Highest and Best Use

Highest and best use, or highest or best use (HBU), is a concept in real estate appraisal that shows how the highest value for a property is arrived. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use. The Appraisal Institute of Canada defines highest and best use as this:

HIGHEST AND BEST USE: the reasonably probable and legal use of property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.

The prior quotation shows that there are a series of tests which any proposed or theoretical use of a property must pass, before it can be the highest and best use of the property.

In some cases, a proposed use might be the highest and best use but for some cost that changes the net economics. An example might be an industrially-used site that is now legal for highrise residential buildings. However, the cost to clean up (remediate) the site is so expensive that the value as currently used is higher. In that case, if it can be continued, the existing industrial use would likely be the highest and best use.

In some cases, appraisers are given specific instructions as to an assumed highest and best use. This use might not pass the tests discussed below as a legitimate highest and best use and may very well produce a different value. One example of this might be a parkland valuation, where the appraiser has been instructed to ignore all other possible uses.