Legal Definitions - highest and best use

The term highest and best use 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. It is a fundamental concept in real estate appraisal, guiding decisions on how a property should be developed or utilized to maximize its economic potential and market value.

To determine the highest and best use, appraisers consider several factors:

• Physical Possibility: What can physically be built on the site, considering its size, shape, topography, and access?
• Legal Permissibility: What uses are allowed by zoning laws, building codes, environmental regulations, and other legal restrictions?
• Financial Feasibility: Is the proposed use economically viable? Will it generate sufficient income or value to justify the investment?
• Maximum Productivity: Among the uses that meet the first three criteria, which one will produce the highest net return or value for the property?

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

• Example 1: Urban Vacant Lot

  Imagine a vacant plot of land located in the heart of a bustling city, surrounded by high-rise office buildings and luxury residential towers. While it might be physically possible to build a small single-family home or a surface parking lot, the highest and best use would likely be to construct a multi-story commercial building or a high-density residential complex. This is because the market demand for office space or apartments in that prime location is very strong (financial feasibility), the city's zoning laws typically permit such development (legal permissibility), and a tall building would generate significantly more rental income and property value than a smaller structure or a parking lot (maximum productivity).

• Example 2: Rural Farmland Near a Growing City

  Consider a large tract of agricultural land situated just outside the expanding suburbs of a major metropolitan area. Currently, it's used for farming. However, as the city grows, there's increasing demand for new housing developments and retail centers. The highest and best use for this farmland might shift from agriculture to residential or commercial development. While farming is physically possible and legally permissible under current agricultural zoning, the financial feasibility and maximum productivity would likely be achieved by selling the land to a developer for a new subdivision or a shopping mall, as the value per acre for development land far exceeds its value for farming in this evolving market.

• Example 3: Historic Industrial Warehouse

  Picture an old, large brick warehouse in a formerly industrial district that has recently undergone revitalization, now featuring art galleries, trendy restaurants, and new residential lofts. The warehouse is currently used for low-value storage or is sitting vacant. Its highest and best use would likely involve an adaptive reuse project, such as converting it into luxury condominiums, creative office spaces, or a mixed-use development with retail on the ground floor. Demolishing it for a new, generic building might be physically possible, but preserving its unique character and converting it for a high-demand use would likely be more financially feasible, legally permissible (often with historic preservation incentives), and result in a higher property value and greater economic return than its current use or a complete rebuild.