Highest and Best Use on a Corner Parcel With a Variance
A 9,600-square-foot corner lot is improved with a 1,400-square-foot single-family house built in 1958. The house is habitable but functionally obsolete: 7-foot ceilings, one bathroom, no off-street parking. The lot is zoned for two-family use, and the corner location allows two curb cuts. Demolition and site prep would cost $28,000. A builder has told the owner that two 1,600-square-foot townhomes would sell for about $340,000 each; site work, construction, and soft costs would run about $215 per square foot, and the builder would need a 12% entrepreneurial return on total cost. The house contributes $95,000 as improved. The neighborhood has a shortage of entry-level ownership units, and the planning department has signaled support for two-family infill, though no permits have been issued on the block.
1. Test the highest and best use of the site as though vacant and as improved, showing the arithmetic for the demolition scenario.
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As though vacant (legally permissible, physically possible, financially feasible, maximally productive):
Two-family use is permitted by right, the corner lot supports two curb cuts, and the entry-level ownership market is undersupplied. So the two-townhome scenario passes the first three tests; the question is whether it is financially feasible and maximally productive.
- Gross sale proceeds: 2 × $340,000 = $680,000
- Construction and soft costs: 2 × 1,600 sf × $215 = $688,000
- Demolition and site prep: $28,000
- Total cost before return: $688,000 + $28,000 = $716,000
- Required entrepreneurial return: 12% × $716,000 = $85,920
- Required total proceeds to justify development: $716,000 + $85,920 = $801,920
- Indicated proceeds: $680,000
- Shortfall: $680,000 − $801,920 = −$121,920
The new-construction scenario does not earn its required return, so it fails the financial feasibility test. The site as though vacant is therefore best used at its existing density or held for later redevelopment, not built to two units now.
As improved: The house contributes $95,000 as improved. Demolishing it to build the townhomes would destroy that contribution and still fall $121,920 short. The existing use is the higher use. Highest and best use as improved is continued single-family residential use, with the two-family option as a land-banking alternative contingent on cost or price changes.
2. The owner argues the planning department's support proves the two-family use is feasible. How should the appraiser respond, and what data would change the conclusion?
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Planning support speaks to legal permissibility and political likelihood, not to financial feasibility. Highest and best use requires all four tests, and a use can be permitted and popular yet still not pay for itself. Here the arithmetic is decisive: the development needs about $802,000 of proceeds to earn its 12% return and generates $680,000. The gap is roughly $122,000, or about $61,000 per unit. Permitting support does not close that gap.
The conclusion would flip if the numbers moved enough to close the gap. Sensitivities worth testing:
- Sale price: each unit would need to sell for about $401,000 at current costs to break even - roughly 18% above the builder's estimate.
- Cost: total cost per square foot would need to fall to about $182 to break even at $340,000 per unit.
- Entitlement value: if the two-family zoning carried a premium the market would pay for the land, that premium belongs in the land value comparison, not in a feasibility claim.
The appraiser should also treat the builder's informal estimate as unverified. A highest and best use conclusion should rest on documented local sale prices for new townhomes and documented cost data, not one builder's opinion. Until that market evidence exists, the conclusion of continued single-family use stands.