Whether it’s turning a vacant lot into a mixed-use development or repurposing an outdated office building into multifamily housing, understanding a property’s highest and best use is the key to smart, strategic investing.

Some deals collapse not because they’re impossible — but because someone tried to shortcut the fundamentals.

A recent deal our team reviewed was a prime example. The owner took a downtown commercial property and rezoned it for residential use. Sounds creative? Maybe. But in reality, it’s a violation of one of the oldest and most sacred rules in commercial real estate: Highest and Best Use.

Here’s What Went Wrong:

Instead of exploring the full spectrum of potentially higher-value commercial options — mixed-use retail, medical office, creative flex space, they defaulted to the “easy button” switching to residential zoning.

And what did they build?

Short-term rentals…

Now, let’s pause. In this market, STRs are getting hammered. Defaults are rising. Underwriters are more annoyed by these than cats are to laser pointers.

So when this deal came across the table — one that had already been appraised during a downward STR trend — it raised red flags. Not only is the property misaligned with the business district’s commercial potential, but the operator made a risky move without strong fundamentals, comps, or historical income.

In other words: underwriting kryptonite.

The Real Lesson? It’s Not Just About Zoning — It’s About Wisdom.

Rezoning isn’t always a bad thing. Converting a rundown hotel to multifamily or assisted living?  That’s still commercial but instead of unpredictable bookings and seasonal down times, you are more likely to get consistent cash flow which is better for bankers and investors.

What Underwriters Want to See:

This series of questions from one of my most trusted colleagues in this space says it best. When evaluating a deal like this, lenders will ask:

• Is the property vacant or cash flowing?

• If there’s cash flow, is it consistent (two years min for STRs)?

• Do the sponsors own other CRE? Any success with similar asset classes?

• What’s their credit, cash position, and net worth?

• What’s the MSA size and absorption trends?

• Is there a time crunch? A looming maturity? A forced sale?

In short: they’re not just funding your property — they’re underwriting you and your decision-making.

Zoning decisions, long-term strategies, and business models must serve a long-term vision. If they don’t, capital will simply move on to the next borrower who did their homework.

Let this deal be a masterclass — not a mistake repeated.

Found a property in its best and highest use and ready to get it funded?  Grab our 5 minute scorecard to see if your deal is funding ready.

DISCLAIMER: This is not real estate, legal, or financial advice. Please contact your preferred attorney or financial adviser for help specific to your needs or issue.