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Reconsidering the Definition of Highest and Best Use: the Case for a Post-Disaster Highest and Best Use

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Reconsidering the Definition of Highest and Best Use: the Case for a Post-Disaster Highest and Best Use FEATURE Reconsidering the Definition of Highest and Best Use: The Case for a Post-Disaster Highest and Best Use BY DONALD R. EPLEY, PH.D. CCIM, MAI INTRODUCTION has been recently impacted by a natural disaster. It A NATURAL dISASTER CAN CREATE A TERRIbLE TOLL OF concentrates on the techniques used to determine the human misery from the loss of possessions, records and HbU of a site as though vacant (hereafter HbU-S), which traces of identity, employment and , worse, human life. could be argued to be the most important part of the The job of picking up the pieces in the aftermath to create estimate of value and property liability. One goal is to a habitable environment can be daunting when the neces - determine if the common procedures learned in educa - sities of life are badly damaged or even destroyed. tion classes and supported by the U.S. Uniform Standards of professional Appraisal practice (USpAp) are applicable Real property damage can range from little to total , in this special type of situation. depending on many factors including location. Flooding often is accompanied by destruction of infrastructure The challenge faced by the analyst is not simply that of involving utilities and sewage disposal. Underground lines how to employ the concepts of evaluation . The typical may be unserviceable . Much of the destruction and its concepts used, such as market value, may be legitimately extent are not readily viewable. A large water surge with a questioned as the market conditions within the defini - storm such as Katrina brings environmental contamina - tions may not exist. Extreme market phenomena with tion , churned from the sediment. In addition, oil residue very special characteristics such as those resulting from may be left on buildings when the water subsides. disaster occur with sufficient frequency to suggest Earthquakes, tsunamis, flooding, fires, strong winds , and volcanic eruptions create a special class of assignments About the Author and challenges for the appraiser whose task is to estimate Donald R. Epley , Ph.D. , CCIM , MAI , value as part of the eventual cleanup and resettlement is a USA Distinguished Professor of Real efforts. problems arise immediately that will bring into Estate and director for the Center for Real question the valuation process of a normal market. public Estate Studies, Mitchell College of Business at the University of South Alabama in Mobile. records may be partially or totally destroyed, property He holds a doctorate degree in regional and lines and boundary markers may be gone or hidden, and urban economics from the University of the infrastructure may be damaged in a manner that Missouri, and was awarded a MAI designation makes usability questionable. Further, the likely suspen - from the Appraisal Institute and a CCIM designation from the sion of a transaction market eliminates comparable sales , Commercial and Investment Institute. Epley served as president of the American Real Estate Society and on its board of directors for fifteen price trends and other market data needed for the valua - years. He was elected as a trustee of the Appraisal Foundation tion process . (Washington, D.C.) and served a term on its executive committee. Epley has authored and co-authored nine textbooks, and has been the The purpose of this article is to examine the typical editor of two academic journals. He frequently is quoted in the media procedure that a professional analyst uses to estimate on his analysis of the local economy and real estate markets. highest and best use (HbU ) and value for a property that REAL ESTATE ISSUES 59 Volume 35, Number 2, 2010 FEATURE Reconsidering the Definition of Highest and Best Use: The Case for a Post-Disaster Highest and Best Use strongly that a new HbU definition and procedure be outlet for an open discussion. Recommendations here are created and used. This article recommends that such a offered to further a discussion that will improve the concept and procedure be developed and proposed as analysis of real estate data: opposed to revising the traditional HbU methods to fit I Does Market Value Work? A popular definition of each discrete disaster instance. the commonly used term “market value ” is : Three questions will be answered here : “The most probable price, as of a specific date, in 1. Is the typical HbU-S valuation process applicable in cash, or in terms equivalent to cash, or in other the market after a disaster? precisely revealed terms, for which the specified property rights should sell after reasonable exposure 2. What are the steps to follow in the estimation of in a competitive market under all conditions requi - HbU-S following a disaster? site to a fair sale, with buyer and seller each acting 3. Has a new paradigm emerged for