Is the use physically possible?
The first test of highest and best use simply evaluates whether it is possible to use the land in a certain way. In this phase SKY ALPHABET ignores the zoning and economics of the proposal, and only considers whether or not the potential use is physically possible. That means the topography, soil type and conditions, lot size and shape, surface and subsurface water, and even weather patterns must make the development possible. In addition, SKY ALPHABET not only consider the proposed use of the site but also the characteristics of the optimum improvements for that use. This first test, however, is usually the easiest to pass.
Is the use legally permitted?
After eliminating any potential uses that are not physically possible, Sky Alphabet moves on to the second test. Whether a potential use is legally permissible involves a few different legal considerations. In this phase SKY ALPHABET checks that the proposed use is allowed by zoning regulations and check if building is in a residential area with restrictive covenants and the proposed improvements do not violate any rules. SKY ALPHABET check also the proposed use conforms to all applicable building codes and height limits. In addition, the improvements adhere to any restrictions imposed by easements on the property.
Determining whether a proposed use is legally permitted requires research into the local building regulations and restrictions. Gaining a comprehensive understanding of the applicable legal requirements can be time-consuming, but it is fairly easy for Sky Alphabet to determine whether or not a proposal violates any of these regulations. Concluding whether or not something is legally permissible is a straightforward process at SKY ALPHABET. Regulations, however, change over time. An area that was zoned for residential development can be changed to commercial development. Just because a proposed development is not legally permissible does not mean that it will always be that way. In these cases, SKY ALPHABET researchers consider the probability of the legal restriction being changed to allow the proposed development.
Would the use be financially feasible?
To address whether a proposed use is financially feasible, SKY ALPHABET conducts a market analysis and develops proforma cash flow estimates. SKY ALPHABET collects data in order to forecast construction and development expenses, operating expenses, rents, absorption rates, vacancy rates, discount rates, cap rates, and residual values. Once SKY ALPHABET'S gathered all of this information, it will estimate the proforma net operating income over your expected holding period. Employing discounted cash flow techniques, SKY ALPHABET can determine which projects meet your particular investment standards. Discounting cash flows by your cost of capital and computing the net present value, SKY ALPHABET considers a project financially feasible if the NPV is greater than 0. You can also order SKY ALPHABET to compute the internal rate of return and compare the property’s return to your acceptable hurdle rate for projects. Only the proposed property uses that meet these criteria for being financially feasible move to the next step of the analysis.
Would the use be maximally productive?
The prior steps eliminated proposed uses that were not physically possible, legally permissible, or financially feasible. In this final step SKY ALPHABET takes all of the proposed uses that meet these requirements and ranks them in order of value or rate of return. While ranking proposed uses, SKY ALPHABET researchers consider the risk associated with the proposed use. For example, one proposed use might generate a much higher internal rate of return than all of the other proposed uses. Yet, the reason for the high return may be related to the higher risk of that project. One of SKY ALPHABET ways to adjust for the risk associated with a proposed use is to apply a discount rate that is commensurate with the level of risk while computing the net present value. In the end, the proposed use with the highest internal rate of return and net present value is the maximally productive use.
