What is Highest and Best Use?

Jim B.

Highest and best use is a method of real estate valuation that attempts to determine the most profitable use for a piece of land. This determination is based first on what use of the land will meet legal obligations and what the land is physically capable of providing. Once those considerations are made, highest and best use, or HBU, of land is determined by financial considerations and the use of the land that will maximize profits. Market forces and location factors, as opposed to subjective appraisal, are crucial to figuring out the HBU of a particular piece of land.

Man climbing a rope
Man climbing a rope

There are many methods used by real estate experts and professionals use to attempt to determine the value of land. Highest and best use is a very practical assessment method, as it essentially roots out any intangible elements of an appraisal and brings matters down to certainties. Such realities as what the land can physically bear, how much potential is there for profit, and how much financial commitment it will take to improve the land so it can reach that potential all factor into HBU.

Whether the land is vacant at the time it is being considered or whether improvements have already been made upon the land also play a big role in figuring its highest and best use. For example, a vacant piece of land will usually be envisioned in terms of its commercial potential and possible profitability. By contrast, a land on which buildings have already been constructed may have more value as a vacant, resale property, in which case demolition of the buildings may be the most profitable decision.

Legal concerns such as zoning issues also must be taken into account for highest and best use purposes. Along those lines, legal fees incurred to straighten out any legal impediments should be considered. Physical qualities of the property and its surrounding location also play into HBU. For example, a piece of property located near a string of commercial properties would most likely merit a commercial enterprise on the property to take full advantage of the location.

In that way, location realities are measured in concert with financial concerns when realizing the highest and best use of a property. This final, most crucial part of an HBU appraisal focuses on market issues associated with the property. For example, if a commercial enterprise is the goal, the landowner has to determine if the market has sufficient demand for the particular enterprise. Ultimately, using the land so that it gains the most profit on the investment is the ultimate goal of an HBU assessment.

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