Highest and Best Use

lane-county-courthouse
Historic Photo of Lane County Courthouse circa 1940s

A property must be appraised in terms of its highest and best use.

The definition of highest and best use is as follows:

The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.

When a site contains improvements, the highest and best use may be determined to be different from the existing use. Implied in this definition is that the determination of highest and best use takes into account the contribution of a specific use to the community and community development goals, as well as the benefits of that use to individual property owners.

An additional implication is that the determination of highest and best use results from the appraiser's judgment and analytical skills; that is, the use determined from analysis represents an opinion, not a fact to be found.

In appraisal practice, the concept of highest and best use represents the premise upon which value is based. In the context of most probable selling price, another appropriate term to reflect highest and best use would be the most probable use.

Any determination of highest and best use includes identifying the motivations of probable purchasers. The motivations are based on perceptions of benefits that accrue to property ownership. Different motivations influence the highest and best use and are significant to an appraiser's conclusions about the highest and best uses of any parcel of real estate.

The benefits of investment properties that are not owner-occupied relate to net income potential and to eventual resale or refinancing. The highest and best use decision for investment property is often influenced by the income tax and inflation hedge aspects of the existing or proposed improvements.

Determination of the type and intensity of the improvement to be placed on the investor's land often requires an after-tax return analysis of various alternatives. Land or improved property that has resale profit as its principal potential benefit is purely speculative. The price such land commands in the market reflects the real motivation of the purchaser/speculator.

This portion of the appraisal process is based on the definition of Highest and Best Use supplied previously. From this definition, it is obvious that market value of the land or site and of an improved property are both estimated under the assumption that potential purchasers will pay prices that reflect their analysis of the most profitable use of both land, as vacant, and property, as improved.

A use must meet four criteria as follows:

  1. Physically Possible
  2. Legally Permissible
  3. Financially Feasible
  4. Maximally Productive.

Once the highest and best use has been determined, the appraiser can then apply the appropriate approaches to value.

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