North Carolina Eminent Domain: What is Highest and Best Use and Why Does it Matter?

When, through the power of eminent domain, the government takes private land for public uses, it must pay fair and just compensation for the land it takes. The payment of “just compensation” is a statutory and constitutional requirement. In order to determine what compensation is “just,” the land in question must be appraised and valued. The concept of “highest and best use” (“HBU”) is one of many tools used by real estate appraisers when they render a valuation opinion. HBU is a direct tool for appraisers in the sense that HBU directly factors into the calculation of fair market value. But, HBU is also an indirect tool for appraisers since HBU helps an appraiser identify comparable properties which are another input data for estimating fair market value.

For landowners facing a taking of their land, an HBU analysis maximizes the chances that the appraiser will render the highest possible value for the land. This matters for landowners since, if their land is taken, they want to obtain the highest price possible from the government as “just compensation.” HBU allows for a higher estimated fair market value because HBU allows consideration of all possible uses for the land and not merely the condition or use of the land as applied by the landowner at the time of the taking.

Here in North Carolina, HBU has been recognized as a valid component of “just compensation” since at least the 1950s. A prominent and often cited case is Kirkman v. State Highway Commission, 126 SE 2d 107 (NC Supreme Court 1962). The case involved the proper valuation of land taken by the North Carolina Department of Transportation to close off a landowner’s access ramp to a state highway. The landowner hired a real estate appraiser who testified that his opinion was that the property lost $30-$35,000 in value when the access to the highway was taken. During his testimony, the appraiser stated that, in arriving at his valuations, he had taken into consideration the fact that the property was less valuable for motel and restaurant purposes after access had been lost to the new highway. At that time and under those conditions, the operation of a motel and restaurant was deemed the highest and best use of the property.

On appeal, the North Carolina Supreme Court approved use of HBU as part of the appraiser’s valuation. Specifically, the court stated (citations omitted):

“The highest and most profitable use for which property is adaptable is one of the factors properly considered in arriving at its market value. Dr. Joyner’s testimony, to which objection is made, was that in arriving at the valuation of the property after the taking he had considered the obvious fact that it was not as valuable motel and restaurant property as it had been before. In other words, its highest and best use had been damaged.”

How is HBU Determined?

To be properly used to help establish fair market value in an eminent domain case, HBU must be reasonable for the property and the local market. A 100-story skyscraper is NOT the HBU in a rural area, small town or even a moderately-large city. In Kirkman, the HBU was a motel/restaurant, not a skyscraper. HBU is about what an objectively reasonable potential buyer would be able to do with the land in question. That, in turn, is about what is a reasonable possible and legal use of the land. More specifically, HBU is about:

• What is physically possible to build on the land — for example, land that is mostly sandy subsoil will not support a tall building
• Is there access to utilities, drainage, sewers, and the like?
• Can the property be easily accessed from main roads?
• Is the land on a flood plain?
• What is legally allowed — for example, how is the land zoned and what does the zoning classification permit?
• What is financially possible? — for example, even if you could physically build and were legally allowed to build a 100-story skyscraper, would it make sense financially? Could you even get financing?
• What is financially reasonable given area market conditions? — HBU cannot be any use that is overpriced for given market conditions; could you sell a 100-story skyscraper in a small town for anything like what it cost to build it?

It is to be emphasized that HBU is NOT the standard for what is legally considered “just compensation.” The legal standard is fair market value. HBU is a component — part of — of a fair market value appraisal.

Contact Experienced Mecklenburg County Land Use/Eminent Domain Attorneys Today

For more information, and to schedule a confidential consultation with experienced and dedicated eminent domain and condemnation attorneys in Charlotte, contact Arnold & Smith, PLLC. Use our “Contact” page or give us a call at 704-370-2828. We handle land use, zoning and condemnation legal matters in federal court, in Mecklenburg County and elsewhere in North Carolina. We have offices in Charlotte, Lake Norman, and Union County.