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DISCLAIMER: The opinions set forth herein reflect the viewpoint of the Appraisal Institute and Appraisal

Institute of Canada at the time of publication but do not necessarily reflect the viewpoint of each individual
member. While a great deal of care has been taken to provide accurate and current information, neither the
Appraisal Institute, the Appraisal Institute of Canada, the UBC Real Estate Division, nor its editors and staff
assume responsibility for the accuracy of the data contained herein. Further, the general principles and
conclusions presented in this text are subject to local, provincial, and federal laws and regulations, court cases,
and any revisions of the same. This publication is sold for educational purposes with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional advice.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved. No part
of this book may be reproduced in any form without written permission from the Appraisal Institute of Canada.
Published by the UBC Real Estate Division. Printed in Vancouver, Canada.

CHAPTER 12

HIGHEST AND BEST


USE ANALYSIS








FUNDAMENTALS OF HIGHEST AND BEST USE

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.2

The Appraisal of Real Estate Third Canadian Edition

y 
y
y

y 






To determine highest and best use, the


appraiser must analyze data, not just
compile it. As an analogy, in applying
the direct comparison approach the
appraiser does not just compile a list
of comparable sales from the market
data; he or she analyzes the relevant
sales. It is critical that a careful highest
and best use analysis precede the
application of the approaches to
value. Otherwise, there is a high
likelihood that serious errors will be
made in the valuation process.

The Four Tests











Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.3


Highest and best use is the

reasonably probable and legal



use of vacant land or an improved

property that is legally permissible,
 
physically possible, appropriately

supported, nancially feasible, and



that results in the highest value.














LAND AS THOUGH VACANT AND THE PROPERTY AS IMPROVED
The highest and best use of land as though vacant and the highest and best use of the property as
improved are connected but distinctly different concepts. To clarify the distinction, consider a singleunit residential property located in an area zoned for commercial use. If there is market demand for
a commercial use, the maximum productivity of the land as though vacant will most likely be for a
commercial use. In this case, the residential improvements may contribute little, if any, to the value of
the property as a whole except as an interim use during the transition between land uses. If, however,
the market value for residential use is greater than the market value for the permitted commercial use
less costs to demolish the residential improvements, then the highest and best use of the property as
improved will be for continued residential use.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.4

The Appraisal of Real Estate Third Canadian Edition

  


Figure 12.1: The Market Analysis Process and Four Parallel Tests

Source: Stephen F. Fanning, Market Analysis for Real Estate: Concepts and Applications in Valuation and Highest and
Best Use (Chicago: Appraisal Institute, 2005), 382.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.5




APPLICATION OF HIGHEST AND BEST USE ANALYSIS

Highest and Best Use of Land as though Vacant






The highest and best use of land
as though vacant is concluded after

the four criteria have been applied

and various alternative uses have

been eliminated. The remaining

use that fullls all four criteria is the


highest and best use.



Testing the Legal Permissibility of Land as though Vacant





Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.6

The Appraisal of Real Estate Third Canadian Edition
















Testing the Physical Possibility of Land as though Vacant












Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.7

PROBABILITY OF A ZONING CHANGE


In investigating the reasonable probability of a zoning change, the appraiser must consider trends
and the history of zoning requests in the market area as well as documents such as the community's
comprehensive or master plan. Uses that are not compatible with the existing land uses in the area (such
as a gas station in the middle of an exclusive single-family residential subdivision) and uses for which
zoning changes have been requested but denied in the past (such as an industrial use where several
industrial zoning changes have been turned down in the past two years) can usually be eliminated from
consideration as potential highest and best uses. On the other hand, a zoning change from residential
to commercial may be reasonable if other properties in the market area have received a similar zoning
change recently or if a community's comprehensive plan designates the property for a use other than its
current use. For example, consider a site zoned single-family residential in a transitional neighborhood
where the zoning on several similar sites has been changed recently to commercial. Also, the city's
comprehensive plan designates the property as lying within a future commercial corridor. Both of these
factors may support an appraiser's conclusion that there is a reasonable probability of rezoning the
subject site for commercial use.
Additional evidence of the possibility of new zoning includes land assemblage, removal of structures,
and new construction in an area. This evidence may be supported by zoning change applications, zoning
hearings, actions by municipalities, and interviews with planning and zoning ofcials. Even if there is
no current market evidence of a zoning change, documented interviews with ofcials and discussion of
zoning practices and histories can be helpful in evaluating the possibility of a zoning change. However,
these interviews may not be a "proof" of a change or the denial of a change. Elected ofcials make
decisions on zoning ordinances, and the processes are often heavily contested, with the outcomes not
known until ofcial actions are taken.
The probability of a zoning change may not be 100%, and the challenge is to determine whether market
participants will pay a premium over the property's current value as zoned in anticipation of a potential
zoning change and to document the conclusion. Because developers are frequently risk-averse, most
buy "subject to" rezoning approval rather than "as is". Many sales never close because they are subject
to rezoning that could not be obtained or could not be obtained within the developer's desired time frame.
Appraisals involving a projected or assumed zoning change are subject to an extraordinary assumption
or hypothetical condition, depending on the situation, and must be addressed as such. If, for the purposes
of the appraisal, the appraiser concludes from research that the probability of a zoning change is likely,
the appraisal is subject to an extraordinary assumption because although the appraiser believes the
statement to be true, if it is not, the value opinion would be affected signicantly.

