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Highest and Best Use
In the real estate arena, the highest and best use of a specific parcel of land is not determined through subjective analysis by a property owner, developer, real estate agent, or appraiser; but rather, it is a use shaped by the competitive forces within the market where the property is located. 

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In a real sense, the definition of highest and best use encompasses four tests. It is ...

  • the most probable use of land or improved property that is legally possible, physically possible, financially feasible (and appropriately supportable) from the market, and which results in maximum profitability.

An attempted analysis of  highest and best use involves two considerations: [1] the most likely and profitable use of the site "as if vacant" under the requirements set forth above and, [2] if a property is "already improved", it is the use that should be made of the property to maximize value for non-income producing properties or, maximize net operating income on a long range basis for investment properties. In cases where capital expenditure is necessary to renovate or improve an income producing property, these costs must provide a sufficient rate of return (to the owner) for the total amount invested in the site and building improvements.

Basic highest and best use assumptions include:

  • If the property is located in an area "zoned" for commercial use, the maximum productivity of the land as though vacant will likely be based on commercial use. If, however, the competitive level of demand is greater for say, residential or multi-family use, then the highest and best use of the property as improved would be for residential use. If market preference conflicts with zoning (and consequently violates the legal permissibility test), a developer will consider if there is sufficient profit incentive to justify the added legal costs, extended time frame, and potential neighborhood opposition before obtaining a zoning change and developing the site.  
  • As long as the value of the property "as improved" is greater than the value of the site as "if vacant", the highest and best use is usually the "improved" property. Once the value of the vacant land exceeds the value of the improved property (including demolition costs), highest and best use will usually dictate that improvements be demolished.

The following are examples of narratives from appraisal reports outlining the primary criteria in estimating highest and best use...

LEGALLY PERMISSIBLE USE

  • The present zoning classification of Highway Business encourages the use of the subject property for retail —clearly a definition consonant with the present use of the subject property and surrounding properties. Environmental conditions and urban infrastructure are adequate to support the present use and it's current use appears to legally conform with the current zoning ordinance.

  • The present lack of zoning would allow for a wide variety of residential and/or commercial/industrial uses. As vacant, the proposed improvements would be legally permissible subject to the same land use regulations that apply to all property types such as erosion control measures, environmental safety, watershed implementation, and EPA compliance. There were no apparent adverse easements or encroachments which would adversely impact subject and there are no known private deed restrictions which would prohibit full utilization of the site.

  • Lack of zoning in the county and no known restrictions concerning the property would permit virtually any use. Even though new zoning regulations may be imminent in the near future, it is probable that current use patterns (retail and offices - a supermarket, insurance office, restaurant, bank branch, convenience store, and so forth) would entail similar zoning.

PHYSICALLY POSSIBLE USE

  • The vacant site is near level, highly visible from the highway, and is considered suitable for "low rise" improvements. Although no soil report has been reviewed, it is the appraiser’s opinion that the soil has sufficient load bearing capacity to support construction. All public utilities are available at the street and capacity for utilities does not appear to be a limitation.

  • If vacant, the site appears to be of sufficient size to accommodate many types of commercial buildings and parking requirements for those buildings. Likely uses would include office or retail. As improved, the existing retail building adapts well, still has significant remaining economic life, and therefore should not be demolished. On the other hand, the roof should be replaced and exterior painted to sustain the condition of the building.

  • The subject site is mildly sloping at its most visible/usable portion. Improvements are possible but construction would be limited by the size, shape, and topography of the site as well as the ability of the vacant site to accommodate on-site well and septic placements. In January, 2002 hopes for a new sewer line to the area were diminished after local officials decided against building a sewer line through the valley. Instead, they elected to spend $150,000 for a small treatment sewage plant.  Further, the recent construction of a nearby Food Lion Center in this rural location required construction of an on-site waste treatment facility that cost in excess of $500,000 and required the acquisition of  four additional acres. These examples, and the prices paid for raw land, are reflective of the difficulty, additional development risk,  and increased costs necessary to develop marginal sites for commercial use.

