Having tapped into a steady stream of gaming revenue over the past few decades, many Native American tribes now seek to expand or diversify their non-casino revenue sources. For instance, one Midwestern tribe recently transformed surplus acreage into a leasable computer data center; meanwhile, several Canadian First Nations have invested gaming revenues into profit-generating vineyards on reservation land.

As tribal leaders seek to stimulate economic growth through creative real estate development, they need advanced information with which to set the development agenda. Highest and best use (HBU) analyses provide this information by using standardized criteria to determine the maximally productive development option for a specific piece of land.

The HBU concept is one of the most important and least understood principles in real estate and commercial development. From the perspective of a real estate appraiser, the highest and best use of a property, more than anything else, is what determines its value.  From the perspective of the property owner—be it a corporate developer or a Native American tribe—the traditionally accepted definition of highest and best use is the reasonably probable and legal use of property that is 1) physically possible; 2) legally permissible; 3) financially feasible, and 4) maximally productive.

As more tribes pursue new or expanded developments on formerly vacant or underutilized land, the concept of an HBU study becomes progressively more critical. Expanding metropolitan areas, for instance, have increased the consumer base within formerly rural tribes’ market areas. Simultaneously, many tribes have acquired surplus revenues from recently developed gaming facilities and used them to acquire additional land and diversify through the development of non-casino functions. With increasingly valuable land and a stable revenue source, many tribes are ready to pursue new commercial ventures, but are uncertain of what will be most profitable.

A professional HBU analysis helps remove this uncertainty by providing property owners with a robust understanding of feasible real estate development opportunities. As an information-gathering and analytical process, an HBU stimulates conversation between stakeholders, thereby fostering integration between the local community and the tribe. This article explores the value of HBU analyses by examining a specific case study in the context of an HBU’s broader benefits. In doing so it reveals that HBUs foster the development of tangible development goals, stimulate synergy between distinct branches of tribal leadership and community stakeholders, and ultimately provide decision-makers with clarity in a market defined by imperfect knowledge.

 

THE PROCESS

One of the advantages of working through the HBU process is using a relatively standardized framework that allows for the identification of development scenarios that are profitable in the short term and strategy oriented in the long run.

The HBU process begins with a thorough evaluation of the development site, which considers such factors as location, access, ingress/egress, topography, zoning, adjacent land use, environmental constraints and infrastructure issues as well as considerations regarding the goals of the local development authorities; and most importantly the goals of the tribe.

The HBU process then proceeds to a thorough market reconnaissance to understand the distinct characteristics of the areas surrounding the site. These indicators include population, age and ethnicity, among others, followed by an analysis of the business atmosphere in the local area.

The next step is to define a series of development concepts for the property. In refining the list of potential options, it is necessary to take into account the tribe’s broad goals and objectives for the economic development of the tribe and more specifically for the property under consideration along with site and market considerations. The final phase of the study evaluates the various potential development options to establish an optimum development concept, driven by the ability to generate a profit and meet long-term goals.

 

APPLYING THE HBU

Native American tribes can find particular benefit from the HBU process to identify complementary and profitable uses for currently underutilized land adjacent to a gaming facility, or to identify independent and creative development options that generate new, non-casino revenue. In either situation the HBU process is valuable in that it can be tailored to, and simultaneously help to refine, the tribe’s specific goals. A prime example of an HBU analysis in which both the process and the final outcome proved to be valuable is a 2012 study for the Eastern Band of Cherokee Indians.

As market conditions and consumer preferences change, previous essential land uses can become obsolete. In 2012, the Eastern Band of Cherokee Indians (EBCI) came to this realization regarding a 20-acre surface parking lot (lower lot) adjacent to the existing Harrah’s Cherokee Casino & Hotel. After the tribe constructed a parking garage, the surface parking lot became redundant and a prime target for redevelopment.

The EBCI had considered partnering or engaging numerous retail developers, hotel companies, food and beverage companies or other entertainment-related entities to develop the lower lot parcel. But prior to entering into contractual relationships with any of these entities, EBCI wanted to evaluate what would be the highest and best use for this valuable piece of property, given the goals of maximizing profit and also diversifying revenue sources.

“The impetus behind the highest and best use study was our Chief’s desire to capitalize on the success of the casino to enrich our cultural tourism efforts, while generating additional business for the casino,” said Paula Wojtkowski, a senior member of the development team at Harrah’s Cherokee.

More recently, an Oklahoma tribe realized that the continuing urbanization of the outer-ring suburbs proximate to their gaming facility was providing increased consumer demand in their market. Furthermore, the neighboring municipality was eager to stimulate further growth in that portion of the city and invested in a new highway linking the city to tribal land. This tribe pursued an HBU in an effort to identify new revenue generating developments that would be profitable while also fostering integration with the city at large.

 

MORE THAN THE SUM OF ITS PARTS

Both tribes’ goals reveal that maximally productive can mean more than just maximally profitable. For instance, although, as EBCI’s Wojtkowski states, “incremental gaming revenue is always a goal,” the EBCI was also hoping to expand their appeal to the leisure traveler and enrich the tribe’s cultural tourism appeal. But applying long-term development goals and business strategies to the decision-making process around a particular property can be challenging. The process of the HBU analysis helps to transform broad goals into actionable development objectives.

