Higher and Better: The Highest and Best Use Principle, Explained ...

The highest and best use principle originally derives from American property law. You will also see it come up often in the arena of real estate appraisal. You can see below how this principle is closely related to the value of your home, as well.

American law is where the highest and best use principle has its roots. Principles of real estate appraisal are also an area to which it relates. The value of your home is extrinsically linked to this principle, as well. A use that is reasonably probable that produces the highest value of your property is the main feature behind the highest and best use principle, also known as HBU. At its core, HBU is simply a designation that locates property and explains how it has the potential to have a higher value, if only it were used for a different purpose. In order to maximize its total value and increase the money ultimately made from it, a piece of property is assessed at its highest or best use in real estate appraisals, specifically.

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.

Only uses that are allowed by law can be considered highest and best uses, first. Governmental regulations, zoning prohibitions, and deed and covenant restrictions are all uses that are not legally allowable.

You can determine the second factor of a property?s eligibility by the specific size, shape and topography of the property in question. It does not meet this test for highest and best use if the use would require something like a large piece of land, because then it would not be physically possible. If the highest and best use of a property requires a flat piece of land and the land in question is mountainous, as another example, it is not physically possible to meet this test for highest and best use.

Feasibility in a financial sense is also required for a property?s highest and best use as a third test. Enough revenue must be generated to justify things like construction costs and profit for the builder in order for any proposed highest and best use of a property to be financially feasible. The highest and best use would not be considered financially feasible if it would cost more to improve the property than the property could ever hope to earn 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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Source: http://coloradopropertymanagement.org/higher-and-better-the-highest-and-best-use-principle-explained/

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