Highest and Best Use Analysis

Highest and best use analysis is a critical issue in analyzing and valuing real estate. Determining highest and best use is essential prior to valuing real estate or determining the use that will maximize profits. Highest and best use analysis can assist an owner in maximizing return. The optimal use for a tract of land or an existing property may seem obvious. For example, it may be clear a 10 acre tract is ideally suited for developing an apartment complex. However, if it is possible to carve out a one acre tract for a retail strip center or drugstore, the total market value of the development may be greatly enhanced. Highest and best use analysis can be performed for acreage, site development, and for improved properties. Research and planning can substantially increase investment returns.

In a metropolitan area, highest and best use can be a combination of uses including single-family, multifamily, and commercial. Mixture of uses and timing of development are both critical factors. Commercial and multifamily land will yield a higher value, but artificially reserving property for commercial usage will result in an excessive holding period. Ultimately the highest and best use may be single-family.

Highest and best use for a single site may seem intuitive. For example: 1.) this is clearly an industrial site since it is in an industrial park or 2.) this is clearly a strip center site since it is on a major thoroughfare at the corner of a street which enters a subdivision. However, an appropriate highest and best use study will be detailed and precise. For the industrial property consider the following issues:

• Tilt wall versus metallic;
• Office warehouse versus warehouse versus flex;
• Percentage of office build out;
• Quality of office finish;
• Depth of truck apron;
• Eave height;
• Truck wells versus grade level versus dock height;
• Sprinkled;
• Parking ratio;
• Level of landscaping;
• Quality of finish for front of building;
• Type of elevation for front of building;
• Cranes;
• Stabilized yard.

For an existing building on two acres, the following should be addressed:

• Is the current use the highest and best use or should improvements be demolished (explain if used as improved; land and demolition; highest and best use is demolition).
• Should existing use be revised or upgraded

Consider the following examples:

• Old office building in central business district into lofts;
• Old big box into self storage;
• Apartments to condominiums;
• Upgrade class C apartments in affluent area to class A-/B+;
• Convert warehouse to flex;
• Cure deferred maintenance and renovate class C office building into class B office building.

Real estate investors often have little time to focus on reevaluating properties already in their portfolio. Searching for new acquisition opportunities, overseeing routine management and arranging financing often requires most of their time. Periodically performing a comprehensive review of the status and opportunities related to an existing property can uncover opportunities to generate a meaningful increase in market value for a modest investment. Research and analysis by seasoned real estate professionals can help identify highest and best use to maximize returns. The old bromide of measure twice and cut once fits highest and best use analysis.

O'Connor & Associates' staff complement of over 50 real estate professionals includes 12-15 senior staff member who can complete an expedited highest and best use analysis for your property. They can also handle other due diligence tasks. These professionals are supported by an experienced staff of over 100 who are accustomed to complex assignments. Our team has experience in all aspects of real estate including acquisitions, due diligence, ownership, appraisal, property tax appeals and dispositions. Reduce your risk and stress by utilizing O'Connor & Associates' breadth and depth of experience to evaluate real estate investments.

To obtain more information on O'Connor & Associates highest and best use analysis services, call or email Larry Brewster at 713-686-9955 or fill out our online form.