Focus on Real Estate Analysis: comments on the probability of rezoning.

Author J.D. Eaton stated in his book "Real Estate Valuation in Litigation" that the "probability of rezoning is fertile ground for the unscrupulous, the naive and the dreamer." (3) This statement can reflect the motivation of both parties to a rezoning situation. The property owner and the rezoning decision authority, in addition to being biased, can both be guilty of these traits. Under current thinking, the probability of rezoning needs to be determined by an unbiased and knowledgeable third party to the process with documented support for the conclusion. This third party is the appraiser and/or the market analyst. It should not be the owner of the property. It should not be an official of the local jurisdiction who could be protecting the status quo of the comprehensive plan when it does not make economic sense to do so. The judgment about the probability of rezoning should come from a market analysis of the immediate economic and physical environment of the subject property.

The current legal land use restrictions on the subject property and the immediate environment are considerations in the analysis. The more important considerations are the existing land uses and financial feasibility of improved neighboring properties and the financial feasibility of neighboring vacant land. In the end, however, the probability of rezoning is an estimate of the local jurisdiction's willingness to allow the land use change. This willingness to change may not reflect current or future market conditions, and it allows the local jurisdiction to manipulate the HBU decision.

The determination of the market analyst or appraiser of the probability of rezoning should not be determined by the judgment of what the zoning authority might or might not allow. Pragmatism currently forces market analysts and appraisers to make such a judgment to assess the probability of rezoning. Their task is to judge the actions of individuals but not the actions of the property market. The economist will say that the market impediment, the zoning authority, dictates the conclusion instead of the free and unobstructed operation of the real property market. The economist will say that the zoning authority is a barrier to entry. Such barriers are an important element in a monopolistic market situation. It is not the perfectly competitive market situation discussed in Part I of this article, "Comments on the Concept and Definition of Highest and Best Use" that is the underlying economic theory for the definition of market value. The zoning authority through the operation of the zoning ordinance can impede the operation of the competitive market and thereby affect HBU and market value of the property.

REZONING JUSTIFICATION ANALYSIS

What is needed is a new phrase to identify the role of the market analyst or appraiser and to replace "the probability of rezoning." "Rezoning justification analysis" is a term that would meet this requirement. There are no probabilities; there are no judgments about the actions of specific local officials. It is an evaluation of the facts drawn from the property market. Is it financially feasible to use a currently illegal use at some point in time--now or in the future? The financial feasibility of the illegal use is estimated and compared to the financial feasibility of the current legal use. If the illegal use is "maximally productive," then a rezoning request could be warranted. The financial return from the rezoning should exceed the cost of the rezoning process.

AN ASSIGNMENT

A recent evaluation assignment of a partial taking brings this issue to the forefront. Let us take a look at another example of rezoning. Exhibit B (on page 29) provides a map of the immediate area next to the subject property. The subject property is a seven-acre site serving as a single family residence but is zoned as multifamily residential. It has substantial frontage on Oak Road, just east of the intersection with the Interstate. The local jurisdiction has taken in excess of one acre of the site by taking a 120-foot wide strip of land from the entire front of the site along the 360 feet of frontage the site has along Oak Road. Adjacent to the west of the subject site are two recently developed retail outparcels along Oak Road: a new neighborhood shopping center and a power center are under construction along the east side of Elm Road heading south. Across Elm Street are free-standing retail establishments. Across Oak Road from the subject property are recent high-rise office buildings facing Oak Road with mid-rise office buildings in the area behind the high-rise office buildings. East of the subject property are the entrances to two low density garden apartment complexes that are 10 to 15 years old. Further east along both sides of Oak Road is a mixture of free-standing retail establishments, motels, unanchored strip centers and more garden apartment complexes. Apartment complexes also exist further north of Oak Road, on both Elm Road and Hickory Road. The subject site is the high ground in the neighborhood. The land slopes down east of the subject property along Oak Road and southeast through the low rise apartment complexes. This topological feature provides the subject property with a scenic view of two high-rise office nodes to the north, one to the south, and one office node to the east.

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Without the benefit of financial analysis, what is your judgment about the process of determining the HBU of the subject property based on a qualitative analysis of the economic and physical environment in which the subject property exists?

Here is my opinion about the HBU process based on the development of compatible and complimentary adjacent and proximate properties: The subject site should be tested for high-rise office use and high-rise, high-density apartment use. Also, it should be tested for general retail use. These three property types are financially feasible in the immediate area of the subject property and these three uses for the subject property have a high probability of being financially feasible in this market. One of them could be the maximally productive use for the site, but this will not be known without the analysis.

The representatives of the local jurisdiction (planning director and county attorney) insist that the comprehensive plan will not change with regard to this site. This decision was made without any formal financial analysis; there was no HBU consideration and their opinion of value was based solely on continuation of the existing zoning and thus the development of the site as a low density apartment complex. These local representatives determined that this would be consistent with the existing apartment developments on that side of the road and behind the subject site. All three land use prospects for the HBU that appear to be good prospects for a financial feasibility test are eliminated by the power of the local jurisdiction. Moreover, by dictating the ultimate use, the local jurisdiction controls the price for the land by stating that only low-rise, low density apartment-comparable properties are permitted in the sales-comparable method. The value of land for garden apartment development was approximately $200,000 per acre, while the value of commercial land was in the range of $600,000 to $900,000 per acre.

The county appraiser's HBU analysis was limited to low-rise apartment development, not by the market but by administrative fiat. This is not HBU analysis in a free and competitive market. The authorities of the local jurisdiction imposed a substantial barrier to the value of the land analysis in order to control the price they had to pay for the taking.

The market analyst or the appraiser cannot change the authority of a local jurisdiction to impose a zoning ordinance or to allow a rezoning. But, the appraisal and market analysis professional can change the way it defines the market potential of a property in our free market economy. Consider the following suggestions for the HBU as vacant and HBU as improved definitions. They are the same definitions offered in Part I of this article, "Comments on the Concept and Definition of Highest and Best Use," but they contain new clauses, which are underlined: The HBU of a vacant land is the most financially feasible use from all uses that can be supported by freely competitive and (legally and physically) unobstructed current and future property market conditions, that is compatible with existing adjacent and proximate land uses, that serves the economic needs of the local community, and that generates the highest present value to the land. The HBU of an improved property is the most financially feasible use from all uses supported by freely competitive and (legally and physically) unobstructed current and future property market conditions that is compatible with existing adjacent and proximate land uses, that serves the economic needs of the local community, and that geneates the highest financial return to the property.

These definitions can be modified to specify the need for compatibility and conformity among property types by adding the following phrases to the definitions: "compatible with existing adjacent and proximate land uses, and serving the economic needs of the local community."

Under these definitions, the HBU is the use of the property, based on free market factors, judged by the appraiser to be the most financially feasible, compatible and economically desired use in the various current and prospective property markets.