How to Determine Highest and Best Use of Commercial Property in Ontario

Highest and best use is the use of a property that is legally permissible, physically possible, financially feasible and results in the highest value. It is the starting point for valuing land and for judging whether an existing building is still the right use of a site. In Ontario the first test, what is legally permissible, is where owners and buyers most often go wrong, because official plan designations, zoning, servicing and approvals can all limit what is realistic, however attractive the idea. This guide is for owners of land and older commercial buildings, and for buyers evaluating a site. It explains the four tests, how they apply in Ontario, how a residual land value analysis works, and how to avoid paying for potential that cannot be delivered. Numerical examples are hypothetical.

The Four Tests

1. Legally permissible: what the zoning by-law, official plan and other legal restrictions allow now, or could reasonably allow in the future.
2. Physically possible: what the site’s size, shape, topography, soil conditions, servicing and access can accommodate.
3. Financially feasible: which of the possible uses would produce a return above the cost of development or conversion.
4. Maximally productive: of the feasible uses, which one produces the highest value for the land.

The tests are applied in order. A use that is not permitted cannot be the highest and best use unless a change is reasonably probable, and a use that is permitted but not feasible is not either.

Legally Permissible in Ontario

Start with the municipality’s official plan, which sets long-term goals and policies, and the zoning by-law, which sets the rules for each parcel. See official plan vs zoning. Then check secondary plans, site-specific provisions, holding provisions and any conditions registered on title. Planning policies must be consistent with the Provincial Planning Statement, 2024, which is also a source of direction on matters such as employment lands and intensification. Where a change is needed, consider the available applications: an official plan amendment, a zoning by-law amendment or a minor variance, along with site plan control and consent for severance. Each takes time, involves public process and carries a risk of refusal or appeal to the Ontario Land Tribunal. An appraiser or buyer will typically assign a probability and a time cost to a use that depends on approvals, and will not treat it as certain.

Physically Possible

• Lot area, frontage, shape and topography.
• Soil and geotechnical conditions, groundwater and drainage.
• Servicing: water, sanitary and storm sewers, hydro, gas and telecom, and any capacity constraints.
• Road access, traffic capacity and any required road works.
• Natural heritage features, floodplains or conservation authority constraints that limit where building can occur.
• Easements, rights-of-way and neighbouring uses.

A permitted use may be impractical if servicing must be extended at great cost or if a large part of the site cannot be built on.

Financially Feasible

A use is feasible when the value of the finished property exceeds the total cost of producing it, including land, construction, professional fees, development charges, financing, approvals and a return for the risk taken. The tool for this is the residual land value analysis, which works backward from the value of the completed project to what a developer could afford to pay for the land.

The following is a hypothetical arithmetic illustration only, not market data.

Land is the leftover, so it is very sensitive to the other numbers. If construction and soft costs turn out 5% higher, at $14,700,000, the residual falls to $1,300,000, a decline of 35%. That leverage is why buyers of development land insist on evidence for costs, revenues and timelines, and why sellers who market a site on a best-case use without support are often disappointed. See how to buy development land in Ontario and how to sell commercial land in Ontario.

Maximally Productive

From the uses that pass the first three tests, the highest and best use is the one that yields the highest residual land value. For a developed property, appraisers consider highest and best use twice: as if the land were vacant, and as improved. If the value of the site as vacant land exceeds the value of the property as improved, the building may be an interim use that a buyer would demolish or redevelop, which affects both price and the buyer pool.

Environmental and Other Site Issues

Contamination can reduce or eliminate the feasibility of a use, particularly a change to a more sensitive use such as residential. Buyers commonly commission a Phase I environmental site assessment under CSA Z768, and Ontario’s O. Reg. 153/04 sets the Record of Site Condition framework for such changes. Costs and timing of remediation can determine whether an otherwise attractive use is feasible.

How Owners and Buyers Should Use It

• Owners: before marketing, find out what uses are permitted, what changes are realistic, and which buyers would pay most for each. Gather planning documents, servicing information, environmental reports and any pre-consultation feedback from the municipality.
• Buyers: build your own feasibility analysis, make offers conditional on approvals or due diligence that matches the risk, and consult a planner, engineer, lawyer and environmental consultant.

Common Mistakes

• Pricing a site on a use that is not permitted and has no realistic approval path.
• Ignoring servicing, access and environmental constraints.
• Using unsupported revenue or cost assumptions in a residual analysis.
• Forgetting the time and carrying cost of approvals.
• Treating official plan designation as if it were zoning permission.
• Failing to consider the property’s value as improved, not just as vacant.

Frequently Asked Questions

What is highest and best use?

The use of a property that is legally permissible, physically possible, financially feasible and results in the highest value.

Does highest and best use have to be the current use?

No. It may be a different use, and if so the existing building may be worth less than the land.

What is residual land value?

The amount a developer can afford to pay for land after subtracting all development costs and required profit from the value of the finished project.

Can I rely on a possible rezoning?

Only with caution. Buyers typically discount for the time, cost and risk of approvals, which are not guaranteed.

Who decides my property’s permitted uses?

The municipality, through its official plan and zoning by-law, subject to provincial policy and appeal rights.

Do I need a planner?

For any site where value depends on approvals, a qualified planner is a wise investment before you price or buy.

Conclusion

Highest and best use tests whether a proposed use is permitted, possible, feasible and the most productive, and in Ontario the planning framework is often the deciding factor. Owners and buyers who verify permissions, test feasibility with evidence and respect the time and risk of approvals avoid the biggest valuation errors. If you are considering selling or buying land or an underused commercial property in the GTA or Southern Ontario, a property-specific valuation and market strategy can help you understand your options before entering the market.

Sources and Further Reading

• Government of Ontario: A Citizen’s Guide to Land Use Planning: The Planning Act
• Government of Ontario: Provincial Planning Statement, 2024
• Government of Ontario: O. Reg. 153/04, Records of Site Condition
• Ontario Land Tribunal: Appeals process

The figures in the table are hypothetical illustrations, not market data or an appraisal. This article is general information and is not legal, planning or accounting advice. Consult qualified professionals about your specific property.