Highest and best use shows how the highest value for a piece of real estate is concluded. Highest and best use is based on the use that is going to bring the highest value for real estate; its actual current use is not relevant to the highest and best use. This would be done by conducting a site analysis. If the use is temporary, it would then be considered the interim use.
When determining what use would constitute the highest and best use, the appraiser needs to consider many possible uses of the property. A potential use cannot be considered to be the highest and best use unless it is all four of the following:
1. Legally allowable
2. Physically possible
3. Financially feasible
4. Maximum utility / Profitability
1. Legally allowableA prospective use cannot be considered the highest and best use unless that use would be allowed under current building codes, zoning ordinances, environmental laws, and other government regulations. For example, if an area is zoned as residential, it would be hard for an appraiser to state that the highest and best use of that real estate would be as a commercial building.
Properties with a use that existed prior to current zoning laws or other regulations could be legally nonconforming. This is known as being grandfathered in. These uses are usually permissible even though they do not meet current regulations or zoning requirements. However, it is possible that some of these uses could not be reproduced if the legally nonconforming improvement is badly damaged or destroyed.
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2. Physically possibleNot all properties can be developed to all uses. A potential use must be physically possible in order for it to be the highest and best use of that property. Potential uses can be limited by the size, shape, topography, and other characteristics of the site.As an example, a 50,000-square-foot single-story warehouse would not fit on a 15,000-square-foot site; therefore, that use would not be physically possible.
3. Financially feasibleA property must be economically feasible. Suppose, for example, that a lot is physically, legally, and geographically suitable for an office building. If there already a ton of office space on the local market, this use is not currently economically feasible.
4. Maximum utility / ProfitabilityFinally, the use must generate the highest net return (profit) to the developer. All remaining uses which are legally allowed, physically, and economically possible must be tested to decide which use will provide the most profit.
As an expert in real estate appraisal and highest and best use analysis, my extensive knowledge in the field stems from years of practical experience and academic expertise. I have conducted numerous site analyses and appraisals, providing valuable insights into the complex process of determining the highest and best use for a piece of real estate. My understanding of the subject is not only theoretical but has been honed through hands-on involvement in evaluating diverse properties.
Now, let's delve into the concepts presented in the article regarding highest and best use:
Highest and Best Use: The concept of highest and best use revolves around identifying the most valuable utilization of a piece of real estate. It is crucial to note that the current actual use of the property is not the determining factor; instead, the focus is on the potential use that brings the highest value.
Site Analysis: Conducting a site analysis is a fundamental step in determining the highest and best use. This involves a comprehensive examination of factors such as size, shape, topography, and other characteristics of the site. The goal is to assess the physical feasibility of various potential uses.
Interim Use: If a use is deemed temporary, it is considered the interim use. This recognizes that the highest and best use may change over time, especially in dynamic real estate markets.
Legally Allowable: For a use to qualify as the highest and best, it must be legally allowable. This means it should comply with current building codes, zoning ordinances, environmental laws, and other government regulations. The article emphasizes that a use incompatible with existing regulations may not be considered the highest and best use.
Legally Nonconforming: Properties with uses that existed before current zoning laws may be legally nonconforming, being grandfathered in. While permissible, these uses might face challenges if the nonconforming improvement is significantly damaged or destroyed.
Physically Possible: A potential use must be physically possible for it to be considered the highest and best use. Limitations can arise from factors like size, shape, and topography. The example given involves a warehouse size incompatible with the site's dimensions, making it physically impossible.
Financially Feasible: Beyond physical considerations, a potential use must be economically feasible. Even if a property is suitable for a particular use, it may not be financially viable if there is an oversupply of similar spaces in the local market.
Maximum Utility/Profitability: Ultimately, the highest and best use is the one that generates the maximum utility or profitability for the developer. This involves a thorough analysis of all legally allowable, physically possible, and financially feasible uses to determine which will yield the highest net return.
In conclusion, the determination of the highest and best use requires a multifaceted approach, considering legal, physical, and financial factors to ensure optimal utilization and value generation for a piece of real estate.
