In market approach, while comparing properties, generally “Highest & Best use” of the property potentials has to be considered to arrive at Fair Market Value on the relevant date. Many a times we come across property which is put to inferior use. (e.g. property falling in commercial zone but being put to residential use). Such inferior use properties are to be valued for best permissible user and valued accordingly, ignoring actual inferior use or continued subsisting use of the property.
Value of property for continued inferior user is bound to give lower value of the property as compared to the Fair Market Value of the property for Highest and Best use. However when the property is valued under development method, it automatically considers Highest and Best use of the property.
First aspect to be considered is highest and best use of the property. Though the property is put to inferior use or has under utilized F.S.I. area, price it would fetch in open market would be for superior use and for full utilization of land.
A residential building existing on the plot which is placed in commercial zone is glaring example of economic obsolescence. Highest and Best use of land and building is not made. The asset is put to inferior usage of residence instead of commercial user resulting in an economic loss. Higher depreciation in such case will not be unreasonable.