Stumped on what to use your vacant land for? Or are you looking to develop and build a commercial property, but you don’t know the right location? What you need to know first is the “highest and best use,” which is the most reasonable and profitable use of a vacant property. For example, let’s say you want to build a hotel and are looking at buying one of two properties in a major city: one next to a stadium, or one near the highway. Each will have a highest and best use, which will help determine where your hotel will be the most profitable.
So, how do you determine it? Ask these four questions:
1. Is It Physically Possible?
Following the hotel example, examine each piece of land and ask yourself if it’s physically possible to build a hotel and the required parking for it. You must consider the size, shape, topography, and accessibility, as well as the zoning of the land.
Let’s say the land by the highway is larger than the land next to the stadium, but the highway location is a long stretch of land, versus a perfect square. You’ll have to determine if the size is worth compromising on the shape of the land.
You also have to find out if it’s possible for a hotel to be hospitable in that location. Would the highway be too loud? Is there access to utilities? Can you build parking in the city by the stadium and regulate it so stadium-goers don’t use your parking lot? All of these things have to be considered.
You should also ask:
Can the site support a new build or improvement?
Is the drainage sufficient?
Is the property easily accessible?
Is it on a one-way street or cul-de-sac?
How much would it cost to build on the site?
Once you have all of that figured out and (preferably) written down, ask yourself the next question…
2. Can You Legally Build There?
While some zoning restrictions can be changed, others can’t be. For example, it will be unlikely for you to get zoning permission to build a hotel in federally protected land or in a city’s historic district without adhering to strict guidelines.
Determining whether your desired build is permitted in the area will require research into local building regulations and restrictions. Thankfully, if a local real estate agent is helping you acquire the land, they will be able to tell you all about zoning restrictions and regulations.
You can also apply to change zoning regulations. In these cases, an appraiser must consider the probability of the legal restriction being changed to allow the proposed development, which can be a lengthy process with a substantial amount of paperwork. This can deter some, though the change could be worth it in the end!
You should ask yourself:
Do you have a current survey of the property?
Are there any deed restrictions?
Are there zoning issues, such as minimum lot size or maximum building height or size?
What are the maintenance easements?
3. Is It Financially Feasible?
Will your future build bring in more money than you spent on building it in your chosen location?
To use our previous example, you should consider the cost of building a hotel in the city versus near the highway, and how much money you expect the hotel to make every year. To do this, conduct a market analysis and collect data from local competition to forecast your projected cash flow and residual value.
Also look at the city you’re looking to build in. Is it a major city that attracts a lot of tourism or do most people just pass through? If tourism is the draw, then a centrally-located hotel will be a safe option. If people use the city as a pit-stop, then the highway will likely draw in the most customers. On top of that, look at the city tax rate, building costs, and the availability of labor as well.
Once you have your answer, you’ll likely know exactly which property will have the highest and best use.
4. Residential Instead of Commercial?
If the highest and best use of your land isn’t commercial use, what else can you do with it? Consider residential buildings and development instead. Instead of commercial, you can consider building single-family detached residential homes, condos, or townhomes. Just remember that properties with five or more units are considered commercial property.
The development process is different between residential and commercial, but there is likely still a highest and best use for your land if you switch your focus. You can read all about the differences between commercial and residential development here.
Their differences go beyond the development process as well. While commercial properties usually take less time to develop and build, residential properties are easier to sell and there are more abundant marketing options available to real estate agents. Residential properties are also significantly easier to maintain, have a more affordable entry-cost, and lower investment risk.
So before you lock yourself into commercial development, be sure to consider residential highest and best use for the land as well.
If you need help finding land or determining the highest and best us, give us a call at 602-492-9242 or visit us online. We’ll help you determine exactly what will be the most profitable for you in the long run.