Highest and Best Use Analysis- By: Patrick Oconnor
Highest and best use analysis can assist an owner in maximizing return. Highest and best use analysis can be performed for acreage, site development, and for improved properties. Research and planning can substantially increase investment returns.
If in a metropolitan area, highest and best use can be a combination of uses including single-family, multifamily, and commercial. Mixture of uses and timing of development are both critical factors. Commercial and multifamily land will yield a higher value, but artificially calling a use commercial will result in an excessive holding period. Ultimately the highest and best use may still be single-family.
Highest and best use for a single site may seem intuitive. For example: 1.) this is clearly an industrial site since it is in an industrial park or 2.) this is clearly a strip center site since it is on a major thoroughfare at the corner of a street which enters a subdivision. However, an appropriate highest and best use study will be detailed and precise. For the industrial property consider the following issues:
- Tilt wall versus metallic;
- Office warehouse versus warehouse versus flex;
- Percentage of office build out;
- Quality of office finish;
- Depth of truck apron;
- Eave height;
- Truck wells versus grade level versus dock height;
- Parking ratio;
- Level of landscaping;
- Quality of finish for front of building;
- Type of elevation for front of building;
- Stabilized yard.
For an existing building on two acres, the following should be addressed:
- Is the current use the highest and best use or should improvements be demolished (explain if used as improved; land and demolition; highest and best use is demolition).
- Should existing use be revised or upgraded
Consider the following examples:
- Old office building in central business district into lofts;
- Old big box into self storage;
- Apartments to condominiums;
- Upgrade class C apartments in affluent area to class A-/B+;
- Convert warehouse to flex;
- Cure deferred maintenance and renovate class C office building into class B office building.
Research and analysis by seasoned real estate professionals can help identify highest and best use to maximize returns. The old bromide of measure twice and cut once fits highest and best use analysis.
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The appraisal division of O’Connor & Associates is a national provider of commercial real estate appraisal services including cost segregation studies, due diligence, real estate expert witness, insurance valuations, feasibility studies, private bond activity, financial modeling, gift tax valuations, highest and best use analyses, casualty loss valuations and HUD map market studies.