Highest and Best Use Analysis: A Practical Guide for Property Owners

If you own commercial land or an underutilized property, one question matters more than any other:
What is the single best use of this site right now? Not the most interesting use, not the easiest use, and not what you personally want it to be. A
highest and best use analysis asks a different question:

What use produces the highest value while being legally allowed, physically possible, and financially feasible?

This guide walks you through how highest and best use analysis works, how developers think about it, and how you can use it to negotiate better when you decide whether to develop, partner, or sell.

What Is a Highest and Best Use Analysis?

A Highest and Best Use (HBU) Analysis is a structured evaluation that determines the most valuable use of a property based on four tests:

• Legally permissible
• Physically possible
• Financially feasible
• Maximally productive

Only a use that passes all four tests qualifies as the highest and best use of the property.

For a deeper dive into zoning and entitlement strategy, see our
guide on how developers decide what to build on a property.

1. Legally Permissible: What Are You Actually Allowed to Build?

This is where most landowners make costly mistakes. Zoning and land-use regulations define what you can legally build on your site today.

Key legal factors include:

• Permitted uses and conditional uses
• Building height and density limits
• Parking requirements and ratios
• Setbacks, buffers, and landscaping standards
• Overlay districts, design standards, or special restrictions

If a use is not allowed under current zoning, it is not your highest and best use in the present tense. Rezoning, variances, and conditional-use approvals can create
future highest and best use scenarios, but those require a separate entitlement strategy and risk analysis.

For background on zoning concepts, the
American Planning Association
maintains a helpful overview.

2. Physically Possible: What Can the Site Actually Support?

Even if zoning allows a use, the property itself might not be able to support it efficiently. A highest and best use analysis looks at the physical constraints and
opportunities of the site.

Typical physical considerations:

• Lot size, shape, and depth
• Topography and drainage patterns
• Floodplain, wetlands, and environmental constraints
• Access, frontage, and visibility from major corridors
• Availability and capacity of utilities (water, sewer, power, telecom)
• Soil conditions and geotechnical issues

A 20-acre parcel with full utilities and great access has a very different physical potential than 20 acres on a two-lane road with no sewer and difficult topography.

3. Financially Feasible: Does the Use Make Economic Sense?

A use may be legal and physically possible but still fail the financial test. This is where many “dream projects” die. Developers and investors will not pursue a concept
unless the numbers work on paper.

Financial feasibility analysis typically includes:

• Total development cost (land, hard costs, soft costs, financing)
• Projected rents or sale prices by use and product type
• Absorption rate and lease-up assumptions
• Operating expenses and property taxes
• Exit cap rate and potential sale value
• Equity returns, yield on cost, and IRR
• Time risk and capital risk

If a project cannot attract capital at acceptable returns, it is not financially feasible — and therefore it is not the highest and best use, no matter how compelling it
looks from the street.

4. Maximally Productive: Which Option Produces the Most Value?

Once you identify several legally permissible, physically possible, and financially feasible uses, highest and best use analysis compares them to see which creates the
maximum land value.

Example trade-offs might include:

• Retail pads vs. a multi-tenant strip center
• Self-storage vs. garden-style multifamily
• Single-tenant build-to-suit vs. multi-tenant center
• Ground lease to a credit tenant vs. fee-simple sale
• Redevelopment now vs. holding for a later market cycle

The highest and best use is the scenario that produces the greatest supported value for the land, not necessarily the one with the most buildings or the most activity.

Common Misconceptions About Highest and Best Use

“Highest and Best Use Means I Have to Develop Now”

Not always. Sometimes the most valuable move is to obtain entitlements and sell, structure a ground lease, or bring in a development partner instead of building on your own.

“Highest and Best Use Is Just Someone’s Opinion”

A professional highest and best use analysis is based on zoning law, physical constraints, market data, and financial modeling — not gut feel. Appraisers and consultants
apply well-established standards such as those from the
Appraisal Institute.

“I’ll Know It When I See It”

Most owners misjudge their property’s true potential because they don’t see the full capital stack, construction cost, or demand picture that developers see. Guessing
based on traffic alone can leave a lot of money on the table.

When Should You Order a Highest and Best Use Analysis?

Consider an HBU analysis when:

• You are preparing to sell commercial land or an income property
• You are considering a new development or redevelopment
• You have received unsolicited offers and don’t know how to respond
• You are holding underutilized land and suspect it could do more
• The city is growing toward your property and zoning may be changing
• You have owned the asset for years and want to reposition it

The earlier you understand your highest and best use, the more options you have to structure a sale, joint venture, or long-term plan around it.

What a Professional Highest and Best Use Analysis Should Deliver

A serious, decision-focused analysis should give you:

• Your best legal use today under current zoning
• Your best potential use after realistic entitlements or rezoning
• Estimated market value under each major scenario
• An understanding of developer demand and likely buyer profiles
• Guidance on whether to build, ground lease, joint venture, or sell

If a report doesn’t help you make decisions or negotiate more confidently, it isn’t doing its job. Highest and best use is ultimately a
strategy tool, not just a stack of paper.

To evaluate your property’s highest and best use, we’ll start with a few key details. Complete the form below and we’ll review your site from a developer’s perspective.

Frequently Asked Questions About Highest and Best Use Analysis

What is a highest and best use analysis?

It is a structured evaluation that determines the most valuable use of a property that is legally permissible, physically possible, financially feasible, and maximally
productive.

Do I have to develop my property to achieve highest and best use?

Not necessarily. In some cases, the best strategy is to entitle and sell, ground lease to a credit tenant, or partner with a developer instead of building on your own.

How long does a highest and best use analysis take?

The timeline depends on the complexity of the site, but many sites can be evaluated with a preliminary highest and best use analysis in a few weeks once data is available.

What information do you need from me to get started?

Basic property details such as address, parcel ID, acreage, current zoning, and your goals and timeline. The intake form above is designed to capture these details.