What does "highest and best use" refer to in real estate?

"Highest and best use" is a fundamental concept in real estate valuation and development that refers to the most profitable use of a property, taking into account various constraints. This use must satisfy three key criteria: it must be legally permissible, physically possible, and financially feasible.

A legally permissible use means that the intended use aligns with zoning laws and land use regulations. If a property is zoned for residential use, for example, a commercial development would not be considered its highest and best use.

Physical possibility refers to the real-world limitations of the property, such as its size, shape, topography, and access to infrastructure. A property located in an area prone to flooding may not be ideal for a residential development, despite high demand in the area.

Financial feasibility involves assessing whether the proposed use can generate enough income to justify the costs of development and ongoing operating expenses. Even if a development is legally permissible and physically possible, it must also be economically viable in order to be considered the highest and best use.

Understanding this concept is crucial for real estate professionals because it informs decision-making on property development, investments, and assessments of property values.