How do you identify and evaluate the highest and best use of a site?

These guidelines for evaluating HBU are helpful, but may fall short in highlighting the importance of how demand and liquidity drive the development process. Merchant developers are not likely to run a HBU analysis unless they already have an existing relationship with an end user for the site, and the necessary liquidity to execute the project thru completion. A helpful point to make could be that HBU is a beneficial starting point for target marketing a site for development. Step 4 addresses potential changes to the HBU and underscores the malleable nature of community development and planning.

When determining the highest and best use of a site one should consider existing zoning, proposed re-zoning, chances of approval of variance, neighborhood transition, and needs of the neighborhood. Regardless of existing zoning there is a good chance that a re-zoning or variance application would be approved if residential land is transitioning to commercial use as evidenced by multiple instances of adjacent new commercial development.

The principle of highest and best use, or optimum use, is fundamental to the concept of market value as the highest value may not always be reflected in the existing use. According to The Appraisal of Real Estate, Third Canadian Edition pg. 12.1, highest and best use is defined as follows: "The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value." An important concept is that the highest and best use for a property is market driven and as market conditions change, the highest and best use may change as well. Therefore, the current use of a property may not always reflect its optimum use.

The highest and best use of land as if vacant and a property as improved must meet four criteria. The optimum use must be legally permissible, physically possible, financially feasible, and maximally productive. These criteria are considered in sequence. For example, a use may be financially feasible, but it fails the test of highest and best use if it is not legally permitted or if it is not physically possible on the site.

In addition to the steps listed above the developer should determine whether there is potential "pushback" from any of the stakeholders.

A financial feasibility involves the preparation of development pro formas to estimate potential developers profit and developers profit margins associated with various development concept schemes.  This would include an analysis of potential revenues, absorption rates, cost of demolition of existing improvements, hard construction costs including parking, soft constructions costs, land dedications, off site and on site servicing requirements, property taxes, holding costs, inflation rates, and risks.

A feasibility analysis should include discussions with representatives from the local municipality/district to identify various approved uses under the existing zoning designation.  This will involve a review of planning constraints, including: zoning bylaws, other development regulations, potential impact of public review process, the City’s current visioning process, and official development plan amendment potential.

An analysis of alternatives should include consideration of rezoning potential, and the cost, timing, and risks associated with achieving any alternative scenarios.  This may include an analysis of the economic and municipal financial benefits which would result from the proposed development, including job implications during construction, and other types of economic benefits flowing from the development of the lands.