The highest and best use principle is a term that has roots in American law. It also relates conceptually to principles of real estate appraisal. It can be extrinsically linked to the value of your home, as well.
Also known as HBU, the highest and best use is considered to be a use that is reasonably probable that produces the highest value for your property. It is essentially a designation that identifies a piece of property that has the potential to have a higher value if it was used for a different purpose. In real estate appraisals specifically, a piece of property is assessed at its highest or best use in order to maximize its total value and also to increase the money ultimately made from it.
Each potential use must pass a set of tests in order to be determined to be a property’s highest and best use. Although it can vary, the use must generally meet tests to ensure it is legally allowable, physically possible, financially feasible and maximally productive.
First, only uses that are or might possibly be allowed by law are eligible to be highest and best uses. Some uses that are excluded are those forbidden by governmental regulations, prohibited by zoning and prohibited by restrictions in deeds and covenants.
Second, the property’s size, shape and terrain dictate its eligibility for the second factor often tested. If a highest and best use is not physically possible because it would require a larger plot of land, it does not meet this test. In the same vein, if a highest and best use requires a flat parcel of land and the land in question is mountainous, its highest and best use would not be physically possible, thus failing this test.
The third test requires the property’s highest and best use to be financially feasible. In order for a highest and best use to be financially feasible, construction costs and a builder’s profits must be justified by generating enough revenue. There would be no way for it to meet the financial feasibility test if a proposed highest and best use would end up costing more on the property’s improvement than it could hope to generate in revenue.
In order for the last highest and best use test to be met, a highest possible return for the builder must be generated. No matter what could be actually built on the property, a property might still only be designated one highest and best use. In order not to raise any questions with respect to its highest and best use, a property must pass these four tests.
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