PROPRIETARY FRAMEWORK
Highest & Best Use
The fourth valuation principle: identifying the use of a property that is legally permissible, physically possible, financially feasible, and maximally productive.
THE CONCEPT
What Is Highest and Best Use?
Highest and best use (HBU) is the use of a property that is legally permissible, physically possible, financially feasible, and maximally productive, resulting in the highest value. It is the foundational assumption underlying every market value opinion — a property is valued on the basis of its highest and best use, not necessarily its current use.
HBU analysis is applied both to land as though vacant and to a property as improved. The two can diverge — a site’s highest and best use may call for redevelopment even where the existing improvements remain in sound physical condition, and a valuer must recognise when that divergence is present.
THE FOUR TESTS
The Four Tests
A use qualifies as the highest and best use only once it passes all four tests, applied in sequence: legally permissible (zoning, title conditions, servitudes and other legal restrictions allow it), physically possible (the site’s size, shape, topography and access can accommodate it), financially feasible (the use generates a return that justifies the cost of achieving it), and maximally productive (among the feasible uses, it produces the highest residual value or return).
The tests are sequential and cumulative — a use that fails any one of the first three is eliminated before profitability is even considered. Only uses that clear all three earlier tests are compared against each other to identify the maximally productive outcome.
THE RECORDING
Watch the Recording
This session from the Valuation Discussion Hour walks through the highest and best use test with worked South African examples.
Download the session slides (PDF).
Why It Matters
Getting highest and best use wrong is one of the most common — and most consequential — errors in a valuation. Valuing improved land on its current use when a materially more valuable use is legally, physically and financially available understates value; assuming a speculative future use that fails the feasibility test overstates it.
A defensible valuation always states the highest and best use conclusion and the reasoning behind it — the four tests applied, the alternatives considered, and why the concluded use was selected over the others.