Highest and Best Use Analysis

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
HIGHEST AND BEST USE

ANALYSIS
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 2011
WHAT IS HIGHEST AND BEST USE (HABU)?
The Philippine Valuation Standards (PVS) defines

HIGHEST AND BEST USE (HABU), as…
“The most probable use of a property which is

physically possible, appropriately justified, legally
permissible, financially feasible, and results in the
highest value of the property being valued.”
WHAT IS HIGHEST AND BEST USE (HABU)?
• In real estate, the highest and best use of a specific parcel of land or
an improved property is not determined through subjective analysis
by a property appraiser; but rather, it is a use shaped by the
competitive forces within the market where the property is located.
• A highest and best use analysis indicates that the value of the
property is directly proportional to the use of the property. This lets a
potential purchaser, and therefore, the appraiser know where the
highest profit potential lies and with what use of the property.
• A use that is not legally permissible or physically possible cannot be

considered as HABU.
• If the condition (legal/physical) exist, appraiser/valuer must explain
why the use is reasonably probable.
• Once analysis establishes that one or more uses are reasonably
probable uses, they are tested for financial feasibility.
• The use that results in the highest value, in keeping with the other test,
is the Highest and best use.
• The concept of HABU is a FUNDAMENTAL AND INTEGRAL PART OF

MARKET VALUE estimates.
• HABU helps determine land value in land development feasibility
studies.
• In line with HABU, the principle of CONSISTENT USE, requires the land
and improvement be appraised on the basis of the same use.
Analysis of HIGHEST AND BEST USE use involves two considerations:
• The most likely and profitable use of the site "as if vacant" under the
requirements set forth above and,
• If a property is "already improved", it is the use that should be made
of the property to maximize value for non-income producing
properties or, maximize net operating income on a long term basis
for investment properties.
• As long as the value of the property "as improved" is greater than
the value of the site as "if vacant", the highest and best use is usually
the "improved" property.
• Once the value of the vacant land exceeds the value of the
improved property (including demolition costs), highest and best
use will usually dictate that improvements be demolished.
PRACTICAL RULES TO ESTABLISH HABU
• Consider the land as if vacant even if it is improved with new

building. Done in order to see if the vacant land can more
profitably be used for a different use than the current one. Also
calculate the HABU of the improved property. To know what
type of market data would best help estimate its value.
• Consider only those uses allowed under current zoning
ordinance and other similar constraint, such as, private
restrictions, or those uses for which it is necessary to get legal
approval. e.g. rezoning, a variance, a use permit an
environmental permit, and others.
PRACTICAL RULES TO ESTABLISH HABU
• Consider only uses that are physically practical. Uses that

require a larger site than the subject property or are lacking
needed utilities should be eliminated.
• Only uses that likely to be in demand and profitable at that
location should be considered. In this case, “profitable” refers to
the ability of the use to return enough benefits to justify the
capital invested in the land and buildings.
CONSIDERATIONS FOR ESTABLISHING HIGHEST AND BEST USE
• The way in which a property is used plays an essential role in its

value
• HABU in relation to income is that use which will generate the
highest net return to the property over a period of time.
• HABU must be legal, means not only criminal but permitted
under local administrative regulations, like zoning.
• The use must not be prohibited by enforceable restrictions
contained in the chain of title to the property.
• The use must be probable use and not an speculative one.
• There must be a demand for the use either in the present or in
the near future as determined by the market.
• There must be a demand for the use either in the present or in

the near future as determined by the market.
• Changes in the character of neighborhood may create
demands for different uses
• HABU may be the present use or an entirely different one. It may
be a combination of uses over a period of time.
• HABU must be the most profitable for the entire property-land,
building, and other improvements-because the market deals
with the total property unit, and land and building are not sold
separately.
• When estimating HABU, the appraiser should not combine under
common ownership parcels that are used independently for
different purposes.
• HABU generates the highest net return over a reasonable period

of time. A use that yields a very high immediate income, but
one of short duration, may not be as valuable as a use that
results in a lower, but more prolonged income stream.
• In a dynamic competitive economy prices frequently changed.
Appraiser/valuer must recognize when larger return in some use
other than the one to which the property is currently put.
• Rent controls imposed by government limit the owner’s control
over the use of a property. This restrict the appraiser for
appropriate evaluation of HABU.
• Under typical management, appraiser estimates income stream

under HABU, prospective investor will be interested what use the
property for its profitable and legal use and employ typical,
rather than extraordinary management.
• HABU is based on the economic concept of general
equilibrium: that is, in the long run economic resources will be
allocated – such that consumer preferences of goods and
services will maximize profits,- and raw materials for land, labor
and capital will be put to their most productive and profitable
use.
• HABU means that market value of property depends on
potential use rather than on current use alone. The principle is
most obvious in the case of vacant land, which commands
value based on potential use.
THE HABU vs. MARKET CONDITION
• Severe volatility/disequilibrium between supply and demand – the

HABU of a property may be a HOLDING for a future use.
• Where several potential HABU is identifiable, discuss the alternative
uses, e.g. anticipated income and expenses.
• Expected change in land use and zoning- immediate HABU of a
property may be an interim use.
HIGHEST AND BEST USE vs ACTUAL USE
• For assessors, HIGHEST AND BEST USE may not play a major role in the
appraisal of real property for taxation purposes.
• Sec. 198 (b) provides: Real property shall be classified for assessment
purposes on the basis of its actual use.
• However, as prescribed in the Philippine Valuation Standards, in the

appraisal for disposition or acquisition, the basis of valuation that
should be adopted by Assessors should be market value, which
requires the analysis of the HIGHEST AND BEST USE of the property
subject of appraisal.

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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

HIGHEST AND BEST USE

WHAT IS HIGHEST AND BEST USE (HABU)?

The Philippine Valuation Standards (PVS) defines

“The most probable use of a property which is

WHAT IS HIGHEST AND BEST USE (HABU)?

• A use that is not legally permissible or physically possible cannot be

• The concept of HABU is a FUNDAMENTAL AND INTEGRAL PART OF

Analysis of HIGHEST AND BEST USE use involves two considerations:

PRACTICAL RULES TO ESTABLISH HABU

• Consider the land as if vacant even if it is improved with new

PRACTICAL RULES TO ESTABLISH HABU

• Consider only uses that are physically practical. Uses that

CONSIDERATIONS FOR ESTABLISHING HIGHEST AND BEST USE

• The way in which a property is used plays an essential role in its

CONSIDERATIONS FOR ESTABLISHING HIGHEST AND BEST USE

• There must be a demand for the use either in the present or in

CONSIDERATIONS FOR ESTABLISHING HIGHEST AND BEST USE

• HABU generates the highest net return over a reasonable period

CONSIDERATIONS FOR ESTABLISHING HIGHEST AND BEST USE

• Under typical management, appraiser estimates income stream

THE HABU vs. MARKET CONDITION

• Severe volatility/disequilibrium between supply and demand – the

HIGHEST AND BEST USE vs ACTUAL USE

• However, as prescribed in the Philippine Valuation Standards, in the

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