Highest and Best Use Analysis
Highest and best use can be defined as the reasonably legal and probable use of an asset or an asset that has improved physically and financially, is adequately supported, and results in its maximum value.
The analysis of greatest and best use is very important when carrying out a valuation process as the maximum economic potential of real estate, usually a land, since it determines the most profitable use of a considered real estate asset (property, plant and equipment) whether the asset currently has a defined use or if it presents an improvement in its characteristics.
content structure
What is Highest and Best Use Analysis?
Highest and best use can be defined as the reasonably legal and probable use of an asset or real estate project that has improved physically and financially, is adequately supported, and results in its highest possible economic value.
The analysis of highest and best use is very important when carrying out a valuation process as the maximum economic potential of real estate, usually land, since it determines the most profitable use of a real estate asset considered. whether the asset currently has a defined use or if it presents an improvement in its characteristics.
What are the fundamental elements?
A fundamental element in the analysis of highest and best use is to investigate similar assets, which perform the same function and conforming characteristics.
Different scenarios will be analyzed, which comply with:
- Project physically possible.
- Legally allowed.
- Financially viable.
- Top performance projects.
Investigate the characteristics of similar properties in locations close to or comparable to the asset to be valued. It is necessary to investigate the similarities in terms of the characteristics of the assets within the surrounding market, which are under consideration and in accordance with the construction regulations indicated by the Construction measures allowed by area and type of construction – developments in the indicated area, existing services, demographic and social studies, etc.
Due to the above, It follows that for an analysis of greater and better use it is essential to understand the market forces that affect each and every one of the assets that make up the object of the appraisal.
What elements are considered to carry out the analysis?
of greater and better use?
In order to properly carry out the highest and best use analysis, four steps are followed:
Legally permissible.
It basically has to do with constructions and land, on whether their modifications may violate, for example, land use or certain restrictions that violate the laws established in that specific location.
physically possible.
They are those modifications that the assets may have in terms of sizes, capacities, dimensions and that are perfectly adaptable in a new location of space, size, shape, capacities, dimensions, topography, etc.
Financially feasible.
This refers to an asset not being excessively modified or improved to fulfill a function that does not require such adaptations, for example, if you have a vertical tank made of sanitary grade stainless steel, this would not serve to store treated water that feeds a purification system, given that this function can be fulfilled by a less expensive carbon steel tank, if a stainless steel tank is used for the purification function, it would not be financially profitable for a project of that asset since it would not offer the expected economic benefits. .
Maximum profitability.
For this point, a complete market analysis is required regarding the assets to be valued. In order for these assets to offer the maximum net return, the market must be analyzed to know what use should be given to an asset to obtain its value. maximum performance based on its structural and technical improvements, the same happens with a land or construction, it is essential to analyze the market to know what use of a property can obtain its highest and best use.
In the case of machinery, An analysis of greater and better use can be done by evaluating the conditions and improvements in which an asset could be used under specific operating and even maintenance conditions, for example, a positive displacement pump could have more capacity handling certain types of fluids. viscous under certain pressure and temperature conditions, raising the productivity of a manufacturing process and thus increasing the rate of return delivered by that production line is specific, it may be the case that it is necessary to use various valuation approaches to determine the highest and best use for an asset, be it land, property, machinery, vehicle, etc.
Environmental feasibility analysis
the studies where it is determined that an investment program or project complies with the applicable regulations on environmental matters;
ANEPSA can help you with the analysis of greater and better use, we are your best option for this type of study, contact us or leave us your information and obtain reliable 100% results.
