Speculative Use / Speculative Income

A speculative use is a use that may or may not be approved or constructed.  Many investors buy vacant land with the assumption that, if held long enough, a property will appreciate and become valuable for an intensive use like multiple-family development or commercial development.  

Land use plans, zoning, arterial roadways, surrounding land uses, future development plans and a number of other factors generally provide some indication regarding the future highest and best use of a parcel.  There are no guarantees in the real estate business, however, and areas that appear to be destined for a certain type of development may change over the years and support entirely different development.  The timing issues is one of the most important, since the carrying cost of land can be significant.  If one speculates that a property will become ripe for development in say 5 years and it takes 10 years to reach that state, the difference can bankrupt those who are not prepared for the longer holding time.

Appraisers analyze developed properties that produce income based on what they believe is the best available data.  When leases are established, appraisers assume that leases will not be broken, and that  re-leasing will occur at or near what has been predicted to be the future market rate.  As we have seen from the financial markets in 2008, however, there is a speculative aspect to everything and income forecasting and lease expectations can turn out to be wrong.

Real estate appraisals on developed properties make the reasonable assumption that the real estate market, and the cash flow expected from properties, will continue into the future will relatively minor adjustments taken for vacancy loss and via capitalization rate changes.  Short of a financial collapse, appraiser income forecasts are usually reasonable and not speculative.  When cash flows are projections with no historical basis, forecasts can be much less reliable.  Appraiser take care to advise readers of their reports when they have based their opinions on projections / forecasts that are not based on historic facts.          

Contact us with your questions or concerns regarding speculative use / speculative income or regarding your appraisal assignment in Nevada via e-mail at grigdon@cox.net or by phone at 1-702-568-6699. 

Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.