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Highest & Best Use: Basic Concepts: Stephen F. Fanning Mai, Cre, Aicp
Highest & Best Use: Basic Concepts: Stephen F. Fanning Mai, Cre, Aicp
Basic Concepts
Stephen F. Fanning
Text Page Reference on Slides is to
MAI, CRE, AICP Appraisal Institute Market Analysis book
by Stephen F. Fanning
Tough Tax Appraisal
Appraisal Question
Slide 2
Tough Tax Appraisal, continued
Slide 3
Market Value
Highest
& Best Use
Market/Marketability
Analysis Timing
Slide 4
The Valuation Process
Definition of the Problem
Identification Type and Date of Identification of Assignment
of client/ definition opinion characteristics Conditions
intended users of value of value of property
(including Extraordinary Hypothetical
location and Assumptions Conditions
property rights
to be valued)
Scope of Work
The H&B Use is Wrong Reconciliation of Value Indications and Final Opinion of Value
1 2
The reasonably probable and legal use
Slide 7
The Appraisal Process
Part 1 The Study – Setting the Foundation for
Highest and Best Use of Property
P L M C C Capture (Marketability)
Determine how much of the
market demand the subject is
likely to capture.
8
Appropriately Supported Text Pg. 382
Market/Marketability
Analysis
Four Tests
Property Productivity Analysis
Physical attributes Physically possible
Legal/regulatory attributes Legally possible
Locational attributes
Financially feasible
Supply and demand
Subject capture
Use
Timing for Use (probable use date
and/or occupancy)
Market Participants
Most Probable Buyer
Most Probable Users of Space
Slide 10
Adequate Highest & Best Use Conclusions
Slide 11
The Appraisal Process
Measure the Property’s Market Value
Part 2 using three different methodologies.
12
H&B Use Conclusions Impact on Value
Slide 13
Highest & Best Use - Market Value - Land
1-Mile
14
Highest & Best Use - Market Value - Land
1-Mile
Major Thoroughfare
New C-
New Fast
Store
Subject Food
$16/SF
$10/SF
Apartments
15
Retail Shopping Center
Subject
150,000 Square Foot Neighborhood Shopping Center in
good location
Subject Currently 95% Occupied
Citywide current average occupancy is 90%
Subject H&B Use Conclusion
Use: Neighborhood retail shopping center
Timing: Due to new competition coming into this
market the forecasted average occupancy is 80%
Market Participants: Users- 2 mile radius, buyer
_investor
Appraisal for Tax Assessment Purpose
Market Value of Fee Simple Interest
DATA INPUTS
Net Rentable Area 100,000 Sq.Ft. EXPENSES
REVENUE Property Tax $3.35 Per Sq.Ft.
Gross Revenue $20.50 Per Sq.Ft. Insurance $0.17 Per Sq.Ft.
NNN Reimbursements $6.12 Per Sq.Ft. C.A.M. $2.60 Per Sq.Ft.
Vacancy & Credit Loss 5 to 20% of Gross Inc. Management 5.00% % of EGI
Reserves $0.00 Per Sq.Ft.
Overall Rate 7.0% Misc. $0.05 Per Sq.Ft.
DATA ANALYSIS
Revenue
Gross Rent Revenue $2,050,000
Add: NNN Reimbursement $612,000
Potential Gross Income $2,662,000
Steps
3. Forecast demand
Slide 20
What Level of Study is “Appropriately Supported ?
