WHAT DOES “HIGHEST AND BEST USE” MEAN?
“Highest and best use” is an important consideration of the appraisal process for a property. In commercial real estate, the phrase refers to a property that represents its most profitable and feasible use. The “highest and best use” is determined by a licensed real estate appraiser, whether for vacant land or improved property. As part of the evaluation, an appraiser will consider multiple uses for the property before making an assessment. The appraiser’s determination represents their opinion, not necessarily fact, and is subject to their professional judgement and experience.
For a use to be considered as the highest and best use, it must pass all four of the following criteria:
- Physical Possibility: All physical characteristics including size of the lot, topography, accessibility, existing or proposed improvements, etc., are taken into consideration.
- Financial Feasibility: The economics of a property’s proposed use must be evaluated. Surrounding properties have an influence on this factor.
- Legal Permissibility: The property’s proposed use must conform to deed restrictions, zoning ordinances, building codes, government and environmental laws and regulations, and more. If a use existed prior to a prohibitive zoning designation change, the use could be grandfathered in or apply for a special exception.
- Maximum Productivity: This criterion most often applies to commercialized properties and is the use that yields the highest net income for the property.
Highest and best use typically plays to a healthcare provider’s advantage, especially when the provider owns commercial real estate that is built out for their healthcare practice or another medical use, as the property will often carry a higher value to another healthcare provider compared to repurposing the space to a general office or retail use.