A Fork in the Road in Condemnation Cases: The Highest and Best Use Question

For many landowners, having property taken through eminent domain can be a jarring experience. Faced with the prospect of losing all or a portion of their property, landowners are often eager to answer the all-important question: how much money will I get for my property?

Answering this question usually requires the landowner to hire a licensed real estate appraiser and an experienced eminent domain attorney. And one of the first issues that the appraiser and attorney will want to determine is the property’s “highest and best use.”

“Highest and best use” is a phrase that has a specific meaning in the appraisal and eminent domain world. Specifically, according to the universally accepted standard set forth in The Appraisal of Real Estate, the highest and best use of the property must be:

1. Physically Possible
2. Legally Permissible
3. Financially Feasible
4. Maximally Productive

Addressing each element will allow the appraiser to determine what appraisers call the “highest and best use” of the property.

So how does an appraiser determine a property’s highest and best use? He or she will need to evaluate the four categories outlined above for the specific property, look at the range of uses that qualify under each of those categories, and then come to a conclusion about which use will result in the highest market value.

An appraiser’s highest and best use conclusion will control virtually everything that follows in an appraisal assignment.

Determining a property’s highest and best use is critical to evaluating its value. An appraiser’s highest and best use conclusion will control virtually everything that follows in an appraisal assignment. It will impact the selection of comparable sales, adjustments to those sales, how certain attributes of the property are valued, and potential damages when only part of the property is taken. Ultimately, the highest and best use determination will have a direct impact on the appraiser’s conclusion of value for the property.

For example, if a condemnor’s appraiser concludes that the highest and best use of a particular property is for industrial uses, that appraiser will likely need to compare it to other industrial properties to determine the property’s value. By contrast, if the landowner’s appraiser concludes that same property’s highest and best use is for mixed-use development, that appraiser will likely need to compare it to other mixed-use properties.

Where the highest and best use of the property is in dispute, the resulting difference in value can be substantial. At that point, the factfinder (either a jury or a commission) will have to decide which conclusion of highest and best use is supported by the facts and evidence. In Colorado, Civil Jury Instruction 36:6 guides the factfinder in that decision-making process. That instruction tells the factfinder that they “should consider the most advantageous use or uses to which the property might reasonably and lawfully be put in the future” so long as that use is not speculative.

Importantly, this means that the highest and best use of a particular property may not be the current use of that property. So while a property may have been used for industrial purposes at the time of condemnation, that industrial use may not be the “highest and best use” if the property could instead be devoted to mixed or commercial uses.

The highest and best use determination is truly a fork in the road for many condemnation cases. And getting that question right will often directly impact how much money landowners receive for the taking of their property.