this situation? prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress.” 3 The current need for a post-disaster property value procedure is worldwide. Interestingly, the professional I Proposed New Definition of HBU-S. A newer literature is almost void of any research on this topic. discussion of value would need an updated definition brody, et.al 1, calculated property damages from 423 flood of highest and best use found later in this article that events in Texas using a dollar loss in the Consumer price is the following: Index —a technique not recognized by the U.S. appraisal “A disaster highest and best use for the site (dHbU- profession. Montz and Tobin 2 used multi-list listing and S) is an immediate use that is both just and fair to the sold prices from before and after the flood to show a change in the market. Listing data is not allowed in owner or potential owner which results in the highest common U.S. appraisal procedure. The sold prices may be present value. Any reasonable and logical approach used in a professional estimation of value only after each in estimating value may be to derive value directly individual price has been scrutinized and adjusted from informed opinions. The three criteria of physi - through a formal valuation process. Montz and Tobin cally possible, legally permissible, and adequate effec - correctly conclude with a call for policies and programs tive demand should be used when possible.” to address spatial and temporal differences in property The popular market value presumptions are not satisfied values caused by unusual events. after a disaster. For example, “reasonable exposure” is the PROBLEMS IN CURRENT DEFINITIONS time immediately following the disaster as the owner is in AND THE VALUATION PROCESS need of immediate cash, has significant damage if not Several problems exist with respect to current definitions total loss of the property, and may have relevant insur - of market value, the valuation approaches, HbU , and their ance coverage issues that will require negotiation. application in a market after a disaster. A “competitive market” may not exist as the damage may be localized to the extent that comparable neighborhoods Contentious Discussion. An examination of the litera - and locations may also have been seriously impacted. ture and interaction with specialists in this area generate Further, the impacted owner may be exhibiting symptoms the conclusion that opinions regarding changes are of stress that inhibit the individual’s ability to make supported by strong emotions. One group argues that the rational decisions . In sum, not every presumption under - current valuation process has produced accurate results lying the existing definition is satisfied. in unique economic situations, and should not be altered without a considerable amount of further discussion and Special attention should be given to the exact date of the examination. Another group is quick to point out that HbU conclusion. Timing of the use and its relationship to the popular definition of market value and the proce - the most likely user was recently identified as the main dures used to produce it are broken and need to be reasons necessary for a new HbU definition. The final revised quickly. Until a trade group or government insti - recommended HbU is derived after the probable user has tution takes the initiative to resolve the issue, articles and sufficient time to develop the intended use. 4 This article journals , such as this one , will remain the necessary argues that a disaster may change the market conditions REAL ESTATE ISSUES 60 Volume 35, Number 2, 2010 FEATURE Reconsidering the Definition of Highest and Best Use: The Case for a Post-Disaster Highest and Best Use so dramatically that long-run decisions are made in a limiting conditions that may identify a situation that shorter period of time than the time needed to implement prevents the appraiser from estimating a value without short-run decisions. qualifications. A site impacted by a disaster could conceivably require so many extraordinary assumptions The timing question is very similar to long-run versus that the appraiser may not be able to progress beyond the short-run decisions taught commonly in a beginning first step. economics course to illustrate profit -maximizing behavior in the analysis of variable and fixed costs. For example, in A good illustration is the impact of Katrina on the the short run of a firm, some factors of production that property in south Mississippi. A flood washes out and are variable in supply are added to other factors of fixed destroys infrastructure such as electricity, gas, water , and availability. The decision is to combine both in a manner sewage. damage is difficult to assess as it cannot be seen that allows for profit maximization to occur. Time in a without extracting the utility in question and performing short-run decision is measured in production units as standard tests. What is the appropriate assumption or opposed to calendar time.
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