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highest and best use

As defined and explained in this ONLINE Encyclopedia

Highest and Best Use is the likely use, selected from a number of available choices, to which an area of land or a building may be put, based on what is physically possible and in compliance with zoning and building regulations and which, at the time of an appraisal, produces the most profitable present value of the land. The legal use of land or improved property which, at any point in time, is likely to produce the highest return to an investor (State Nat'l Bank of Conn. v. Planning and Zoning Comm'n of Town of Trumball, 156 Conn 99, 239 A.2d 530 (1968); Re Eddy Forest Products (1991) 27 OMBR 85, 87 (Can)). “The most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which resultsin the highest value of the property being valued”, International Valuation Standards Committee, International Valuation Standards (8th ed. London: 2007), § 6.3.

   An area of land may be considered to be at its highest and best use when it provides the optimum return to its owner or user, which may be as measured in monetary terms, or in intangible and social values, or a combination of such values. However, this value is not static. The use of land at any point in time is dependent on the legally permitted use, that which is physically and financially viable and the most productive use. In particular, highest and best use of land is a function of the land’s 'capacity'—its ability to provide fruits and benefits. In turn this ability is a function of physical characteristics (slope, fertility, climate, load bearing capacity, etc.); the permitted or authorised use (agricultural, residential, industrial, mining commercial); intensity of use (the permitted plot or floor area ratio, planning and building height restrictions, etc.); location (accessibility, proximity to complementary uses); technological factors (building techniques, availability of plant and machinery); and the availability of other factors of production (labour, capital and management) to exploit the full potential of land. The use to which land is put is a function also of the owner’s tastes and preferences and will be dependent on the demand of the end user. 'Highest and best use' represents a dynamic concept, a point to which land is tending. Landowners, or potential landowners, are constantly seeking to obtain a higher return from a given area of land than would be receivable by continuing the existing use. However, at any point in time, one use may be considered as the one that provides a higher and better use than any other. It is upon the basis of that use that an appraisal of land is generally carried out.

   In the US and Canada, apart from its use in the general appraisal of real estate, 'highest and best use' may be applied when assessing just compensation for condemnation, i.e. account should be taken of a reasonable probability that a zoning change would be permitted; but not a special use available only to the acquiring authority, or any special purpose for which the property is being acquired. "'All [the land's] capabilities or uses to which it may be adapted should be considered in order to determine the market value.' Joyce on Damages, § 2135. … the test is not the value for a special purpose, but the fair market value of the land in view of all the purposes to which it is naturally adapted", Sacramento Southern R. Co. v. Helbron, 156 Cal 408, 104 P 979, 980–1 (1909) (Olsen v. United States, 292 US 246, 255, 54 S Ct 704, 78 L Ed 1236 (1934); United States v. Cors, 337 US 325, 69 S Ct 1086, 93 L Ed 1392 (1949); United States v. 50.8 Acres of Land, 149 F Supp 749, 752 (DC NY 1957); Weldon v. State, 495 So.2d 1112, 1117 (Ala Civ App 1985); Krupa v Camel Resources Ltd (1982) 40 AR 528 (Can)). Also, for the purpose of determining the assessed value, a property should be appraised on the basis of its highest and best use. Sometimes called the 'optimum use'.  Cf. existing use.

Terms in bold are defined elsewhere in the Encyclopedia.
Further explanation of the style of reference material is provided in the User Guide (available to subscribers)

bibliographic references:

Mark R. Rattermann. Highest and Best Use Problems in Market Appraisals (Chicago: Appraisal Journal, Winter 2008).
AIA & U.S. Department of Justice. Uniform Appraisal Standards for Federal Land Acquisitions (5th ed. Chicago: 2000), § A-23 'Analysis of Highest and Best Use'.
Appraisal Institute. Readings in Highest and Best Use (Chicago: 1981).
Appraisal Institute. The Appraisal of Real Estate (13th ed. Chicago: 2008), Ch. 12 'Highest and Best Use Analysis'.
S.F. Fanning. Market Analysis for Real Estate: Concepts and Applications in Valuation and Highest and Best Use (Chicago: 2005, with CD-ROM).
J.D. Eaton. Real Estate Valuation in Litigation (2nd ed. Chicago: 1995), Ch. 6 'Highest and Best Use'.
S. Fanning. Market Analysis for Real Estate (Chicago: 2005), Part III 'Highest & Best Use Analysis'.
J.D. Fisher & R.S. Martin. Income Property Valuation (3rd ed. Chicago: 2007), Ch. 19 'Highest and Best Use Analysis: Applications'.

Australian Property Institute. Valuation Principals and Practice (2nd ed. Deakin, ACT: 2007), pp. 6–7, 88, 96, 386.
International Valuation Standards Committee. International Valuation Standards (8th ed. London: 2007), pp. 28–9.

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