Testing the Financial Feasibility of Land as though Vacant







Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.8

The Appraisal of Real Estate Third Canadian Edition











 





For more information on nancial feasibility and maximum productivity, see also Stephen F. Fanning, Market Analysis
for Real Estate: Concepts and Applications in Valuation and Highest and Best Use (Chicago: Appraisal Institute,
2005), 389; and Richard Parli, "What's Financial Feasibility Got to Do With It?" The Appraisal Journal (October 2001):
419-423.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.9

Testing the Maximum Productivity of Land as though Vacant
















The Conclusion of Highest and Best Use as though Vacant









2

According to traditional economic theory, income attributable to the three other agents of production (labour, capital, and
entrepreneurial coordination) is paid, and then the remaining income i.e., the residual is attributable to the land.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.10

The Appraisal of Real Estate Third Canadian Edition


















THE IDEAL IMPROVEMENT
If the appraiser concludes that a building improvement is the highest and best use of a parcel of vacant
land, the appraiser then determines and describes the type and characteristics of the ideal improvement
to be constructed. The ideal improvement should meet the following criteria:

Takes maximum advantage of the site's potential market demand


Conforms to current market standards and the character of the market area
Contains the most suitably priced components
If a new improvement is considered to be the highest and best use of the land as though vacant, it
presumably will have no physical deterioration or functional obsolescence i.e., it would be neither
an underimprovement nor an overimprovement. Thus, any difference in value between the existing
improvement and the ideal improvement would be attributable to these forms of depreciation. The
appraiser must still consider external obsolescence, which may affect both the existing improvement
and the ideal improvement.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.11




Highest and Best Use of Property as Improved










The highest and best use of a property

as improved may be continuation

of the existing use, renovation or



rehabilitation, expansion, adaptation

or conversion to another use,

partial or total demolition, or some



combination of these alternatives.

Testing Continuation of the Existing Use of the Property as Improved




Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.12

The Appraisal of Real Estate Third Canadian Edition






Testing Modication of the Existing Use of the Property as Improved









Testing Demolition of the Property as Improved and Redevelopment









Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.13

SPECIAL SITUATIONS IN HIGHEST AND BEST USE ANALYSIS


y
y
y
y
y
y








Single Uses

Single uses, interim uses, legally

nonconforming uses, uses that are

not the highest and best use, multiple

uses, and special-purpose uses all

require special consideration.


single use

A special case of highest and best

use; a unique or special-purpose

land use that may not be consistent

with surrounding uses.











Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.14

The Appraisal of Real Estate Third Canadian Edition

Legally Nonconforming Uses







legally nonconforming use


A use that was lawfully established

and maintained, but no longer

conforms to the use regulations

of the current zoning in the zone

where it is located; also known as



a grandfathered use.






 












Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.15













Interim Uses













interim use

The temporary use to which a site

or improved property is put until it is

ready to be put to its future highest

and best use.



Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Use That Is Not the Highest and Best Use

















3

In general usage, the term speculative investment can carry pejorative implications of high risk or uncertainty. In the
language of real estate appraisal, speculation is dened as the purchase or sale of property motivated by the expectation of realizing a prot from a rise in its price.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.17




Mixed Uses


mixed use

A combination of compatible land

uses in an area or in a single building.




 



 



Special-Use Properties









Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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12.18

The Appraisal of Real Estate Third Canadian Edition








Table 12.1: Highest and Best Use Statements in Appraisal Reports


If . . .

The land is already improved to the highest and best use.

Then the report should include . . .

A discussion of this analysis and conclusion.

If . . .

The highest and best use of an improved property is different from


its existing use.

Then the report should include . . .

Justication for this conclusion in a market value appraisal report.

If . . .

The property is improved but a separate estimate of land value is


presented in the appraisal.

Then the report should include . . .

Discussion of the highest and best use of the land as though vacant
as well as the highest and best use of the property as improved.

If . . .

A separate estimate of land value is not presented, and continued


use of the property as improved is an appropriate limiting condition
of the appraisal.

Then the report should include . . .

Discussion of only the highest and best use of the property


as improved, unless the highest and best use of the land as
though vacant is relevant to the analysis of highest and best
use as improved.

If . . .

The highest and best use of the land as though vacant and highest
and best use of the property as improved are different.

Then the report should include . . .

Discussion of the analysis of each highest and best use separately.

Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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Chapter 12 Highest and Best Use Analysis

12.19

COMMON ERRORS AND ISSUES IN HIGHEST AND BEST USE

One misconception is that it is acceptable to simply state the highest and best use conclusion.
Appraisals typically require some analysis of highest and best use. Solely providing data is not
addressing highest and best use the data must be analyzed.
Another misconception is that it is unnecessary to discuss excess land or functional issues relating to highest and best use.
Sections of appraisal reports are related. The market analysis and other sections of the report
must support highest and best use conclusions as well as the valuation sections.
When the existing use is legal but nonconforming and is obviously the highest and best use, it is
appropriate to acknowledge in the report that highest and best use is the current use, which is
legal but nonconforming.

REPORTING HIGHEST AND BEST USE CONCLUSIONS












Copyright 2010 by the Appraisal Institute of Canada and the Appraisal Institute. All rights reserved.

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