What is highest best use in property development?

What is the highest best use in real estate development

Highest Best Use

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The highest and best use for a property is determined by an assessment of its potential to generate income and the overall market conditions.

It refers to the most profitable and efficient use of a piece of land or property, taking into account all potential uses and market conditions.

This concept is used by developers, investors, and appraisers to determine the most profitable and sustainable use for a piece of real estate.

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For example, if a piece of land is located in a highly desirable area with a lot of foot traffic and good access to public transportation, based on it’s zoning and permissible use, the highest and best use may be to develop a retail space or a mixed-use building with both residential and commercial units.

On the other hand, if the land is located in a more rural area with little foot traffic, the highest and best use may be to develop a single-family home or a small apartment complex.

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It is important to understand the role of allowed zoning, covenants and restrictions and various planning overlays. Even though you can technically build a highrise on a piece of land, it doesnt constitute it’s highest best use as long as…

  1. The sites’ zoning and overlays allow to do so and
  2. There is an actually demand for you intend to build on that block.

In order to determine the highest and best use, developers and investors will typically conduct a thorough analysis of the local market, including an examination of the area’s demographics, zoning laws, and economic conditions.

They consider various potential uses for the property and the costs associated with each use, including construction and ongoing operating costs. This is where financially modelling of various proposed schemes help developers model the financial viabilityo of their highest best use proposal to make an informed decision.

Overall, the highest and best use analysis is an important tool that helps developers and investors make informed decisions about how to use a piece of real estate in the most profitable and sustainable way possible based on it’s market demand.

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