HBU analyses require an iterative approach, and oftentimes the information acquired and analyzed during the process is as useful as the final outcome. “We found the collaborative process of working through the HBU with The Innovation Group most helpful,” Wojtkowski said.

The initial elimination phase, for instance, is useful in that it helps the tribal leadership focus in on and articulate specific goals for the property.  In the case of the EBCI, a range of potential development options were drafted that would maximize the financial benefits associated with developing the site, yet still take into consideration the interests of the local community. The tribe and its consultant team easily eliminated some of these options from consideration due to their lack of site suitability, incompatibility with casino resorts or other compelling reasons. Throughout the process, the entire team needed to thoroughly consider how long term economic and development goals could best be served by development on this site.

The EBCI was initially interested in the potential development of vertical gardens similar to the ornate botanical offering at Bellagio. Because it was broadly in line with themes important to the tribe such as sustainability and increasing cultural tourism, the concept was initially attractive. However, upon further analysis and through consultation with the tribe, the HBU revealed that the parcel’s adjacency to the gaming facility meant that a superior use more complementary to gaming would be a better solution.

In addition to providing immediate development opportunities, a HBU analysis also yields recommendations for a long-term development strategy. Current market factors may render a use unfeasible for the short term; but markets are ever-changing. In order to capitalize on current opportunities without hindering future investment, the HBU process can be used to identify uses that can be profitable in the short-term and do not hinder more lucrative development in the future.

 Through this iterative process of consideration and elimination, the EBCI was able to refine its goals for that site within the broader framework of its long-term and short-term economic development strategy.

 

SYNERGY & INTEGRATION

A critical component of an HBU analysis is to ensure that the development is consistent with broader city, county or regional development plans which can either hinder or enhance the development.  In other words, it helps to assure that the development is not operating in a vacuum. To achieve this, a HBU analyses should include interviews with county/municipal government and business leaders in order to assess the broader business climate and establish development trends from a qualitative standpoint. Specifically for tribal entities eager to expand and develop on non-tribal lands (or get approvals for land-into-trust), strong relationships with local government will become ever more critical as the tribe seeks to benefit from, and contribute to, the overall well-being of the greater community. The HBU process can be a tool to begin or continue conversations with local leaders, further strengthening relationships.

The aforementioned Oklahoma tribe, for instance, realized that it would behoove their economic development efforts to pursue revenue-generating opportunities that complemented the neighboring municipality’s goals. There was already a strong relationship between tribal and local leaders, which facilitated the exchange of information and provided all parties with a better understanding of big-picture goals. With an understanding of local government administration, the HBU analysis can facilitate collaboration between the two realms. Furthermore, an HBU analysis will formulate specific development options that can gain political and/or financial support from both communities.

The HBU process can also facilitate synergy within distinct branches of tribal leadership, as was the case with the EBCI. “The highest and best use study fostered additional synergies between the gaming business and the tribe’s economic developments efforts,” Wojtkowski said. “We are partnered in our efforts as never before, and are beginning to align all possible strategies.”

 

THE OUTCOME

The HBU process facilitates long-term economic tactics, such as stimulating the development of tangible goals and fostering inter-agency and intra-agency synergy, but it also provides concrete knowledge that sets the stage for imminent action. Real estate, more than any other market, is characterized by imperfect knowledge. The HBU analysis is one of the best ways for a tribe—or any commercial developer—to obtain reliable and actionable information, and ultimately, expand its revenue generating enterprises. 

 In the case of the EBCI, the tribe felt that a mixed-use facility including a hotel with conference space and a branded retail anchor—a development option formulated and supported by the HBU analysis—was the best fit for its needs. Based on the HBU, the tribe concluded: “Currently, we are able to offer limited rooms for the regional conference market-segment; however, additional rooms are required if we wish to truly maximize our potential. Having a branded retail anchor will also enable us to increase our day-trip traffic as well as lending legitimacy to any smaller retail offerings contained in the space.” Not only does this detailed development strategy—which is currently underway—help increase day-trip traffic in the short run, but it also lays the groundwork for expanded retail development in the future.

The ultimate decision regarding what to develop on a specific parcel of land will always fall to the tribe. A professional HBU analysis provides tribal leadership with an expert opinion, and all of the information and data that went into informing that opinion.

 

LOOKING FORWARD

 As tribes continue to expand gaming operations and seek to diversify their economic base, HBU analysis will become increasingly useful as a tool to provide a solid foundation for development decisions. Tribes all over the country are exploring innovative ways to diversify revenues, many of which involve property development both on and off reservation. Gaming tribes have an inherent advantage in that they have a land use that already attracts large volumes of visitors, which in turn offers the potential for additional non-gaming revenue streams and the means to strengthen visitation to the casino. Tribes may also be located close to population centers where growth will allow for land uses that previously may not have been feasible. As markets continue to change and cities continue to expand, opportunities for development will only become more prevalent. A highest and best use analysis can provide the structure to set development goals, develop relationships and make informed and profitable decisions that will benefit tribes for years to come.