CRE 101 · deweyluong.realtor
Highest and Best Use Explained: The Four Tests That Decide What a Georgia Commercial Property Should Be
Highest and best use is the use of a property that is legally permissible, physically possible, financially feasible, and maximally productive — in that order. It is the analysis an appraiser runs before valuing a Georgia commercial property, and the analysis a smart buyer or seller runs before trusting a price. On the made-up Gwinnett example on this page, a use that produces the highest paper return (multifamily, residual land value about $1,200,000) is eliminated at the first test because the zoning does not allow it. Of the uses that pass all four tests, a new retail strip leaves a residual land value of about $1,061,111 against about $938,462 for medical office — so retail is the highest and best use as if vacant. As improved, the existing building is worth $1,800,000, well above the land value minus demolition (about $1,001,111), so the right answer today is to keep the existing building. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498
The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial, appraisal, or legal advice.
The four tests, in order
- 1. Legally permissible: zoning, deed restrictions, building codes, and environmental rules. A use that is not allowed — and cannot realistically be made allowed — is out, no matter how profitable it looks on paper.
- 2. Physically possible: size, shape, topography, access, utilities, and parking. A use the site cannot physically hold is out, even if zoning allows it.
- 3. Financially feasible: the use must produce a return that justifies its cost. A legal, buildable project whose rent cannot cover its construction cost and a market profit is out.
- 4. Maximally productive: among the uses that pass the first three tests, the one that leaves the highest value — usually measured as residual land value — is the highest and best use.
Two questions, not one: as vacant and as improved
- Highest and best use as if vacant: pretend the land is empty. Which allowed use leaves the most land value? This sets what the land itself is worth and what a developer should build.
- Highest and best use as improved: compare the property as it stands against the land value minus the cost of demolishing what is there. If the existing building is worth more, you keep it — even if it is not the ideal use. Demolishing a building worth more than the cleared land destroys value.
- Why sellers get this wrong: pricing land on a use that fails test 1, or pricing a working building as if it were vacant land, both produce numbers no informed buyer will pay. See also BOV vs appraisal and development feasibility.
Worked example (made-up numbers, labeled as such)
A made-up 1.8-acre corner parcel in Gwinnett with an older 6,000-square-foot retail building. Four candidate uses are tested:
- Multifamily, 24 units: on paper the strongest return, residual land value about $1,200,000. But the zoning does not permit multifamily. It fails test 1 and is eliminated — the highest number in the spreadsheet is not a use at all.
- New retail strip, 9,000 SF: stabilized NOI $210,000 at a 6.75% cap rate gives a completed value of about $3,111,111. Construction, soft costs, and demolition total $2,050,000. Residual land value: about $1,061,111.
- Medical office, 10,000 SF: stabilized NOI $230,000 at a 6.50% cap rate gives a completed value of about $3,538,462. Costs total $2,600,000. Residual land value: about $938,462.
- Result as if vacant: retail wins by about $122,649 of residual value ($1,061,111 − $938,462), so retail is the maximally productive use.
- Result as improved: the existing building, renovated and leased, produces NOI of $126,000; at a 7.00% cap rate it is worth $1,800,000 as it stands. The land as vacant for retail is worth about $1,061,111, minus about $60,000 of demolition, or about $1,001,111 cleared. Because $1,800,000 is greater than $1,001,111, the highest and best use as improved is to keep the existing building today — and revisit the redevelopment case when rents, cap rates, or zoning change.
How buyers, sellers, and lenders each use this
- Buyers: never pay for a use you cannot legally build. Price the use that passes all four tests, and treat any rezoning-dependent price as a speculation, not a value.
- Sellers: if a better use genuinely passes all four tests, document it — zoning letter, site plan, and a feasibility sketch — because documented potential is what a buyer can underwrite and a lender can lend against.
- Lenders and appraisers: an appraisal must state and support a highest-and-best-use conclusion. A valuation built on a use that fails any test is a valuation a reviewer can reject.
- Timing matters: highest and best use is a conclusion at a date, not forever. A zoning change, a new road, or a cap-rate move can flip the answer — which is why the as-improved test above ends with “today.”
Cho nhà đầu tư người Việt
Highest and best use — cách dùng đất và tòa nhà mang lại giá trị cao nhất — phải qua bốn bài kiểm tra theo đúng thứ tự: hợp pháp (zoning có cho phép không), khả thi về vật lý (đất có chứa nổi không), khả thi về tài chính (thu nhập có xứng với chi phí xây không), và cuối cùng mới là sinh lời cao nhất trong số những cách dùng đã qua ba bài trước. Ví dụ giả định trên trang này: một khu đất góc 1,8 acre ở Gwinnett. Cách dùng cho con số cao nhất trên giấy — chung cư 24 căn, giá trị đất còn lại khoảng $1.200.000 — bị loại ngay ở bài kiểm tra đầu tiên vì zoning không cho phép. Trong các cách dùng hợp lệ, xây khu bán lẻ mới để lại giá trị đất khoảng $1.061.111, cao hơn văn phòng y tế khoảng $938.462, nên bán lẻ là cách dùng tốt nhất khi đất trống. Nhưng tòa nhà hiện tại đang có giá trị $1.800.000, cao hơn nhiều so với đất trống trừ chi phí phá dỡ (khoảng $1.001.111), nên quyết định đúng hôm nay là giữ tòa nhà hiện tại. Đừng bao giờ trả tiền cho một cách dùng mà pháp luật không cho phép, và đừng phá một tòa nhà đang có giá trị cao hơn mảnh đất trống. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.
Frequently asked questions
What are the four tests of highest and best use?
Legally permissible, physically possible, financially feasible, and maximally productive — applied in that order. A use must pass the first three before its return is even compared in the fourth.
Why is highest and best use done twice, as vacant and as improved?
Because the best use of empty land and the best decision for a property with a building on it can differ. In the worked example, retail is the best use as if vacant (residual land value about $1,061,111), but the existing building is worth $1,800,000 — more than the cleared-land value of about $1,001,111 — so keeping it is the highest and best use as improved today.
Can a use with the highest return still fail highest and best use?
Yes. In the worked example, multifamily shows the highest paper residual (about $1,200,000) but the zoning does not permit it, so it fails the first test and is eliminated. Return only counts among uses that are legal, buildable, and feasible.
What is residual land value?
The completed value of a project minus everything it costs to create it. In the worked example, the retail project is worth about $3,111,111 completed and costs $2,050,000 to build, leaving a residual land value of about $1,061,111 — the most a developer could pay for the land and still make the project work on those assumptions.
Highest and best use khác nhau thế nào giữa đất trống và đất đã có tòa nhà?
Với đất trống, câu hỏi là cách dùng hợp lệ nào để lại giá trị đất cao nhất. Với đất đã có tòa nhà, phải so giá trị tòa nhà hiện tại với giá trị đất trống trừ chi phí phá dỡ: nếu tòa nhà đáng giá hơn, giữ tòa nhà là quyết định đúng dù cách dùng đó chưa phải lý tưởng nhất.
Thinking about what your Georgia property should be — or what it is really worth under its best use? Call Túy “Dewey” Luong, CCIM at 678-707-2498 or see SERHANT. Atlanta.