The fundamental concept in real property analysis and value is the concept of highest and best use.  Highest and best use has been described by appraisal authorities and the courts as the foundation in real property valuation. ¹ It is defined by the Appraisal Institute of Canada as:

The highest and best use of a property is an economic concept that measures the interaction of four criteria:

• the use must be physically possible;
• the use must be legally permissible;
• the use must be financially feasible; and
• the use must be maximally productive.

The highest and best use conclusion establishes the valuation foundation that market participants and appraisers/assessors require to identify and analyze comparable market data for valuation purposes.

An appraiser/assessor considers the highest and best use of a property as if vacant separately from the highest and best use as improved. This is because the highest and best use of a site as if vacant and available for development determines the value of the land, even if the property’s existing improvement does not represent the highest and best use of the site.

Many appraisers/assessors treat highest and best use somewhat superficially, determining the highest and best use of a property with little or no analytical support.  This is unfortunate as the highest and best use conclusion is the basis for the entire appraisal of a property. More specifically, the highest and best use conclusion provides the basis for the selection of market comparables (both vacant and improved) in the Direct Comparison Approach and the land valuation (land as if vacant and available for development) in the Cost Approach.

Once the appraiser/assessor has considered the highest and best use of the subject property if vacant, it is necessary to consider the improvements, if any, on the subject property to assess whether the contribution to value provided by the improvements creates highest and best use of the subject through the improved state.

Though often the highest and best use of a property is obvious, in many cases what would appear obvious on the surface may be hiding more than it reveals. It takes a complete analysis to address key in-depth questions, for example:

• Is the neighbourhood in a state of transition?
  
  
• What can be legally built on the property?
  
  
• What is the supply and demand for various uses?
  
  
• What is the capacity of available services?
  
  
• What alternatives are financially viable?
  
  
• If the highest and best use seems to be a hotel/motel development, what is best - a motel or a hotel?  a limited service hotel or a full service hotel?

¹ Shell Canada Ltd. v. British Columbia Transit, [2007] B.C.J. No. 191 (QL) (B.C.C.A.) at paragraphs 12 and 13;  The Appraisal of Real Estate, Second Canadian Edition, page 12.1
² Canadian Uniform Standards of Professional Appraisal Practice, 2007, page 51, clause 12.34.1.