Highest and best use
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Main article: Highest and best use
Highest and Best Use (HABU) is a term of art in the appraisal process. It is a process to determine the use of the property which produces the highest value for the land, as if vacant. There are four steps to the process. First, the appraiser determines all uses which are legally permissible for the property. Second, of the uses which are legally permissible, which ones are physically possible. Of those, which ones are financially feasible (sometimes referred to as economically supported) Of those uses which are feasible, which one and only use is maximally productive for the site. In a simple context, the appraiser must do this twice, comparing the results -- as if the land is vacant and in the as-is-improved state, taking into account the costs of demolishing any existing improvements. The outcome of this process is the highest and best use for the site. An appraisal of market value must explicitly assume that the owner or buyer would employ the property in its highest and best use, and therefore value the site accordingly.
In more complex appraisal assignments (e.g. -- contract disputes, litigation, brownfield or contaminated property valuation), the determination of highest and best use may be much more complex, and may need to take into account the various intermediate or temporary uses of the site, the contamination remediation process, and the timing of various legal issues.
Types of ownership interest
Implicit in the analysis of the subject property is a determination of the interest in the property being appraised. For most common situations (e.g. -- mortgage finance) the fee simple interest is explicitly assumed since it is the most complete bundle of rights available. However, in many situations, and in many societies which do not follow English Common Law or the Napoleanic Code, some other interest may be more common. While there are many different possible interests in real estate, the three most common are:
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Fee simple value (known in the UK as freehold) - The most complete ownership in real estate, subject in common law countries to the powers reserved to the state (taxation, escheat, eminent domain, and police power)
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Leased fee value - This is simply the fee simple interest encumbered by a lease. If the lease is at market rent, then the leased fee value and the fee simple value are equal. However, if the tenant pays more or less than market, the residual owned by the leased fee holder, plus the market value of the tenancy, may be more or less than the fee simple value.
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Leasehold value - The interest held by a tenant. If the tenant pays market rent, then the leasehold has no market value. However, if the tenant pays less than market, the difference betweent the present value of what is paid and the present value of market rents would be a positive leasehold value. For example, a major chain retailer may be able to negotiate a below-market lease to serve as the anchor tenant for a shopping center. This leasehold value may be transferrable to another anchor tenant, and if so the retail tenant has a postive interest in the real estate.
Scope of work
While USPAP has always required appraisers to identify the scope of work needed to produce credible results, it became clear in recent years that appraisers did not fully understand the process for developing this adequately. In formulating the scope of work for a credible appraisal, the concept of a limited versus complete appraisal and the use of the Departure Rule caused confusion to clients, appraisers, and appraisal reviewers. In order to deal with this, USPAP was updated in 2006 with what came to be known as the Scope of Work project. In short, USPAP eliminated the Departure Rule and the concept of a limited appraisal and created a new Scope of Work rule. In this, appraisers were to identify six key parts of the appraisal problem at the beginning of each assignment:
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Client and other intended users
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Intended use of the appraisal and appraisal report
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Definition of value (e.g. -- market, foreclosure, investment)
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Any hypothetical conditions or extraordinary assumptions
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The effective date of the appraisal analysis
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The salient features of the subject property
Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of investigation , and the applicable approaches to value. The rule provided the explicit requirement that the minimum standards for scope of work were: