Legal Definitions - best use

The term "best use," more formally known as highest and best use, is a core concept in real estate appraisal and land use planning. It refers to the most probable use of a property that is physically possible, legally permissible, financially feasible, and that results in the highest value for the land or property. This concept helps determine a property's market value by considering its optimal potential, not just its current use.

To identify the highest and best use, four criteria must be met:

• Physically Possible: The proposed use must be able to be built or implemented on the site given its size, shape, topography, and other physical characteristics.
• Legally Permissible: The proposed use must comply with current zoning regulations, building codes, environmental laws, and any other legal restrictions.
• Financially Feasible: The proposed use must generate a positive return for the owner or developer, meaning it is profitable and economically viable.
• Maximally Productive: Among all physically possible, legally permissible, and financially feasible uses, the highest and best use is the one that produces the highest net income or the greatest present value for the property.

Here are some examples illustrating the concept of highest and best use:

• Urban Vacant Lot:

  Scenario: A vacant lot sits on a busy street corner in a rapidly growing downtown area, zoned for mixed-use development.

  Highest and Best Use: An appraiser determines that constructing a multi-story apartment building with ground-floor retail space would generate the highest net income and property value, given the strong demand for housing and commercial services in the area. While a single-family home might be physically possible, it wouldn't be financially feasible or maximally productive in this high-density urban environment.

  Explanation: This use is physically possible (the lot can support such a structure), legally permissible (mixed-use zoning allows it), financially feasible (there's market demand and financing available), and maximizes the property's value by addressing the most pressing market needs, making it the highest and best use.

• Historic Industrial Building:

  Scenario: An expansive, but aging, brick warehouse in a revitalizing industrial district is currently underutilized, storing old equipment. The area is experiencing an influx of creative businesses and young professionals.

  Highest and Best Use: An analysis suggests that renovating the warehouse into a complex of artist studios, co-working spaces, and a trendy restaurant would unlock the property's greatest value. Demolishing it for a new structure might be legally restricted due to historic preservation guidelines and might not be as financially optimal as leveraging its unique character.

  Explanation: This renovation strategy respects legal constraints (potential historic preservation), is physically possible, and is financially feasible due to the demand for unique commercial and social spaces in a desirable, up-and-coming location. This adaptive reuse maximizes the property's economic potential far beyond its current use as storage.

• Rural Farmland Near a City:

  Scenario: A large parcel of productive farmland is located just outside the expanding suburban boundary of a major metropolitan area. The city's growth plan indicates future residential development in this direction.

  Highest and Best Use: While currently used for agriculture, the "highest and best use" might be to hold the land for future residential development. Even if it requires rezoning, its value is significantly higher when considered as potential future housing tracts rather than solely as agricultural land, especially if zoning changes are anticipated or likely in the near future.

  Explanation: This illustrates that the highest and best use isn't always the *current* use. It considers future potential. While farming is physically possible and legally permissible *now*, the financial feasibility and potential for much greater value through future residential development, even if it requires a change in zoning, makes "holding for development" the highest and best use in terms of maximizing the land's present value.