Diminution Valuation Assignments Enhance Importance of Highest and Best Use

By Benjamin R. Sellers, MAI, & Scott Robinson, MAI, SRA, AI-GRS, AI-RRS

UntitledrobinsonHighest and best use analysis serves as the foundation on which market value opinions are built. If any deficiencies arise from the analysis, they expand into the valuation approaches, weakening the entire appraisal and its credibility.

Before and after method

Diminution valuation assignments present unique circumstances and often utilize the before and after method to establish the value opinion. Physical or legal changes to a property may result in differences in highest and best use in each scenario, which can significantly impact value. The development of highest and best use becomes a critical component of assignment credibility in these instances where the diminution value is derived from the difference in the before and after value opinions.

Building the foundation

The productivity analysis of the property in both the before and after scenarios is a crucial, and often overlooked, component of these assignments. The identification and analysis of a property’s productive attributes (physical and legal) in each scenario is an integral part in determining how these attributes collectively serve the needs of potential users, or if the measure of the change is significant enough where the property attributes serve different markets. Special care and appropriate due diligence are required to understand how any physical or legal constraints impact  the utility of the property. These potential uses then are linked to a market where demand is measured to establish feasibility.

The support for feasibility is intertwined with market analysis. Conclusions reached in establishing feasibility should be grounded on more than just optimism. The “if you build it, they will come” may have worked to bring back Shoeless Joe Jackson, however this motto should be avoided when analyzing use and timing for development scenarios. Market demand must be evident, either now or in the future, with appropriate market support. Consideration should be given to the competitiveness of the subject based on the productive attributes analyzed in the previous two steps.

Final takeaway

Building a strong foundation for complex appraisal assignments requires special care when developing the highest and best use analysis. A logically and structured study of the four tests of highest and best use is critical. Each step builds on the previous one. If one is inadequately addressed, it will result in  weaknesses throughout the valuation sections and result  in a less convincing measure of value.

Benjamin R. Sellers, MAI, is an associate appraiser with Sellers & Associates, a real estate valuation and advisory firm in Clinton, Tennessee. Follow Ben on Twitter: @benrsellers. Scott Robinson, MAI, SRA, AI-GRS, AI-RRS, was the 2016 Appraisal Institute president, and has been active in real property appraisal and consulting since 1987, when he joined Robinson Associates, a Salisbury, North Carolina, firm his father started in the mid-1960s.

See the description for this session, and others, that will be presented at the Appraisal Institute’s 2019 Annual Conference in Denver.