THE Concept OF Highest AND BEST USE IN Property Development PDF

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THE CONCEPT OF HIGHEST AND BEST USE IN PROPERTY DEVELOPMENT Haziqah Najihah Binti Norazimi 1.0 THE DEFINITION OF HIGHEST AND BEST USE The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value. It is based on the use that is going to bring the highest value for real estate it is actual current use is not relevant to the highest and best use. This would be done by conducting a site analysis. If the use is temporary, it would then be considered the interim use. When determining what use would constitute the highest and best use, the appraiser needs to consider many possible uses of the property. In appraisal practice, the concept of highest and best use represents the premise upon which value is based. In the context of most probable selling price, another appropriate term to reflect highest and best use would be the most probable use. Highest and best use analysis should seek to incorporate or accommodate the reality of community politics. Moreover, town-planning controls may have significant impacts on the property development process and that in many instances, the optimum or most profitable development may be the one that takes the line of least resistance in terms of recognizing the concerns of the public.

2.0 THE PRINCIPLES OF HIGHEST AND BEST US IN PROPERTY A potential use cannot be considered to be the highest and best use unless it is all four of the which are legally allowable, physically possible. financially feasible. maximum utility/profitability. i.

Legally allowable A prospective use cannot be considered the highest and best use unless that use would be allowed under current building codes, zoning ordinances, environmental laws, and other government regulations. For example, if an area is zoned as residential, it would be hard for an appraiser to state that the highest and best use of that real estate would be as a commercial building. Properties with a use that existed prior to current zoning laws or other regulations could be legally nonconforming . This is known as being grandfathered in. These uses are usually permissible even though they do not meet

ii.

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current regulations or zoning requirements. However, it is possible that some of these uses could not be reproduced if the legally nonconforming improvement is badly damaged or destroyed. Physically possible Not all properties can be developed to all uses. A potential use must be physically possible in order for it to be the highest and best use of that property. Potential uses can be limited by the size, shape, topography, and other characteristics of the site. As an example, a 50,000-square-foot single-story warehouse would not fit on a 15,000-square-foot site; therefore, that use would not be physically possible. Financially feasible A property must be economically feasible. Suppose, for example, that a lot is physically, legally, and geographically suitable for an office building. If there already a ton of office space on the local market, this use is not currently economically feasible. Maximum utility / Profitability Finally, the use must generate the highest net return (profit) to the developer. All remaining uses which are legally allowed, physically, and economically possible must be tested to decide which use will provide the most profit.

3.0 IMPORTANCE OF HIGHEST AND BEST USE The highest and best use determines the most profitable use of the site, whether the subject is vacant land or an improved property on the site. The highest and best use usually requires less analysis when appraising an existing property rather than a proposed property. However, an improved structure is not always its highest and best use. In basic appraisal courses, various appraisal theories and the approaches to value. An essential element in the preparation of highest and best use is to understand the market forces that affect the subject property. What are the surrounding properties? Are they similar to your subject property? This is most

important when appraising a proposed structure, whether it is a residential or commercial property. Besides, it also to establishes the criteria for selecting comparable and elements of comparison, to provide the basis for estimates of physical, functional, and external obsolescence, provides the basis for forecast required to apply the income capitalization approach.

4.0 CONCLUSION In conclusion, the use of the property as improved is the highest and best use if the value of a property as improved is greater than the value of the land as though vacant. However, a property's existing use may represent temporary use whereby the new highest and best use can be achieved which begins with the land value for the new highest and best use and adds the contributory value of the current improvement. In practice, when the value of property as improved exceeds the value of the vacant land, a property owner who is redeveloping a parcel of land may remove an improvement. The costs of demolition and any remaining improvement value are taken into consideration in the test of financial feasibility for redevelopment of the land. Likewise, if an improved property has value but may have greater value if modified in some way, the cost of modifying the improvements and the value gained in that modification are accounted for in the determination of highest and best use.

Summary Highest and best use may be defined as the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value. The theoretical focus of highest and best use analysis is on the potential uses of the land as though vacant. In practice, however, the contributory value of the existing improvements and any possible alteration of those improvements are also important in determining highest and best use and, by extension, in developing an opinion of the market value of the property. There are four principles are use in highest and best use which are Legally allowable, Physically possible. financially feasible. maximum utility/profitability....