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

What if the HBU is not a "legally permissible use" but an "illegal" use that the market will support? In terms compatible with the above definition, what if the HBU is not a current use that conforms to the zoning ordinance but its use is financially feasible but does not conform to the existing zoning ordinance? The appraiser's responsibility to the client, the property owner in this situation, is to report the HBU. If the HBU is not a legal use, then the appraiser's analysis can be used in the public hearing to request (appeal, beg or plead) to have the local zoning authority convert the illegal use to legal. On the other hand, if the local jurisdiction is the client, the appraiser's responsibility to the client is also to report the HBU. To do otherwise would be unethical.

REZONING JUSTIFICATION ANALYSIS REVISITED

This article calls for the appraiser to move away from attempting to judge the "probability of rezoning" because it is a judgment about an impediment in the free market that is subject to manipulation and monopolistic control by the local government. The market analyst and the appraiser are well qualified to judge the financial feasibility of a vacant or improved property use. The judgment is well grounded in market factors rather than in the powers of government that can be easily manipulated.

In order to eliminate confusion, "rezoning justification analysis" should replace the "probability of rezoning"" in the appraisal literature. Consider the following definition for "rezoning justification analysis:" Rezoning justification analysis is the application of financial feasibility as determined by the market analyst's or appraiser's expert judgment. The rezoning justification is high if the proposed use for the subject property is financially feasible whether it is permitted or not by the current zoning for the subject property.

Under this concept of "rezoning justification analysis," the appraiser can test financial feasibility of any and all "illegal" uses and show the extent of the effects of the rezoning on the subject property and the market area. The rezoning itself is beyond the scope of the market analyst's or appraiser's assignment. The market expert provides the evidence to evaluate the rezoning request. The financial feasibility can be tested. The compatibility and conformity can be evaluated. The rezoning justification is a matter that the market expert can research, evaluate and report.

The actual rezoning decision is a different matter. The probability for rezoning is a situation faced by the owner of the property and the decision rests in the hands of others. The rezoning justification rests on the facts provided by the market expert. The decision to rezone can pass or fail for other reasons not covered in the market expert's analysis.

Consider the following simple cases as an example of rezoning justification analysis.

Case I: The value of the land in apartment use in the current market is $400,000 per acre for high density apartment development. Land value is $350,000 per acre in office use, which is not legal for the site and not prevalent in the area. A rezoning request is not financially appropriate in this case because the land value in the illegal case is less than the current legal use.

Case II: The value of the land in apartment use in the current market is $340,000 per acre for high density apartment development. Land value is $380,000 per acre in office use, which is not legal for the site but does exist in close proximity. A rezoning request is financially appropriate but only if the cost to obtain the rezoning is less than $40,000 per acre.

In these cases, the market expert reports what is obtained from market evidence. The property owner can determine if the benefits from rezoning will cover the costs of obtaining the rezoning.

CONCLUSION AND SUMMARY

The judgment about the "probability" of rezoning relies, in part, on market information. Zoning officials can affect the outcome of a rezoning request for a variety of reasons. Some of these reasons are based on market considerations and sometimes community concerns. Personal bias also can play a part. When personal bias comes into play, the zoning process is manipulated and thereby a violation of the perfectly competitive market situation. The analyst or appraiser should not have to make this judgment about probability. He or she should provide evidence concerning a rezoning. Is it financially feasible for the landowner? This form of the analysis is rezoning justification analysis; it considers only the market information to judge the HBU of the land or the improved property.

ENDNOTES

(1) The Appraisal of Real Estate, 12th edition. (Chicago: Appraisal Institute)

(2) The Principles of Conformity and Externalities come into consideration here. "Conformity holds that the real property value is created and sustained when the characteristics of the property conform to the demands of the market (Appraisal of Real Estate, p. 41) "The principle of externalities states that factors external to a property can have positive or negative effect on its value". (Appraisal of Real Estate, p. 42)

(3) J.D. Eaton. Real Estate Valuation in Litigation, 2nd edition (Chicago: Appraisal Institute, 1995, p. 143)

BY JOSEPH S. RABIANSKI, Ph.D., CRE

About the Author

Joseph S. Rabianski, Ph.D., CRE, is a professor of real estate at Georgia State University. He teaches graduate and undergraduate courses on topics including market and financial analysis, investment and valuation, housing and regional economics and finance. He also teaches professional courses on behalf of organizations such as the Appraisal Institute, the U.S. government and public and private corporations. Rabianski has more than 40 years of experience in the real estate field and has published numerous articles, books and monographs.

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