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.
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 Highest and Best Use helps accountants/investors make important decisions about a property’s future. It helps them know whether investing in more improvements or selling the property is better for the investors future.
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 may want to keep it as a rental, while others want to make it their place of business or sell it. The same property might have more than one highest and best use in the eyes of its owner, which is why they should consult professionals before deciding on a plan.
When determining the highest and best use for a property, the most popular considerations are the long-term tenant value, short-term tenant value, marketability, development potential, zoning considerations and tax consequences.
Property can be used for many different purposes. Still, 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 that should be answered and Items that can be considered as a test of the highest and best use. They include the following items.
Is it physically possible?
This is usually the first test to get an overall view that verifies that the potential use must be physically possible to undertake.
Is the soil type, physical conditions, topography and other characteristics plus shape & land size, weather conditions suitable to allow the development or redevelopment possible? What are the best possible uses, qualities and features of the site or property?
Can you afford it? Would the use be financially feasible?
Construction and improvement costs can escalate well beyond your initial estimate. Do you have they have the funds to afford the cost of construction for the land of improved design to achieve this?
To do this, you would need to undertake a market analysis to generate cash flow projections. Only if the commercial property is assessed as being financially feasible would prepare you to move to the next stage.
Is it legal?
Can you get development approval for the legal use of vacant land? In other words, does the vacant land have the zoning for it? Have you checked with the local council or your town planner or architect?
Does the property have the size shape topography and physically appropriately supported? Specifically, are you legally permitted do it?
What are the risks?
Are there any risks involved in doing it? Does your highest and best use analysis show that demand is increasing? Have your feasibility studies confirmed that the construction or building improvement results in the highest return for your investment?
Is the investment property an improvement?
To begin with, have you spoken to any specialised commercial real estate agents in the area for a real estate appraisal? In addition, have you discussed any recent sales or leases confirming good demand for your proposed project? Specifically, will the result indeed result as the property as improved to the more significant market?
Would the intended use achieve maximum productivity?
This stage requires the property investor or developer rate every proposal on its ability to generate the highest net return. This is then compared to the risk. Is it worth taking the risk with the best possible return scenario? How does the risk-return factor for the other proposals compare?
To summerise, are you getting the maximum return for your commercial investment property? In addition, does your feasibility analysis verify it is supported financially feasible and results in maximal productivity and the highest possible performance for your investment?
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