HIGHEST AND BEST USE

When considering the value of a building the valuer must firstly, determine the highest and best use of the land. The value of a building will only equal its replacement cost new if it is new and represents the highest and best use of the land. Highest and best use is that use of the land which generates the highest land value commensurate with the risk of development. Generally, that is also the highest improved value (land and building value) as non highest and best uses typically cause non adaptable building values to fall to demolition value only.

EXAMPLE

Suppose that on an industrial site there is an old cottage. There are only 3 possible alternative uses:

Using existing use rights (assuming this would be allowed by the controlling authority).

A use equivalent to a number already developed and successful in the locality.

A use based on a perceived market gap demand for motels within large industrial areas. However, none have yet been built in such a location.

See pioneer land use

See overcapitalization

See undercapitalization