The highest and best use principle originally comes from from American property law. Principles of real estate appraisal are also an area to which it relates. You can see below how this principle is closely related to the value of your home as well.
Also called HBU, the highest and best use is a use that is reasonably probable that produces the highest value for your property. It is essentially a label that identifies a piece of property that has the potential to have a higher value if it was utilized for a different purpose. This can be utilized particularly in real estate appraisals to assess a property at its highest possible value, thus maximizing its value and increasing the money you can make on it.
If you want to find out a property's highest and best use, you'll have to run it through a sequence of tests. Although it can vary, the use must generally meet tests to guarantee it is legally allowable, physically possible, financially feasible and maximally productive.
First, only uses that are or may possibly be allowed by law are eligible to be highest and best uses. If it is not allowed by government ordinances, zoning, restrictions in deeds and covenants, it is not a legally allowable use.
You can establish the second factor of a property's eligibility by the specific size, shape and topography of the property in question. It does not meet this test for highest and best use if the use would require something like a large piece of land, since it would not be physically possible. If the highest and best use of a property requires a flat piece of land and the land in question is rocky, as another example, it is not physically feasible to meet this criteria for highest and best use.
The third criteria requires the property's highest and best use to be financially feasible. In order for a highest and best use to be financially feasible, construction costs and a builder's gains must be justified by making enough revenue. There would be no way for it to meet the financial feasibility test if a proposed highest and best use would end up costing more on the property's upgrades than it could hope to earn in revenue.
Finally, the highest and best use must generate the highest possible gain for the builder. No matter what could be actually built on the property, a property's highest and best use may still be designated. In order not to raise any questions in regards to its highest and best use, a property has to pass these four specific criteria.
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