Highest and best use is the reasonably probable use of a property that is legally permissible, physically possible, financially feasible, and maximally productive. It is the use, among all lawful and buildable options, that produces the highest value. Every appraisal rests on this conclusion, because value is measured against a property's most profitable legal use.
What Are the Four Tests of Highest and Best Use?
The four tests of highest and best use are legal permissibility, physical possibility, financial feasibility, and maximum productivity, applied in that order. Per McKissock Learning and Elliott Davis, each test screens out uses, and only a use that passes all four can be the highest and best use. The four are applied as a sequential filter.
The order matters because it removes options efficiently. Zoning and deed restrictions eliminate illegal uses first, then site attributes such as size, shape, topography, and access eliminate what cannot be built. Only the survivors are tested for financial feasibility and then ranked.
Test | Question it answers |
Legally permissible | Does zoning, deed restriction, or regulation allow the use? |
Physically possible | Can the site's size, shape, soil, and access support the use? |
Financially feasible | Does the use produce a positive return, generally a net present value above zero? |
Maximally productive | Among feasible uses, which produces the highest value or risk-adjusted return? |
The analysis is run twice: once for the site as if vacant, and once for the property as improved. If the land value as vacant, less demolition cost, exceeds the value as improved, the highest and best use is redevelopment.
Why Highest and Best Use Matters
Highest and best use matters because it sets the frame for the entire valuation. An appraiser cannot value a property without first deciding what it should be used for, since a cornfield zoned for retail is worth its retail potential, not its farm income. The wrong use conclusion produces the wrong value, no matter how careful the later math.
The operator-side stake is redevelopment risk. When the land as vacant is worth more than the existing building generates, the improvements are functionally a teardown, and paying for them as income-producing real estate overpays. Per Altus Group, this is why the as-vacant analysis runs alongside the as-improved analysis on every assignment.
Example
An appraiser evaluates an aging retail building on a central-business-district parcel. As improved, the building nets $126,000 per year and, capitalized at a 9 percent rate, indicates a value near $1,400,000. As vacant, the land is worth $150,000, but redeveloping it as a mixed-use building would produce a far higher value once complete.
Scenario | Indicated value |
As improved, retail, NOI capitalized at 9% | ~$1,400,000 |
As vacant land, current use | $150,000 |
As vacant, redeveloped to mixed-use | Higher than as-improved once built |
If the redevelopment value, net of construction and demolition cost, exceeds $1,400,000, the highest and best use is redevelopment, and the existing building contributes no value beyond the land. If it does not, the highest and best use is continued retail operation. The four tests decide which path wins.
Variations and Edge Cases
Highest and best use has several special cases that change the conclusion, so an analyst should confirm which case applies before accepting a value. The table below lists the common variants.
Variant | Treatment |
Interim use | A temporary use, such as surface parking, that maximizes value until the ultimate use becomes feasible |
Excess land | Separable land with its own highest and best use, valued independently |
Legally nonconforming | An existing use that predates current zoning and could not be rebuilt as-is |
Consistent-use principle | Land and improvements must be valued under the same use, not one use for land and another for the building |
Speculative use | A future use not yet reasonably probable is excluded from the current conclusion |
The most common error is ignoring the as-vacant test and valuing an obsolete building at its income when the land alone is worth more.
Highest and Best Use vs Current Use
Highest and best use is often confused with current use, and the two are frequently different. Highest and best use is the most profitable legal and buildable use of a property. Current use is simply what the property is used for today, which may be outdated, underbuilt, or below its potential.
The practical result is a value gap. An older warehouse in a rezoned residential district has a current use of storage but a highest and best use of housing. The appraisal reflects the housing potential, not the storage income, which is why an underused site can appraise far above what its present operation would suggest.
Frequently Asked Questions
What are the four tests of highest and best use?The four tests are legally permissible, physically possible, financially feasible, and maximally productive, applied in that order. A use must pass all four to qualify as the highest and best use. The tests act as a sequential filter that removes options at each step.
What is the difference between highest and best use as vacant and as improved?As vacant analyzes the ideal use of the bare site, ignoring any existing building. As improved analyzes the best use of the property with its current structure in place. If the land as vacant, less demolition cost, is worth more than the property as improved, redevelopment is the highest and best use.
Can highest and best use be different from current use?Yes. Highest and best use is the most profitable legal and buildable use, while current use is what the property does today. They differ when a property is outdated or underbuilt, such as an old warehouse on land now zoned for housing.
Related Terms
Cost Approach
Broker Opinion of Value
Cap Rate
Development Spread
Due Diligence