UP Standards

4.3.2.4. Zoning and Permits.A proposed highest and best use cannot be considered reasonably probable unless it is legally permissible.328 Zoning regulations, permits, and other land use restrictions are therefore of critical importance in analyzing highest and best use because they restrict the uses to which property can lawfully be devoted.329 Indeed, “regulatory restrictions may preclude an otherwise possible use even more decisively than the inherent physical characteristics of a property.”330 And “it is clear that just compensation must be determined in light of such regulatory restrictions.”331 As a result, any zoning or other use restrictions that are applied to the property and its proposed use on the date of valuation must be considered.332  Under federal law, a “use is not…

4.3.2.3. Economic Use.For just compensation purposes, market value must be based on a property’s highest and most profitable use—that is, an economic use.306 The inquiry must be “what is the property worth in the market . . . from its availability for valuable uses.”307 And valuable uses are those which “the prospect of demand for such use affects the market value while the property is privately held.”308 Because “[c]onsiderations that may not reasonably be held to affect market value are excluded[,]”309 noneconomic uses cannot be considered in determining market value for federal acquisitions.310 Federal courts have also rejected valuations that improperly fail to consider an economic use.311  “The federal concept of market value is intimately related to selling price on…

4.3.2.2. Market Demand.Any highest and best use requires a showing of market demand. As the Supreme Court observed, “most things…have a general demand which gives them a value transferable from one owner to another…[T]his transferable value has an external validity which makes it a fair measure” of just compensation.295 Accordingly, “it is generally accepted that there must be demonstrated an actual profitable use or a market demand for the prospective use.”296 To meet this standard, “objective evidence substantiating [the appraiser’s] market demand analysis” is required.297 “Value implies demand and a buyer”—and each must be proven, never assumed.298  Highest and best use cannot be predicated on demand created solely by the government project for which the property is acquired; as the…

4.3.2.1. All Possible Uses.As “economic demands normally result in an owner’s putting his land to the most advantageous use[,]”286 a property’s highest and best use is ordinarily its existing use on the date of value.287 Many courts describe this precept as a presumption in favor of a property’s existing use;288 others simply regard an existing use as “compelling evidence” of highest and best use when a different proposed use is asserted.289 Either rationale has the same result: to assert a highest and best use other than a property’s existing use, there must be evidence “that this [different] use is ‘reasonably probable’ and that the probability has a real market value.”290 Similarly, in litigation (such as condemnation proceedings), the party claiming…

4.3.2. Criteria for Analysis.As discussed in Section 1.5.2, in determining a property’s highest and best use, each potential use must be analyzed using four criteria: (1) physical possibility, (2) legal permissibility, (3) financial feasibility and (4) degree of profitability. Because most property is adaptable to several uses, the highest and best use is the physically possible, legally permissible, and financially feasible use that results in the highest value. 28 

4.3.1. Highest and Best Use Definition.  Definition of Highest and Best Use  The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.  A highest and best use must be reasonably probable. The determination of market value must take into account all considerations that might fairly be brought forward and reasonably be given substantial weight in bargaining between buyer and seller.277 But the Supreme Court has stated: “Elements affecting value that depend upon events or combinations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable, should be excluded from consideration.”278  A significant practical implication of this legal rule is…

4.3. Highest and Best Use.Market value must be determined by considering a property’s highest and best use, a term of art defined by the Supreme Court in 1934 as the “highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.”275 The Court went on to explain that a property’s highest and best use must be considered “not necessarily as the measure of value, but to the full extent that the prospect of demand for such use affects the market value while the property is privately held.”276 

4.2.6. Exceptions to Market Value Standard.These Standards direct appraisers to estimate a property’s market value—not the just compensation due for a government acquisition269— because appraisers do not have the authority to determine just compensation under the Fifth Amendment.270 Rarely, deviation from market value as the measure of just compensation may be required in federal acquisitions, but “only ‘when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public.’”271 Such situations are highly unusual,272 and moreover, inevitably require appropriate legal instruction.273 Whether departure from the established market value standard is appropriate in a given set of facts is a legal question beyond the scope of an appraiser to determine.274 

4.2.5. Special Rules.Certain types of federal acquisitions raise unique compensation questions that have led the courts to craft special valuation rules with limited applicability, which is discussed in Section 4.11. The general principle that just compensation does not include value created by the United States has specific implications in the appraisal of riparian lands involving the United States’ navigational servitude (Section 4.11.1) and of ranch lands involving federal grazing permits (Section 4.11.2). Similarly, the valuation of public roads, infrastructure, and facilities sometimes requires special treatment to ensure that compensation will reflect the owner’s loss, not the government’s gain (Section 4.11.3). 

4.2.4. Refinements of Market Value Standard. The Fifth Amendment requirement of just compensation “derives as much content from the basic equitable principles of fairness as it does from technical concepts of property law.”265 With this in mind, the Supreme Court has honed the basic foundation of market value “with certain refinements developed over the years in the interest of effectuating the constitutional guarantee” of just compensation.266 Valuations for federal acquisitions must comply with these refinements, which reflect the Supreme Court’s recognition that “strict adherence to the criterion of market value may involve . . . elements which, though they affect such value, must in fairness be eliminated.”267 These refinements reflect the practical applications of the principles of fairness underlying the…