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  • Writer's pictureJesse Ledbetter

The Problem with HBU

Highest and Best Use analysis is a test that appraisers use in order to determine how to value real estate. However, there is an underlying problem with its fundamental assumptions, that if taken to their logical end, would be destructive.

The Appraisal Institute defines Higher and Best Use as:

The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.

In the way in which an appraiser is trained to perform the analysis, one sits down with the subject property and applies the four tests. If at any point the property use fails, then the HBU fails. For example:

  1. If a property is zoned residential, and you are testing commercial usage, this fails the test of "Legal Permissibility" (unless you are to appraise the property under the hypothetical condition that a variance were able to be received).

  2. If a property is 5,000 square feet of high-density residential, then it is highly unlikely that a sky scrapper is "Physically Possible" even though it might be legally permissible.

  3. If a 50-acre property is properly zoned as to be able to be subdivided, but the soil won't perc and the nearest sewer line is 50 miles away, then its likely that a subdivision would not be financially feasible, even though it is legal and possible.

  4. Finally, if one is left with two or more options that are legal, possible, financially feasible, then we are to compare those and select the highest value-producing option as the "Highest and Best Use."

The analysis is straight forward, easy to understand, able to be replicated, able to produce helpful results... and would kill us all if we used it, and only it.

Highest and Best Use analysis will never result in a park, stream, undeveloped wild space, uncluttered ocean view. Its analysis is cold and inhuman, one might say anti-human. It will always pave paradise and put up a parking lot.

I propose that there must be a higher analysis performed and that this higher analysis is assumed in (though assuming rarely produces good results for U or Me) step 1: Legal Permissibility. HBU assumes that the local authority will act in the best interest of humanity and hold back the inhuman development that the rest of HBU would produce otherwise. HBU assumes that the local authority will say to heavy industry, "Not here," and to nuclear waste "Not anywhere." However, I've appraised next to nuclear cleanup sites, and know the limitations and short-sightedness of local authorities.

So, with the assumption being at best a weak assurance that development will be for mankind, and not mankind the fuel of development, it is up to humans to say, "No." When developers want to build 2,100 homes and 3,000,000 sf of commercial space on the south rim of the Grand Canyon, people have to say, "No." When the oil and gas industry want to put a gas well in your backyard and pay politicians to keep the chemicals they'll be injecting into your drinking water a secret, you have to say, "No."

Are these developments likely the highest and best use... according to the textbook definition, sure. However, if you believe that your grandchildren being able to drink water and see the natural beauty of the Grand Canyon is the highest and best use of those sites, then probably not.

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