The highest and best use of land refers to the most profitable and advantageous way a property can be used, considering the following factors: legal, physical and financial constraints (the national timber tax).
Identifying the most lucrative use of land is a necessity for real estate investors.
The concept of highest and best use is most frequently applied to non-financial assets.
As many financial assets do not have alternative uses, there may be circumstances where the HBU of financial assets needs to be considered.
By considering various uses and their potential returns, appraisers can accurately estimate the property’s market value.
According to the Dictionary of Real Estate Appraisal, it means the “reasonably profitable use that results in the highest value”.
It is important to mention that the HBU for an asset might be its current or existing use when it is being used optimally. For example, the lease of a bare land might be its HBU for the lessor.
The major consideration in HBU analysis:
Legal consideration: Does the best use comply with the zoning laws, building codes and other regulations? It is very pertinent to carry out feasibility studies of all legal implications that may affect the actualisation of the proposed project.
Physical consideration: Can the land’s physical attributes support the proposed use? E.g. the land size, the shape of the land, and the topography.
Maximum return: Does the proposed use offer the highest return on investment for stakeholders?
The target market: Is there a demand for such development from the target market?
Financial feasibility: The available equity and other sources of financing for the project must be critically looked at, as the cost of the project and the cost of acquiring external funds, etc.
Common challenges in appraising the highest and best use of land:
Data availability: The availability of both primary and secondary data on all potential uses. Details on zoning laws, for example, are very difficult to gather in Lagos State, as an instance, market demands; the property market in Lagos State lacks control, artificial market arises at every given opportunity. Other factors include demographic and infrastructure capabilities.
Conflicting stakeholders’ interests: Different stakeholders, different wants/desires. How do you address the conflicting interests of the stakeholders?
Property owners, developers, community members, local government and the state government may have different visions for the property. Balancing these perspectives can be very complex.
Forecasting market trends: The real estate market in Nigeria and globally can be very unpredictable. It is important to mention that the highest and best use today may differ from the optimal future use.
It is important for the appraiser to use robust techniques and tools to anticipate shifts in demand, economic conditions and changes in policies.
Environmental and sustainability considerations: Environmental and sustainability considerations are essentially significant. The environmental impact of a proposed project and the sustainability of the project often require input from experts and government agencies.
Benefits of highest and best use analysis to a real estate investor:
Risk mitigation: By carefully analysing alternative uses, you can identify potential risks and take steps to mitigate them in the course of the project. This helps protect your capital and reduces the chances of financial loss.
Informed decision-making: The highest and best use analysis provides you with the necessary tools to make informed decisions about where to allocate your money. It helps you weigh the potential benefits against the risks and choose investments that align with your financial goals and risk tolerance.
Performance tracking: Initial analyses of your investment opportunities allow you to track the performance of the most preferred investment and make adjustments as needed. This helps you stay on top of your portfolio and ensure that it’s meeting your expectations.
Opportunity Identification: The highest and best use analysis can help you identify potential investment opportunities that you might otherwise have missed. By staying informed about market trends and analysing different asset classes, you can discover opportunities with promising growth.
Maximise return on investment: By identifying the most efficient and profitable use of an asset, investor(s) can maximise their ROI.
Align development projects with market demand: The highest and best use analysis helps to understand current market trends and the target market preferences. It will enable the investor to tailor the project towards the existing needs/demands of the end users.
It is widely known that the highest and best use can be a basis for valuation.
The difference in the conventional valuation and HBU analysis practically lies in the approach and depth of the understanding required.
As earlier mentioned, HBU automatically helps in determining the current value of an asset.
The concept of highest and best use involves a series of thorough and well-considered steps with the skills and techniques of experts.
Physical consideration: The physical attribute of the asset is a major determinant of the actualisation of HBU. Take all the necessary information from the size, shape, topography and all existing structures on the asset if there are any.
Market analysis: Analyse the market condition of the geographical location or the asset supply, demand, recent sales, and recent letting/lease.
Legal analysis: Get data on zoning regulations, building codes and other restrictions. Conduct a thorough and detailed investigation of all the associated documents to avoid any form or encumbrances that may affect the project’s usage of the property in the future.
Feasibility and viability studies: This is the estimation of the costs and revenue stream of potential alternatives
Social and environmental consideration: It is pertinent to understand the customs, norms, gender, and demography of the people within the geographical zone of the asset and identify all environmental issues that could pose a threat to property use. E.g. flood zone.
Sustainability: Specialised knowledge is needed to determine the sustainability of use, the type of maintenance that will be required in the long run, how often it will be required, protection of the cost of use, etc.
Adebule, an estate surveyor and valuer, is the CEO of Bola Adebule and Company
