An owner calls about a corner building on a Chicago retail strip. The zoning allows five stories. The building is two. The owner wants the appraisal to reflect the three floors that are not there. A commercial real estate appraiser has to answer a narrower question first. Would a buyer pay for them today?
- The four tests behind a highest and best use finding, and why their order decides the answer
- How a Chicago zoning rule can quietly remove a use an owner assumes is still there
- What the Cook County Assessor’s commercial model does with use, and where an appraisal pushes back
What a Commercial Real Estate Appraiser Tests Before Pricing Upside
Highest and best use is the reasonably probable use that supports the highest value as of the appraisal date. Four tests get it there, and they run in order.
Legally permissible comes first. Zoning, deed restrictions and other enforceable limits either allow the use or they do not. Physically possible comes second: size, shape, topography, access, utilities.
Financially feasible comes third, and it is the one that does the damage. The use cannot be speculative. Demand has to generate enough income to cover construction and carry the property through its economic life. It also has to deliver a return of the investment and a return on it.
Maximally productive comes last. Among the uses that survive the first three tests, the winner is the one producing the highest residual land value.
Owners usually argue the fourth test while the first three sit unresolved. That is the whole problem. A use has to clear all four, in sequence, before it belongs in an opinion of value.
Chicago Zoning Can Quietly Remove the Use You Think You Have
Plenty of older Chicago buildings run on nonconforming use rights. The use was lawful when it started, the district around it changed, and the use carried on as grandfathered.
Those rights expire. Under Chapter 17-15 of the Chicago Zoning Ordinance, a nonconforming use discontinued for 18 continuous months or more loses its rights. Re-establishing the use is then no longer allowed. Six months is the limit for a nonconforming open use of land. Ceasing operations counts as discontinuance even when the structure and equipment stay put. So does failing to maintain a valid business license.
Expansion gets limited too. A nonconforming business, commercial or manufacturing use in an R district cannot expand without an approved variation. And when a structure holding a nonconforming use suffers intentional damage from causes within the owner’s control, the use does not come back at all.
For valuation that converts a legal question into a money question. A vacant nonconforming building in month 15 is a different asset from the same building in month 19. Before anyone prices a use, somebody should confirm the use still legally exists. Counsel makes that call, not the appraiser, but the appraiser has to ask.
Feasible Means the Numbers Clear, Not That the Zoning Allows It
Zoning that allows five stories grants permission. It does not create demand.
Feasibility asks a harder question. Could a buyer build those floors and still earn a return? That means hard costs and soft costs. It also means the entitlement calendar, carry during construction, lease-up time, and the exit capitalization rate a buyer would underwrite today.
When those numbers do not clear, the extra floors are not value. They are an option nobody is paying to exercise.
This also explains why a use that penciled two years ago may fail now. Construction pricing and financing terms both move, and feasibility moves with them. Buyers pay for what they can finance, so the appraisal follows the financing, not the zoning map.
You Cannot Value the Land One Way and the Building Another
Here is the error that turns up most often in appeal files and broker pro formas. Someone values the site as though it were cleared for redevelopment. Then they add the income the existing building throws off.
Appraisal practice does not permit that. The principle of consistent use requires the site and the improvements to reflect the same use. You get the income of the building standing there. Or you get the land value of a cleared site, less the cost of clearing it. Not both.
The two analyses answer different questions on purpose. One looks at the property as improved. The other looks at the site as if vacant. Demolition becomes the economic answer only when the land value as if vacant exceeds the value of the property as improved.
A transitioning corridor can carry an interim use now and a different ultimate use later. That is a legitimate finding. It is still one use at a time.
How Cook County Values Commercial Property, and Where Use Enters
The Cook County Assessor reviews one third of the county each year. The rotation runs between the City of Chicago, the north suburbs, and the south and west suburbs. Most commercial property goes through a mass-appraisal income model. Market rents, typical vacancy and collection loss, typical operating expenses, then a loaded capitalization rate that carries the tax burden inside the rate instead of in the expense line.
Then the level of assessment applies. Office, industrial and retail typically sit at 25 percent. Multifamily sits at 10 percent. County ordinance sets those levels, so they are not something an appraisal argues about.
Two things follow for anyone weighing an appeal. First, the fight is over market value. A model built from typical rents and typical vacancy can miss a specific building badly. Second, an assessment may appear to carry a redevelopment assumption. Then the appraisal’s job is to show the feasibility work, not to assert that the assumption is wrong.
For counsel, the practical reading is narrow. An appraisal establishes value and documents how it got there. Whether that evidence carries the appeal belongs to the reviewing body and to the lawyers arguing it.
Decide Which Building You Are Actually Selling
Settle three things before you order an appraisal, in this order. Whether the current use is still legally yours. Whether any alternative use clears cost, time and financing. And whether you are asking the market to pay for the building’s income or for the site’s land value.
An appraisal that answers those in sequence survives a review. One that stacks the best answer from each on top of the others does not. Reviewers on the lending side and the tax side both look for exactly that stack.
Is Your Building Priced for a Use That Never Happened?
Send us the property and the story behind it. We will tell you which use the market will actually pay for, and what the file needs to show it.
Frequently Asked Questions
Does highest and best use always increase property value?
No. Highest and best use is a test, not a premium. It can just as easily support a lower value. A redevelopment scenario that fails the feasibility test carries no weight. In many cases the analysis confirms that the existing use is the highest and best use.
Can the current use be the highest and best use?
Yes, and it often is. If clearing a site and rebuilding costs more than the finished project would return, the building standing there stays the answer. Demolition becomes the economic answer only when land value as if vacant exceeds the property’s value as improved.
What happens to a nonconforming use in Chicago if the building sits empty?
The Chicago Zoning Ordinance treats 18 continuous months of discontinuance as the end of nonconforming use rights. Six months applies to a nonconforming open use of land. Ceasing operations or letting a business license lapse counts as discontinuance. Whether a specific property has crossed that line is a question for a zoning attorney.
Why did my assessment stay high when my building is half empty?
The Cook County Assessor values most commercial property with a mass-appraisal income model. That model uses typical vacancy for similar properties, not a single building’s actual occupancy. Where a property performed worse than typical, that gap is the argument, and it needs documentation rather than assertion.
Does a commercial appraisal help with a Cook County tax appeal?
It gives counsel an independent opinion of market value with the analysis behind it, including the highest and best use finding. What weight it carries in a given appeal depends on the record and the reviewing body. That is your attorney’s territory, not the appraiser’s.
Where PahRoo Fits on a Commercial Assignment
Michael Hobbs, MAI, SRA, signs every PahRoo report. The firm works out of Lincolnwood across Chicago and Cook County. Our commercial appraisal practice covers office, retail, industrial and mixed-use assignments for lending, litigation, estates and tax appeals. There is more on how we approach commercial valuation in a shifting market, and on what our Chicago coverage includes.
