Highest and Best Use on a Split-Zoned, Partly Flooded Infill Parcel
An appraiser is asked to develop an opinion of highest and best use for a 1.2-acre parcel (52,272 sf) in a first-ring suburb. Zoning is R-3, six units per acre, and rezoning is not likely. A 20-foot recorded utility easement crosses the front 60 feet, and about 0.25 acre lies in FEMA zone AE, where ordinance requires the lowest floor to sit two feet above BFE at an added $22,000 per affected unit. A 1,100 sf house on the site rents for $2,400 monthly; expenses run 38% of gross income; the market cap rate for such houses is 6.5%. Two scenarios are realistic: six 1,500 sf townhouses at $385,000 each (hard and soft costs $155/sf, site work $180,000, 5% contingency, 15% developer profit on revenue, 2% marketing), or three finished lots at $110,000 each ($28,000 demolition, $45,000 site work, $22,000 permits, 6% marketing, 12% profit on revenue).
1. Apply the four tests of highest and best use and determine the highest and best use as though vacant. Show the residual land calculations for both scenarios and state the conclusion.
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Tests applied to each scenario
- Legally permissible: R-3 permits up to 7.2 units (1.2 ac x 6/acre), but parking and the front easement cap the practical yield at six. Three lots are also permitted. Both are legal.
- Physically possible: Both fit; the easement removes about 1,200 sf of buildable envelope, and the AE zone constrains building pad elevation, not yield.
- Financially feasible: Tested below.
- Maximally productive: The higher residual land value.
Scenario A - six townhouses
| Item | Amount |
|---|---|
| Revenue (6 x $385,000) | $2,310,000 |
| Construction (6 x 1,500 sf x $155) | $1,395,000 |
| Site work | $180,000 |
| Floodproofing, 2 units x $22,000 | $44,000 |
| Contingency, 5% of $1,619,000 | $80,950 |
| Developer profit, 15% of revenue | $346,500 |
| Marketing, 2% of revenue | $46,200 |
| Residual land value | $217,350 |
Scenario B - three finished lots
| Item | Amount |
|---|---|
| Revenue (3 x $110,000) | $330,000 |
| Demolition | $28,000 |
| Site work and permits | $67,000 |
| Marketing, 6% of revenue | $19,800 |
| Profit, 12% of revenue | $39,600 |
| Residual land value | $175,600 |
The townhouse program produces roughly $42,000 (24%) more land value, so the highest and best use as though vacant is six townhouses. The appraiser should not stop at the arithmetic: the margin is thin relative to the uncertainty in absorption, and the profitability of Scenario A depends on cost and timing assumptions that must be market-supported, not simply asserted.
2. Assuming the townhouse conclusion, identify the single unresolved fact that could reverse it and explain how the appraiser should treat it before finalizing the opinion.
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The floodplain exposure. The appraiser assumed exactly two units fall inside zone AE. If all six pads require elevation or fill, floodproofing rises from $44,000 to $132,000, and the residual calculation becomes:
$2,310,000 - $1,395,000 - $180,000 - $132,000 - $85,350 contingency - $346,500 profit - $46,200 marketing = $124,950
That is far below the $175,600 produced by the lot split, so the conclusion flips to subdivision.
The appraiser may not resolve this with an extraordinary assumption that construction cost stays at $44,000; the number of affected pads is a factual, knowable matter that materially affects the result. The proper steps are:
- Obtain the FIRM panel and a site survey or elevation certificate and count the pads inside AE.
- If the count cannot be determined, test the sensitivity explicitly and disclose it, rather than presenting a single point residual as though it were certain.
- Confirm the elevation requirement with the local floodplain administrator, since the two-foot freeboard rule is jurisdictional and may change.
The lesson: the four tests are a filter, not an answer. A highest and best use conclusion that survives only under one favorable cost assumption is not adequately supported.
3. The house on the site is currently leased. Determine the highest and best use as improved and explain whether it must match the highest and best use as though vacant.
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As-improved test
- Potential gross income: $2,400 x 12 = $28,800
- Expenses: 38% = $10,944
- Net operating income: $17,856
- Capitalized at 6.5%: $17,856 / 0.065 = $274,708, say $274,700
Compare with demolishing and developing: the as-vacant land value of $217,350 less $28,000 demolition is a net $189,350. The existing house contributes about $85,000 more value than the cleared site, so the highest and best use as improved is to retain the house and continue the residential rental use as an interim use, not to demolish now.
The two conclusions do not have to match. Highest and best use as improved asks what to do with the improvements in place; as though vacant asks what the site would be built with if cleared. Interim uses that are not the ultimate use are common and legitimate in transition areas. The appraiser should state both, note the interim nature of the rental, and identify the trigger that would end it - for example, townhouse prices rising enough that the land residual exceeds $274,700 plus demolition. This also matters for the valuation approach: the sales comparison approach should weight interim-use sales, while the land value supporting the eventual redevelopment is a floor, not the conclusion of value.