require their own analysis.
Why This Is the Correct Answer
Option C is correct because when building costs exceed the completed project's value, the project cannot recover its costs, let alone produce a required return. Under a same-date analysis with no offsetting benefits, that shortfall directly shows the use is not financially feasible.
Why the Other Options Are Wrong
Option A: The soil conditions require special engineering
Option A, soil conditions requiring special engineering, is a physical-possibility issue. It may raise costs and affect feasibility indirectly, but on its own it does not show that costs exceed value.
Option B: The use requires a zoning variance to be granted
Option B, a use requiring a zoning variance, is a legal-permissibility issue. Whether the variance is probable must be analyzed separately; it does not directly show a financial shortfall.
Option D: The use differs from the surrounding properties
Option D, a use that differs from surrounding properties, raises conformity and market-acceptance questions. A different use can still be feasible, so this fact does not directly prove financial failure.
Cost over value fails
If it costs more to build than it is worth when done, the numbers do not work.
How to use: Use this check to spot the fact that most directly fails financial feasibility.
Exam Tip
Map each fact to its test: soils to physical, zoning to legal, cost versus value to financial.
Common Mistakes to Avoid
- -Treating a physical or legal obstacle as direct proof of financial infeasibility
- -Assuming a use that differs from neighbors cannot be feasible
- -Forgetting that feasibility requires covering a required return, not just costs
Concept Deep Dive
Analysis
This question tests what directly signals failure of the financial-feasibility test. A use is financially feasible only if it produces a positive return, so costs that exceed completed value show failure directly. Other facts like soil, zoning or surrounding uses relate to other tests or need separate analysis.
Background Knowledge
Uses that produce a positive return, meaning income greater than what is needed for operating expenses, debt service and capital recovery, are regarded as financially feasible. When total development cost exceeds the value created, the use produces a negative return.
Real-World Application
A builder proposes a speculative house whose construction costs exceed the value it would have when complete. The appraiser concludes the proposal is not financially feasible as of the analysis date.
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