How to Determine the Highest and Best Use for Land

When it comes to land acquisition – one of the most important factors in getting this number reasonably accurate is to understand the “highest and best use” for a property.

The question of a property's highest and best use is something all appraisers aim to address – and the issue is particularly relevant to appraisers and investors who are working with vacant land.

When a vacant lot doesn't have any pre-existing improvements on it, there can be many potential uses for the property (depending on how the owner wants to use it, and what the local zoning regulations will allow), but even when there are several possibilities, there is only ONE highest and best use.

Highest and best use is always the use that would produce the highest value for a property, regardless of its current use.

The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. Alternatively, the probable use of land or improved property – specific with respect to the user and timing of the use – that is adequately supported and results in the highest present value.

In some situations, it's easy for a professional appraiser to get lost in the weeds when determining what the highest and best use actually is.

The Four Criteria

To keep things simple, let's assume we're looking at one acre of rural land with no improvements and no history of environmental contamination.

According to the Appraisal Institute, the four standard criteria points we'd be looking at are:

Legal Permissibility

Physical Possibility

Financial Feasibility

Maximum Productivity

Legal Permissibility

According to the local  and planning department, what are you allowed to do with this property?

Furthermore, are there any particular uses that are disallowed by government regulations and/or prohibited by deed restrictions or other issues covered in the property's title history?

Physical Possibility

When considering what can be done with a property, it's important to recognize what is physically possible – taking into account the physical attributes of the property (its size, shape, location, terrain, legal easements, and a lot more).

For example, if you've got one acre of land located in a swamp, you shouldn't assume the property is buildable. Likewise, if you've got one acre of land in the middle of the desert, you shouldn't assume the property can be used as a marina… because it's just not physically possible.

Of course, both are ridiculous examples – but they illustrate the point of taking the property's physical attributes into account when determining what the property may be used for.

Financial Feasibility

When taking any kind of construction or improvements into account (whether you plan to build a house or a skyscraper), it's important to ensure that the intended use can either:

• Generate enough revenue to justify the cost of the improvements (in the case of a commercial project or business endeavor).
• Create enough additional value to justify the cost of construction for the homeowner and/or make a profit for the investor.
• To use another ludicrous example, you wouldn't spend N10 million to buy a high-end parcel of land in downtown Ibeju lekki, only to run a lemonade stand that earns N2000 a day – right?

If you're going to pay this kind of cash (and even more to develop it), you need to be confident it will create enough value or generate enough revenue for this kind of investment to actually make sense.

Maximum Productivity

To determine a property's maximum productivity, it's important to know which use is likely to generate the highest return on investment (ROI) for the investor.

Another important factor to consider is the local supply and demand for such buildings and businesses. It may not make sense to build a self-storage facility right next to another pre-existing self-storage facility, or a movie theater complex two doors down from another movie theater complex. If the presence of similar buildings in the area interferes with the feasibility of the property use, this also needs to be considered.

When Improvements Already Exist

Of course, in many cases, we aren't dealing with a simple, vacant parcel of land.

If you're trying to determine the highest and best use for a property that already has a designated use (because it already has an existing structure on it), there are three scenarios you'll have to think through:

What would it cost to tear down the existing structure and redevelop the site? Do the ends justify the means?

What are the opportunities and limitations of renovating or adding a new addition to the existing building?

What are the opportunities and limitations of using the existing building in the exact same way it was before?

Each scenario comes with inherent costs, opportunities, risks, and rewards. Depending on your access to funding and what you stand to gain (and what you'll have to sacrifice) for each option on the table, these factors should play a role in guiding your decision on what the highest and best use of the property actually is.

In any event, don't forget to adhere to the four criteria listed above when determining the highest and best use of the property in question.

Assessing Your Property

So what does all of this mean for the property YOU are trying to appraise?

If you'd rather avoid losing yourself in hours of detailed and complicated analysis, a faster way to run this assessment is to start by asking yourself an abbreviated version of the four criteria…

Question 1: According to the local zoning laws and deed restrictions (if any), what am I allowed to do on this property?

Question 2: How many of these allowed uses are physically possible on this property?

Question 3: Of the uses that ARE allowed, AND physically possible, which of them are actually worth the investment (which ones would be most likely to increase the value of the property beyond the cost of improving it)?

Question 4: If my plan was to develop the property and sell it at market value, which plan would generate the highest return on my investment?

As you're asking yourself these questions, ALWAYS REMEMBER THAT TIME IS OF MAJOR ESSENCE.