Highest and Best Use
The reasonably probable use of a property that results in the highest value, considering uses that are legally permissible, physically possible, financially feasible, and maximally productive.
Highest and best use is a fundamental appraisal concept that underlies all three approaches to value. It is analyzed for both the land as if vacant (what would you build?) and the property as improved (should you keep, modify, or demolish the current improvements?). The four tests are applied sequentially: legal permissibility (zoning, deed restrictions, environmental regulations), physical possibility (size, shape, topography, access, utilities), financial feasibility (would the use generate sufficient return?), and maximum productivity (which feasible use produces the highest residual land value?). When the highest and best use of the land as if vacant differs from the current use, it may indicate the improvements have reached the end of their economic life.
Related Terms
Legally Permissible
The first test in highest and best use analysis: a use must be allowed under current zoning, building codes, environmental regulations, deed restrictions, and other legal constraints to be considered..
Physically Possible
The second test in highest and best use analysis: a use must be physically achievable given the property's size, shape, topography, soil conditions, access, and available utilities..
Financially Feasible
The third test in highest and best use analysis: a use must generate sufficient income or value to justify the cost of development, including land cost, construction costs, and a market rate of return..
Maximally Productive
The fourth and final test in highest and best use analysis: among all financially feasible uses, the maximally productive use is the one that produces the highest residual land value (or highest property value for improved properties)..
Highest and Best Use Analysis
The systematic analysis performed in every appraisal to determine the most profitable, legally permissible, physically possible, and financially feasible use of a property.
More in Highest & Best Use
View allInterim Use
A temporary use of a property that is expected to change in the foreseeable future as market conditions evolve or when the property becomes ripe for development to a higher use..
Conforming Use
A property use that complies with current zoning regulations and is consistent with the predominant land use pattern in the neighborhood.
Feasibility Analysis
The study of whether a proposed project's value upon completion exceeds its total cost, including profit.