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. The foundation for all valuation approaches.
Highest and best use analysis is performed for the land as if vacant and for the property as improved. For the land as if vacant, the appraiser considers what use would maximize land value. For the property as improved, the analysis considers whether the existing improvements should be continued, renovated, or demolished. The analysis follows a sequential test: is the use legally permissible, then physically possible, then financially feasible? Among all feasible uses, which is maximally productive? This analysis drives the selection of comparables, the application of the cost approach, and the income approach methodology.
Related Terms
Highest and Best Use
HBUThe 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..
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)..
More in Appraisal Process
View allScope of Work
The type and extent of research and analysis performed in an appraisal assignment.
Effective Date (Date of Value)
The date on which the appraiser's opinion of value applies.
Extraordinary Assumption
An assumption that is directly related to a specific assignment and, if found to be false, could alter the appraiser's opinions or conclusions.
Hypothetical Condition
A condition that is contrary to known fact but is assumed for the purpose of analysis.