McClelland Minute - January 10,2010

Highest and Best Use

One of the principles of valuation is a concept called “highest and best use”.  It is that use which, at the time of appraisal, is most likely to produce the greatest net return to the subject property over a given period of time.  We look at it from two perspectives: as though vacant or as improved.

Let’s say for example, that you are a farmer and own a quarter of land under which a significant deposit of gravel has been recently discovered.  In its current use, the parcel is worth what comparable parcels of farm land would be worth within the immediate area.  However, the true market value of the property would be determined by the estimated pre-crush volume of the gravel.

Another application of this principle is an old house sitting on commercial property.  It appears to be an ideal location for a restaurant or retail outlet.  There are a number of factors that will need to be considered including any potential environment concerns, historical property designations, appropriate zoning, municipal servicing, and restrictions on building size.  If it clears those hurdles, then it would be valued by the square foot or front foot based on actual sales of comparable properties.

It is not as straightforward as it looks sometimes.  A commercial lot along side the highway may seem a suitable site for a motel today, but the buyer would be prudent to look into the city’s long term transportation strategy.  Although traffic currently flows both ways in front of the property, the multi-year plan calls for medians that restrict access, which will likely cause potential customers to keep searching further on down the road for an easier site to turn into.

The same applies to raw land on the perimeter of a community.  A developer may think it will be easy to tie into municipal services but finds out after purchase that they will not only be responsible for infrastructure costs internal to the project, but also have to pay an offsite levy to assist the town to increase the capacity of the lagoon or water plant.

Not too long ago I was approached by an investment group with land adjoining a lake.  They had plans drawn for further subdivision, but wanted to sell the project in the planning stages.  Further inquiry determined that all they had was a simple map of how they would carve up the property but nothing more than that.  They had done no investigation into the extensive health, municipal, or provincial regulatory framework a project like this would have to satisfy.  In fact, they claimed no knowledge of the current moratorium on development around the lake.  Even so they wanted 6 times what they had paid for it less then three years before.  I suggested they find another Realtor to represent them. 

Vern McClelland is associate broker with RE/MAX of Lloydminster.  If you have questions or comments on this article or other real estate matters, he can be reached at 780.808.2700 or through the McClelland Group website www.mcclelland.ca

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