When looking to buy real estate, investors look for what is feasible to achieve maximum use and legal permissibility for their money. To do this, they must undertake market analysis to determine the highest and best use of the property. The question is “How to determine the highest and best use of a property?”


When should you determine highest and best use of a property?

Highest and best use is a term used in accounting and finance. The determination of this value is vital for analysing and assessing the value of a property.

Determining the highest and best use of a property is a critical decision to make. Both accountants and investors must seriously consider it. It helps them know whether it’s essential for investors to invest in more improvements or sell the real estate to help them understand which option will provide the best financial future.

When do you know if a commercial property is the best one for you? 

There are several factors to consider: location, amenities, zoning, and more. Consider these questions to help you figure out which commercial properties will be the best for your needs:

What is the process for determining highest and best use?

The process for determining this value may differ for various reasons.

Different owners may have different plans for the property. Some people might want to rent it for a little while, while others may want to run their business from the property. The usage of the commercial real estate might differ according to what its owner intends for it. Consulting a specialised commercial real estate agent before deciding on a plan is advised.

When considering the potential of a property, some of the most important considerations are its long-term tenant value, short-term tenant value, marketability, development potential, zoning considerations and tax consequences. The higher the long-term tenant value or short-term tenant value for a property, the higher its marketability. The more desirable a property is for development purposes also increases its marketability. Zoning restrictions can either increase or decrease a property appeal and value.

What purpose should my commercial property serve? 

It is essential to find the one that will provide the most economic benefit without considering how it could be used differently. This process provides the most significant economic return without considering a financial return.

Before you spend any money on your commercial investment property, questions should be answered. Items that can be considered as a test of the highest and best use. They include the following items.

Is a re-development proposal physically possible?

This is usually the first test to get an overall view verifying that the potential user must be physically possible to undertake.

Do the soil type, physical conditions, topography and other characteristics plus shape & land size, weather conditions and other characteristics allow for development or re-development? What are the best possible uses, qualities and features of the site or property?

Can you afford to develop the property? Would the use be financially feasible?

Construction and improvement costs can escalate well beyond your initial estimate. Do you have the funds to afford the cost of construction for the land of improved design to achieve this?

You would need to undertake market analysis to generate cash flow projections. You would also need to analyse the commercial property to determine whether it is financially feasible. Only if the real estate meets these conditions would you be prepared to move on to the next stage.

Is it a legal commercial investment project?

The commercial investment market has seen a lot of changes over the past few years, and it is now becoming much more challenging to generate a return on your investments.

When buying a property or making plans to develop your vacant land, there are many things you must consider, including the legalities of the use of that land. For instance, does the zoning allow for it? Have you checked with the City Council or planning department about any necessary approvals? Does the property have the appropriate size, shape, topography, and physical features? Specifically, are you legally permitted to do it?

What are the risks of undertaking this construction project?

Construction projects are risky because there is a lot that can go wrong. There could be an accident, or completion may be delayed. The most challenging part of the construction is the design phase, which includes ensuring that the plans are accurate and up to date.

Designers need to make sure that they have all the information necessary to draw up plans for a project to avoid mistakes in their designs. This includes knowing what materials to use and how much it will cost for each material and understanding how long it will take for each step in the process.

Are there any other risks involved with this project? Have your feasibility studies showed that the building improvement will have a positive return on investment? Does your market research show that demand for this type of project is increasing in the area?

Will the value of commercial investment property be higher if you undertake the re-development?

There are many reasons why a property’s value may increase after a re-development.

Firstly, the new property is likely to be more appealing to buyers because they will see what is on offer and make comparisons.

Secondly, it might have been poorly maintained in the past and will look better with some work done.

Thirdly, if the area is in high demand, there may be more potential for rental income.

Have you spoken to any specialised commercial real estate agents in the area for a real estate appraisal? 

Have you discussed any recent sales or leases that have confirmed good demand for your proposed project? More specifically, would the project result be improved to the more significant market?

Would the intended new use of the property achieve maximum productivity?

In this stage, the property investor or developer is required to rate every proposed improvement on its ability to generate the highest net return. Then this is compared to the risk. How does the risk-return factor for a proposal compare to that of another? Is it worth taking the risk with the best possible return scenario?