What is the highest and best use definition in appraisal?

Highest and best use is defined as the reasonably probable and legal use of a property that is physically possible, financially feasible, and results in the highest value. The Appraisal Institute and USPAP both recognise this four-criteria framework as the standard for property valuation.

What are the four criteria for determining highest and best use?

The four criteria are legal permissibility, physical possibility, financial feasibility, and maximum productivity. They are applied sequentially, and a use that fails any single criterion is eliminated from further analysis.

How does highest and best use apply to vacant land versus improved property?

For vacant land, HBU identifies the most productive use if the site were bare. For improved property, the analysis compares retaining, renovating, or demolishing the existing structure against the vacant land value, with demolition costs factored into the redevelopment scenario.

Can the highest and best use of a property change over time?

Yes. HBU is a dynamic determination that must be reassessed as zoning regulations, market conditions, and community preferences evolve. In the GTA, e-commerce growth and employment land policy changes have shifted the HBU of many suburban retail and older industrial properties within the past five years.

Is the highest-revenue use always the highest and best use?

No. Risk-adjusted returns determine HBU, not gross revenue. A use with lower revenue but straightforward permitting, strong market demand, and predictable cash flow can rank above a higher-revenue use that carries significant execution risk or community opposition. ***

May 30, 2026

What is highest and best use in real estate: 2026 guide

By Michael Law · Industrial Real Estate Broker, Lennard Commercial Realty

Discover what is highest and best use in real estate. Learn how this crucial concept impacts property value and investment decisions in 2026.

About Michael Law

Managing Partner and Industrial Real Estate Broker at Lennard Commercial Realty. Representing tenants and landlords across Toronto and the GTA for 15+ years.

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What is highest and best use in real estate: 2026 guide

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