A Landowner’s Guide to Understanding the Concept of Highest and Best Use
This Article is written by Owners’ Counsel of America for general informational purposes only. It is intended to assist landowners in understanding the concept of Highest and Best Use when valuing and appraising property in an eminent domain proceeding. This Article is not to be viewed as providing legal advice or to be considered as a substitute for consulting with an OCA lawyer or other attorney experienced in eminent domain matters.
What Does the Concept of Highest and Best Use Mean?
Property in an eminent domain proceeding need not be valued based on its’ current use. Rather, it must be appraised in terms of its’ highest and best use. The typical (and somewhat formal) definition of highest and best use is as follows:
The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
Essentially, the concept of highest and best use entails selecting a use for the property that meets certain basic criteria and results in the highest value being developed. The concept of Highest and Best Use is one way the law seeks to ensure that the landowner receives full and fair just compensation for the taking. An analysis of Highest and Best Use often looks at the property as both improved and as vacant.
How Critical is the Issue of Highest and Best Use in Valuing Property for Condemnation Purposes?
The concept of Highest and Best Use can be of critical importance in a condemnation case and, in some instances, can be the primary reason for widely divergent opinions of the property’s value. By way of example, think of a situation where the appraiser for the government contends that the highest and best use of the property is for agricultural development, i.e. its’ current use. However, the landowner’s appraiser contends that the highest and best use is actually to subdivide the property into residential homesites and sell each homesite individually. Depending upon which highest and best use opinion is accepted, the valuation conclusion can vary remarkably.
What Factors are Considered in Determining the Highest and Best Use for Property?
As the definition above indicates, there are four test factors that must be considered by the appraiser in formulating the opinion of highest and best use. Below is a general description of the four factors:
Legal Permissibility: This factor primarily pertains to the zoning of the property or other land use restrictions that might dictate how the property can be used and/or operated. For instance, if the property is zoned for agricultural use only it would be inconsistent (or contrary to the legal permissibility test) to opine that the property’s highest and best use is for commercial development. See however the discussion of the Reasonable Probability Doctrine below.
Physically Possible: This factor requires the appraiser to take into consideration the size, shape, topography, accessibility, utilities and other physical features of the property when determining what uses are physically possible. Is the size of the site adequate to construct an anticipated improvement? Is there a drainage way or ravine across the property that might impact what can be built or where? Is a portion of the property in a designated floodplain area? These and many other physicality issues must be considered as part of any highest and best use analysis.
Financially Feasible: Assuming a use is legally permissible and physically possible, one must also determine whether it is financially or economically feasible.
Most Profitable or Maximally Productive Use: The test of maximum productivity is applied to the uses that have passed the first three tests. Of the financially feasible use or uses, the highest and best use is the one that produces the highest fair market value or highest rate of return.
Tell me more About the Reasonable Probability Doctrine.
Sometimes a particular use of property is not possible under its current zoning, but evidence shows that the property may be rezoned to allow for that use. In such circumstances, if the landowner can show that there is a “reasonable probability” that the property can be zoned to allow for the use, this fact may be considered in determining the property’s highest and best use and in ascertaining its value. What precise factors are necessary to prove that a “reasonable probability” exists may differ from jurisdiction to jurisdiction. However, most jurisdictions will consider evidence of recent rezonings of properties similar to the subject property as evidence of “reasonable probability.”
Over time the “reasonable probability” standard has been expanded beyond simply rezoning situations to consider whether the property could receive permits, licenses or other governmental approvals consistent with the highest and best use being considered.