Slide 21
Characteristics of Levels A–C Market/Marketability Studies
Property Productivity
Descriptive + Critique +
Physical Descriptive only Descriptive + Critique
Rating Matrix
Basic + Deed research +
Legal Basic Basic + Deed research
Rating Grid
Linkages/Urban growth
Locational General observation & logic +Linkages/urban growth
+ Rating Grid
ID on map + consumer
Market Delineation Macro: whole community Subject Specific
Quantified
Comps
Economic Demand Comps + General data + Published surveys Fundamental forecast
+ Trends Quantified
Subject Capture
Inferred from general
Inferred from comps
Quantified through rating
observations grids of competition
Slide 22
Criteria for Selecting the Level of Market/ Text Ch. 2
Marketability Analysis
Levels of M/M Analysis:
Slide 23
Step 1. Property Productivity Analysis Text Pg. 197-198
Legal
Location
Slide 24
Text Pg. 416
Slopes 1 2 0 0 -2
View 2 2 0 1 0
Access 1 2 -3 -2 2
Floodplain 1 2 -2 -1 -2
Abutting Land Uses 3 3 -3 -2 -3
Noise 1 1 1 1 1
Utilities 1 1 1 1 1
Trees\soils 0 0 0 0 0
Legal 3 2 1 1 -1
Total Score-> 13 15 -5 -1 -4
Slide 25
Retail Property Rating Text Pg 205
Sub-Rate
Factor High Moderate Slight Neutral Slight Moderate High
(rate factors by inserting "X")
Site X
Size X
Land-to-building ratio X
Parking
Number X
Location X
Convenience X
Interior circulation X
Topography
Circulation impact X
Drainage X
Exterior access (curb cuts) X
Landscaping X
Slide 26
2.3 Table. Retail Property Rating, cont. Text Pg. 205
Slide 27
Warehouse Property Analysis Text Pg 317
Slide 28
Analyze the Location
Employees
Competitor Customer
Customer
Base
Base
Customer
Customer
Base
Base Retail
Retail Site
Site
&& Employees
Environment
Environment
Competitor
Employees Customer
Customer
Base
Base
Distribution
Center Competitor
Center
Slide 29
Location and Income Patterns
Average Household Income in
Nearby Zip Codes
$44,385
$60,197
Evaluate the Location
• Look at neighborhood location
• Look at land use trends in the area
I-10
• Look at neighborhood income patterns
A
$168,230
30
New Housing Location Analysis
80% of the 65,000 new homes built in 2005 were outside Beltway 8.
Slide 31
Analyze the Rate and Direction of Growth
Slide 32
Retail Competitive Location Analysis Text Pg. 214 -Updated
Rank by
Factor Rating Criteria Area A* Area B Area C Area D Area E
Importance
1 Density of households in 2 miles 1 1 1 1 1 6
Slide 33
Step 2. Delineate the Market
Market Area Delineation
Page 270
Direct Competitor
Secondary Competitor
Subject
Slide 34
Define the Primary Market Area
35
Step #3 Forecast Demand
Slide 36
Retail Inferred Demand Example
Positive Factors
Current rents of subject property are highest
in the city
major expansions
Slide 38
Inferred Demand for Electronic Manufacturing Plant
Slide 39
Fundamental Demand - Retail Text Pg. 247
Line
Year-> 2010 2015 Forecast Comments/Source
#
Slide 41
Text Pg. 253
Slide 42
Step 5. Residual Demand Example
The subject is equally competitive with all properties
in the market.
1. What would be the most likely year(s) for the
subject property to lease-up to 90%+ occupancy?
2. What year(s) would be most likely for rents to
start increasing?
Marginal Demand Study
Forecast Forecast
Current
+5 Years +10 Years
Estimate of total supportable space (in sq. ft.) 1,524,000 1,770,000 2,000,000
Less current competitive supply-built 1,800,000 1,800,000 1,800,000
Less new competition (forecast) 0 0 0
Marginal demand estimate
(276,000) (30,000) 200,000
(Excess) shortage of supply
Slide 43
Step 6. Forecast Subject Capture
Text Pg. 258
Slide 44
Step #6 Capture Analysis
Ranking Factors C
Proximity to Current Retail (Cumulative Attraction)
Marketability
Proximity / Linkages to Current Residential Analysis
Proximity to Higher Income Household
Evaluate The Marketability
Proximity to New / Renovated Development or Capture Potential For
(Any Type)
Subject Properties
Ease of Access to and from Major Roads (corner • Apply ranking factors to
location, on/off ramps, etc.)
specific properties within the
primary trade area
Major Road Frontages
Slide 46
Text Pg. 265 Data
Updated
Quantified Capture Conclusion
Slide 47
H&B Use Financial Analysis of Alternatives
and
Slide 48
Land Residual Technique- Example
Slide 49
Financial Analysis of Alternatives by Present Value Of Sales
Comparison.
Slide 50
Example, cont.
The appraiser’s market /marketability study
conclusion was that demand would not be
sufficient for new development for:
Retail uses for eight to ten years
Slide 51
Possible Solution
Retail -PV $12 ; 9 yrs @ 15% = $3.40
Apartment -PV $6 ; 2 yrs.@ 15% = $4.53
Use: Apartment
Timing: one to three years
Most Probable Buyer: Investor to hold and
resell to apartment developer
Slide 52
Six Step M/M Conclusions Are Applied to: Text Epilog
Slide 53