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Changing Times

Published On 08-29-2013 , 3:32 PM

After a slow start, the year got very busy for me over the summer months, which is why I have been remiss in posting blogs until now. Despite the greater workload, I was able to fit in two interesting CE seminars. The one I took in MN was expanded to include visits with extended family. That was the AI seminar Practical Regression Using Microsoft Excel taught by John Urubek, MAI. And last week I attended the AI seminar Advanced Spreadsheet Modeling for Valuation Applications taught by Jim Amorin, MAI. Both were interesting classes.
I found it significant that both instructors mentioned that AI now teaches something new in its highest and best use and market analysis classes. Historically, the highest and best use exercise requires appraisers to consider and discuss the physically possible, legally permissible, financially feasible, and maximally productive uses for a property, both as vacant and as improved. As it has always been taught, an interim use should be concluded and reported if the highest and best use is not for immediate development. I have found, however, that many appraisers skip this last step. They state the highest and best use, noting its lesser viability at this time, but do not state the property’s interim use. Sometimes the reverse is true: the interim use is concluded to be the highest and best use.
We appraisers are always mindful of how markets can, and often do, shift in various ways. We are painfully aware that USPAP changes, to some degree, every two years. But what we can forget is that appraisal theory and best practices can and do change over time. One such change pertains to highest and best use analysis.
In addition to the four tests needed to derive highest and best use, the Institute now teaches that every highest and best use discussion should include the following:
  1. The statement of highest and best use, which should be specific to property type and approximate size in the highest and best use as vacant discussion.
  2. The timing of the development of that highest and best use and, if not immediate, the specific interim use.
  3. The general nature of the most likely users/purchasers, most particularly if they are owner occupants or investors.
I realize that the highest and best use discussion is fairly esoteric when a property is already developed. Of course, there are situations when it is important even when the property is improved. The highest and best use, as vacant, discussion becomes more relevant when the improvements reach the end of their economic life. Also, when the improvements constitute a legal non-conforming use under the zoning, it is helpful for the reader to know what the site could be developed with if the improvements were destroyed. I have noticed recently that some appraisers are discussing this in the zoning section of their report, including a statement as to whether the existing improvements could be re-developed in the event they were destroyed.
For those who bemoan the extra work involved with these greater expectations, the Advanced Spreadsheet Modeling for Valuation Applications seminar includes some examples of straightforward ways to approximate the building size that will represent the highest and best use of a site. Excel workbooks with formulas already in place are provided to all course attendees. That alone is worth the price of admission.



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