Accepted appraisal theory has long held that an improved parcel may have two separate highest and best uses--that of the site "as if vacant" and that of the site "as currently improved." The need for this differentiation stems from the principle that land value is residual and that property value is maximized by improvements that conform to the site's highest and best use.
Appropriate appraisal methods currently being promoted by leading appraisal texts and courses encourage evaluation of the highest and best use of improved property both as if vacant and as currently developed.
(b) recognize that land is appraised as though vacant and available for development to its highest and best use and that the appraisal of improvements is based on their actual contribution to the site.(2)
The Comment relating to Standards Rule 2-2(i) states in part that "If an opinion as to highest and best use is required, the reasoning and support of the opinion must also be included."(4) According to the Comments section relating to Standards Rule 2-2, there is to be no departure from this binding requirement.
These data not only are significant to a highest and best use evaluation and subsequent valuation, but are also significant to the readers of reports as an aid to underwriting and planning.
The value of a site as if vacant provides an indication of whether existing improvements conform to the highest and best use of the site.
When existing improvements generate net income either well above or well below the required return on site value, the conclusion as to whether they conform to highest and best use seems obvious.
The use to which a site or improved property is put until it is ready for its future highest and best use is called an interim use.
Interim uses therefore are improvements whose income has a net present value above the net present value of holding a site as if vacant for a perceived future highest and best use. The future highest and best use must 1) be predictable with a reasonable degree of reliability; and 2) maximize a site's value.
The first type is a continued use of existing improvements that no longer represent the highest and best use but are capable of generating an excess of operating income (or that minimize an operating loss) compared to the maintenance of the site in a vacant state.
The Appraisal of Real Estate, tenth edition, contends that interim use improvements do not meet the tests of highest and best use, yet create increments of value higher than the value of vacant land.