The feasibility study of a proposed land development determines whether or not the proposal is economically feasible. That is, whether or not upon completion, the developer will enjoy sufficient returns and benefits on monies and labour invested to cover the risk and provide sufficient entrepreneurial reward. The first stage of a feasibility study is the listing of a number of alternative land uses for the subject site and then, to decide the highest and best use. This could be the existing use which is usually designated as option 1.
Land development is subject to the following environments:
The 3 controls can be thought of as filters in a highest best use filter. The initial high number of possible uses are progressively eliminated until eventually, only one, the highest and best remains see diagram 1 . The combined effect of the 3 can effectively curtail a proposal to a much lesser land use than what would otherwise be allowed.
THE PHYSICAL ENVIRONMENT
There are physical constraints to the size of a proposed building including the suitability of the soil for the footings, current building technology and the availability of necessary machines and equipment to allow a building over a certain height or complexity. Although limits on building size caused by technology come under the head of physical controls they cannot be completely divorced from economic controls.
Other constraints may be the availability of materials, skilled labour, and sufficient room for storage and labour on the site. For example, the site may be too small to store materials, machinery, and house labour for a building beyond a certain size. However, for non innovative projects the physical environment is less important than the other two environments.
THE LEGAL ENVIRONMENT
Legal controls are usually, the most rigorous of the 3 environments. They include local building controls and regulations, state and federal laws. Local controls are those under the jurisdiction of local council, the first body consulted when considering a development project. Important local controls are the town plan and building regulations. Other local controls include traffic, fire, parking, landscaping and health regulations. For example, fire prevention controls can render a proposal to rehabilitate an old building uneconomic.
State controls are more general, concerning such things as safety, health, and the preservation of historical buildings and sites. These are particularly important for large and/or specialist and/or contentious developments such as service stations, hotels which often require a state licence to operate.
Federal controls can apply to proposed land uses near an airport, or in a national forest or park. For example, the height of CBD buildings in Adelaide are restricted to that allowed under the Air Navigation Act. The Federal government is also able to exert indirect control on a number of land uses by requiring the recipients of grants to satisfy or agree to certain conditions before they receive the grant. For example, nursing homes, private hospitals and some tourist developments.
more detailed consideration of legal controls is considered under
"design of the project " below. This includes particularly,
the Federal Government's initiatives for a national development code;
THE HIGHEST AND BEST USE FILTER
THE ECONOMIC ENVIRONMENT
The final environment is the economic environment and is the ultimate determinant of a land use. It is concerned with whether or not the proposed development provides sufficient return or reward on labour and capital inputs commensurate with the risk of the project.
HIGHEST AND BEST USE
The developer will consider a number of alternative land uses for the development site but the "highest and best" use is that use which provides the highest return commensurate with the risk of the proposal. The highest and best use will generate the highest land value.
A number of possible land uses can be quickly eliminated during the initial investigations as being obviously uneconomic. These can be eliminated using the hypothetical development method of valuation However, the valuer should carry out a more accurate analysis using discounted cash flows for all the other possible land uses.
If the proposed building is not the highest and best use, it represents either the under or over capitalisation of the subject site. If it cannot be converted to the highest and best use, it will have nil value (demolition valuation only (DVO)) as it will have to be demolished.
See modern design and legal controls.