FEASIBLE AND MARKETABLE USES

  • The current market value of the subject is driven by its current use. A general shortage of developable sites in this mountainous region has sustained land prices, encouraged development of marginal sites, and demolition of those buildings that no longer produce economic return. Case in point, rapid development along the Highway corridor. The advent of growth along the corridor has driven prices out of reach for most uses except those catering to brand name retailers, fast food/restaurant chains, and/or strip centers. Outdated buildings are being acquired and demolished to make way for more modern structures that can produce greater economic return.

  • For the subject, it is fairly new and the cost to demolish would appear to make this property too costly as raw land. The location has high traffic volume – a requirement for retail use, but it has only marginal visibility (due to it’s elevation above the highway) and limited access – also requirements for retail. It’s present use as retail is constrained by the following: a lack of road frontage, excessive above-the-road elevation, small site size, and poor access – factors that would likely discourage brand retailers from acquiring the site if vacant. Although access may be cured at some cost, the elevation of the site, limited visibility, and blocked signage cannot be financially overcome. Market data suggests office and "secondary" retail pricing are competitive.  Given these limitations, probable uses would include: [1] the continued retail use or, conversion to office use if conversion costs can be sufficiently amortized

  • The subject site is 15 acres located off a growing corridor just a short distance from a new regional mall and corporate business center. Commercial retail growth is migrating south along this corridor with secondary commercial uses spilling over to available off-highway parcels. The site is located within a mile of the Interstate and Hwy 10 interchange and within 2 miles of the Interstate/Hwy 101 interchange – important access/convergence points for the city and western North Carolina. The site is of sufficient size to accommodate large trucks and turning radii for those vehicles. The site has no highway visibility from the state road but does have potential visibility from the Interstate which runs parallel to the eastern boundary. Limited access form the state road, a lack of visibility from passing traffic, and low traffic counts would discourage most all types of retail use. Adjoining land uses are a blend of older residences and varying commercial uses. Changing land use patterns would not favor residential development of this parcel if vacant. Assuming the site were vacant, likely use would include some type of commercial use. The advent of growth near the Mall area has driven prices out of reach for most uses except those catering to expensive name retailers, fast food, and/or hotel/motels. Lack of road frontage would preclude development of the first two uses and hotel/motels already saturate the interchange location so it is not likely the market would bear further competition at this location which is more removed from the highway. The proposed use of the site for a regional warehouse/distribution center is considered a likely, viable use. The location of the subject lends itself to the intended purpose for several primary reasons: [1] reasonably good access to a convergence of two Interstate arteries – a major hub for western North Carolina, [2] visibility from the Interstate, [3] affordable land prices and, [4] an expanding employment/population base. Analysis of market data suggests that an 8 to 15 acre cleared, leveled site is optimal for this use. A general shortage of developable sites of this size in this mountainous region has sustained land prices. Further, the advent of nearby commercial development has driven the market value of "as vacant" land to the point where many lots have more value vacant than older, "as improved" properties. The proposed improvements appear functionally well designed and potential rent rates can likely amortize building and land costs and provide a return to the property owner.  Highest and best use is therefore deemed to be the proposed use as a warehouses/distribution facility.

  • The subject site is a corner lot located along Hwy 10 at the intersection of  WalkDontWalk Street. It has limited depth but is graded level with street grade, has considerable frontage, and appears to have good visibility from passing traffic. Such benefits typically encourage retail development although lack of sewer availability along most of the highway limits commercial development to only the best parcels. The limited depth of the site and a steeply climbing embankment at the rear would dictate that only a smaller structure can be built.  The moderate growth of residential construction in the general area indicates a need for retail services to meet the needs of the growing population therefore, assuming the site were vacant, highest and best use of the site would most likely be for commercial use where frontage along a primary road and traffic volume are essential. Thus, if the subject property were vacant, it is considered best suited for some type of commercial usage to utilize it’s primary road location. Market data suggests that  a higher and better commercial use of a site (such as a strip center) can be obtained by combining multiple parcels. 

  • The property is presently improved with a one-story 2000 sq. ft branch bank facility.  The structure is reasonably well designed and in good condition however, it does not have the modern appearance of more recently constructed facilities. On the other hand, there are no other branch bank facilities in this section of the County and the present use as a branch bank is felt to command a competitive advantage due to the lack of competition of other banks in the market. Further, it is the appraiser’s opinion that use of this location for this purpose may command a premium in the market.

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