What does the highest and best use rule refer to?

The highest and best use rule refers to the most legally allowable and feasible use for a property that will yield the highest value. This principle is essential in real estate appraisal and investment analysis as it helps determine the optimal use of a property based on zoning laws, market demand, and physical limitations.

In essence, the highest and best use combines both legality and practicality; it must be a use that is permitted under current regulations (such as zoning laws), as well as one that is financially viable and logical given the circumstances surrounding the property. It emphasizes that simply aiming for the maximum profit or the most expensive development option does not necessarily align with the property’s highest and best use.

This principle guides property owners and investors in making informed decisions that not only comply with legal restrictions but also align with the market's economic potential.