H&BU Before and After: 18 Notley Pl, Toronto ON
An Honest Look at Highest and Best Use (H&BU) and How Property Improvements Benefit the GTA
The G.T.A has been a hot spot for real estate investors and housing developers for many years, and even if housing sales eventually slow down, our market will continue to remain hot. This is because there is a growing trend of real estate investors A.K.A “Flippers”, that are maturing and becoming “Developers”. We all appreciate a good home improvement that takes an old, outdated property that gets a face lift; a nip, and a tuck. But what about the property that goes through a complete transformation with new structuring and redesign? We are not talking about from rags to riches here, this is about a higher and better use, a renovation that not only benefits the property owner, but also the entire neighborhood, city, and municipality.
According to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), the definition of Highest and Best Use (H&BU) is: The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. In simpler words; if a property is okay, but has the potential to be totally awesome then go ahead and build on it!
Of course, this is easier said than done. There are important steps that must be taken before simply tearing down and building up. Property assessors and appraisers analyze a property carefully before determining property value or its potential, and developers should also consider the same process before purchasing a property for development. Twelve important factors to consider before developing include:
Define the problem: What is the reasonable problem that could legally be corrected?
Capability: As a developer, do you have the ability to properly address and correct that problem and support the highest possible value for that property after completion?
Screen for alternative uses: You may have what seems to be a fantastic idea for the property, however, consider the various alternatives. For example, if there is a single-family dwelling sitting on a large parcel of land amongst several larger commercial properties, consider changing its use to a commercial property as opposed to building another single-family dwelling.
Consider the trends: Although your intention is to improve upon a property, consider the various trends that could affect your plan: economic, environmental, and social trends should be taken into consideration before you go ahead.
Market Analysis: This includes studying the neighborhood and considering the size, type, age, or possible theme of that area. Perhaps your plan was to build a super modern and high tech structure, while all the other 45 houses within close proximity remain Victorian in style. Revisit your blueprints.
Property Productivity and Use: After your project is complete, how will your property meet its maximum potential? Is it the right fit for that parcel of land?
Legal/Regulatory attributes: Does your plan for development meet all municipal bylaws? Have you considered all City regulations? Are you able to easily obtain a City building permit that meets all zoning laws?
Market Demand: If you build it, will they come? Perhaps your new structure will be spectacular, and well appreciated by all the neighbours, you must also consider if it will also attract new buyers at fair market value. Speak to a qualified realtor with experience in that particular market.
Long Term Analysis: How long do you anticipate the property will sit on the market? Also known as the absorption period. Considering the season and the overall activity in the real estate market, the most ideal property may sit for a considerably long period of time simply due to a slow-down. However, no need to worry; with extra exposure and patience, the right buyer will come. A qualified and experienced realtor will work you through that.
Probable Use: After carefully doing your homework and having considered all the legal and possible alternatives for the property, identify the most appropriate use to be developed.
Financial Analysis: The R.O.I. is one of the big factors as to why you would consider taking on such a big project to begin with. Make sure all costs of construction, legal, mortgage financing, insurance, plus additional and surprise carrying costs are taken into consideration before you even consider making an offer to purchase. If you are not financially prepared to follow through on your project, don’t even begin. Consider passing that opportunity to another developer with a similar vision. Do not scale your grand development plan down to a “fixer-upper-flip”, if the potential of highest and best use is there.
N.I.M.B.Y: If you are the first developer to appear in an existing, and aging neighborhood you can expect that your grandiose plan may not be well received by the immediate neighbours…initially. Give them time. Assuming your project meets all municipal bylaws and you have obtained the necessary permits, insurance, Tarion warranty, and financing then go for it! Many neighbours may get emotional about wanting their community to stay the same. Don’t let that deter you because the big picture is that neighbourhoods go through life cycles where property structures peak, and then decline in value down to obsolesce. It is important that the community is revitalized with newer and more efficient structures that will accommodate population and job growth. The Province of Ontario has policies in place for the purpose of development in existing markets. It is housing developers that are helping Toronto neighbourhoods by evolving and maximizing use and productivity.
Have you recently completed a residential development project? Tell us about it.