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Written by Skip Preble
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Friday, 01 June 2007 |
Skip Preble presents his third article in a four-part series on how to create value in any market.
In this, the third of four articles on creating value in any market, I will discuss how changing uses can be a valuable tool for property owners. Creating value through a change in use utilizes the concept of “Highest and Best Use”, which is defined by the Appraisal Institute as follows:
“the most probable use of land or improved property that is legally permissible, physically possible, financially feasible …, and which results in maximum profitability.”
In other words, a property's value is based upon whatever use it can legally and physically be used for that gives the highest net return to the owner. This brings up some interesting points.
First of all, a property's highest and best use may change passively. The most obvious example of this would be rural land located in the path of growth for a large city, whose use will eventually change from farming to something else.
Another example of this would be due to changes in market conditions. Land zoned for high-rise condos in some sections of Florida may now have a different highest and best use than it did earlier in this decade.
In addition, changes in highest and best use can create value when an owner (or prospective buyer) of a property identifies a new product or strategy that increases profitability over the current highest and best use, and then pursues whatever changes are required to allow that use. Examples of this might include:
- buying apartments and converting them to condominiums;
- purchasing land zoned for high-density single family use and re-zoning it for retail use;
- conceiving a new use for an abandoned or under-utilized property that creates value where others only saw blight;
- changing an existing land plan from one homogenous use (e.g. 6,500 square foot single family lots) to a mix of residential uses.
This list is only limited by the imagination. Opportunities to use these strategies exist in any market - but it seems that more of them “pop up” when markets are in transition, as many markets in the United States are today.
Obviously, it would be best if the property was identified, the purchase price set based upon the existing use, and then the changes in the highest and best use made - this way the buyer benefits immediately from the increase in value of the land. But if you find yourself holding a project that no longer is as financially attractive as it once was, consider the impact that a change in use might have. It might provide a way to set your property apart from the other owners of similar property and give you a much needed advantage in a competitive marketplace. SLDT |
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