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September 23, 2019
Appraisers and other land professionals use "highest and best use" as a guiding principal when valuing agricultural land use. This is affected by the local land market but also by the income generated by the farm or ranch land. It is important to have knowledge of not only the characteristics of the land, but the land sales market, future plans for adjacent land, and what types of crops and income can be generated from the land.
One well known example of the importance of knowing what the highest and best use is for a specific tract of land comes when the property is in an area of commercial or residential development. As urban areas expand, what was once farmland which was valued for the crops it could raise, becomes more valuable when it is in line to be taken out of production agriculture and developed into a residential neighborhoods or commercial/retail buildings. If a person was not aware of the future development potential of a property, they could sell at a lower value and potentially leave thousands of dollars per acre on the table.
Highest and best use also comes into play when valuing agricultural land that has no development potential. It is based on the income that can be generated by the farm which is determined by the type of crops that can be raised. Land that can raise higher value crops or have more productive soils that can produce higher crop yields generate more income which is capitalized into the value of the land. For example, ag land in the Columbia Basin of Washington produces 90 different crops with many of them being higher value than commodity grains. The higher crop incomes and cash rental rates capitalize into higher land values. The highest and best use for Columbia Basin land is from raising higher value crops compared to pasture or commodity grains.
If one is interested in selling or buying land, the highest and best use value is important to know. Most agriculture land in the US is fully utilized in production agriculture and is valued according to productivity and income generated. But if the land has a higher and better use, knowledge of such is important in valuing the land for sale or when buying. Seeking expert help in these cases is critical in making good decisions.
Senior Vice President - Real Estate Operations
|Category: Agricultural Real Estate News|