CGA Market Analysis & Highest and Best Use 2 — Questions and Answers
Question 1: In a highest and best use analysis, which test must be satisfied FIRST before the others are applied?
- Financially feasible
- Legally permissible (Correct answer)
- Maximally productive
- Physically possible
Correct answer: Legally permissible
Legal permissibility is evaluated first because uses that violate zoning, deed restrictions, or regulations are eliminated before physical, financial, or productivity tests are applied.
Question 2: Which type of market analysis examines supply and demand conditions for a specific property type in a defined geographic area?
- Macro-level market analysis
- Segmented market analysis (Correct answer)
- Inferred market analysis
- Fundamental market analysis
Correct answer: Segmented market analysis
Segmented market analysis focuses on a specific submarket defined by property type and geography, providing more precise supply/demand data relevant to the subject.
Question 3: A property's current use is a non-conforming industrial facility in an area rezoned for residential. What is the most likely highest and best use conclusion?
- Continue the existing industrial use indefinitely
- Immediate conversion to residential
- Demolition and redevelopment as residential when economically justified (Correct answer)
- Seek a variance to expand the industrial use
Correct answer: Demolition and redevelopment as residential when economically justified
A legal non-conforming use may continue but cannot expand; when the land value as residential exceeds the value of the existing use plus demolition costs, redevelopment becomes HBU.
Question 4: The concept of 'surplus land' in highest and best use analysis refers to land that:
- Cannot be sold separately from the main parcel under any circumstances
- Exceeds what is needed for the current or probable future use and may be valued separately (Correct answer)
- Is encumbered by an easement that limits its utility
- Is zoned for a more intensive use than currently developed
Correct answer: Exceeds what is needed for the current or probable future use and may be valued separately
Surplus land is excess acreage beyond what is needed to support the property's highest and best use and can often be sold separately, warranting separate valuation.
Question 5: Market rent differs from contract rent in that market rent represents:
- The rent stipulated in an existing lease agreement
- The most probable rent a property would command in the open market as of the appraisal date (Correct answer)
- The rent that maximizes the landlord's long-term income stream
- The average of all rents paid in the submarket over the prior 12 months
Correct answer: The most probable rent a property would command in the open market as of the appraisal date
Market rent is the competitive rent a property would likely achieve in the open market, which may differ from the contract rent actually being paid under an existing lease.
Question 6: When analyzing absorption rate for a residential subdivision, an appraiser should primarily consider:
- The historical national housing starts data
- The rate at which similar units in the local competitive market have been selling over a recent period (Correct answer)
- The developer's internal sales projections
- The number of building permits issued in the metropolitan statistical area
Correct answer: The rate at which similar units in the local competitive market have been selling over a recent period
Absorption rate analysis for a subject subdivision relies on comparable competitive project sales rates in the local market, not national trends or developer forecasts.
Question 7: Which market condition would most likely indicate an over-supplied commercial market?
- Rising effective rents and declining vacancy rates
- Stable rents with flat vacancy rates
- Increasing vacancy rates and concessions offered to tenants (Correct answer)
- Strong net absorption exceeding new construction deliveries
Correct answer: Increasing vacancy rates and concessions offered to tenants
Rising vacancies and landlord concessions (free rent, tenant improvement allowances) signal that supply exceeds demand in a commercial market.
CGA Market Analysis & Highest and Best Use 2
In a highest and best use analysis, which test must be satisfied FIRST before the others are applied?