Property Rights

Highest and Best Use: The Foundation on Which Fair Market Value is Built.

William G. Blake, 4/25/2018.

In determining the amount of just compensation an owner is to be paid when property rights are acquired for public use, a fair market value of the property is the fundamental focus of our search.  It provides the measure of compensation for the property as well as a basis for calculating the loss of value of the remainder of the property.

Highest and best use is the foundation on which the determination of fair market value is built, but it is sometimes given little thought.  This is a mistake.  It is like any foundation.  It must be solid or everything built on it is doomed to failure.  Similarly, everything that does not rest on the foundation will be in peril.

The landowner, appraiser and condemnation lawyer must always carefully consider highest and best use early in the process and must keep their efforts consistent with that use.  Indeed, highest and best use is a guiding principle in the valuation process.

While fair market value looks at the probable result of an arm’s length transaction in the open market, highest and best use looks at the use on which reasonably informed buyers and sellers would base their negotiations.  It is the reasonably probable use of property that results in the highest value.  While it is not always correct that buyers and sellers will look at the transaction in this manner, it is logical that such will be the case most of the time.  Deviations will occur in any market, but that is just one reason the analysis does not stop after looking at one comparable sale.

Highest and best use is often the existing use of the property, and this is particularly true when dealing with improved property.  However, the analyst must look at four areas:  Physically possible, legally permissible, financially feasible, and maximally productive uses.  Neither the lawyer representing a property owner in condemnation nor the appraiser preparing an opinion the value of that property can simply conclude that its highest and best use will be something other than what it is currently used for.  A change in use may not be legally permissible or financially feasible.

A common mistake in this process is to seek damages that are inconsistent with the highest and best use.  A crop irrigation well on a cornfield that has the highest and best use for retail development may not add any value to the land.  The owner of an old amusement park site cannot expect to collect compensation based on a highest and best use for current commercial development and also collect for the loss of an old swimming pool that cannot be integrated into that development.  On the other hand, if the highest and best use of a property is currently for agricultural production followed by commercial development in the near future, improvements that enhance the current agricultural production may add to the value of the land.

The lesson for those involved in eminent domain proceedings is to always pay close attention to the highest and best use.  You must build a solid foundation.  Look carefully at the property being appraised.  Study each of the comparable sales and ask whether they are consistent with the highest and best use of the property with which you are dealing.