Background: Residence characteristics can affect health of residents. This paper reports the development of an instrument assessing these aspects of neighborhoods. Materials and Methods: Literature search and focus group discussions with residents were carried out and relevant items were extracted. Five experts reviewed and commented on the items. An observation instrument with 54 items was composed and completed by two independent observers in 20 randomly selected locations. Due to lack of acceptable reliability in some items, the checklist was revised. The new 22-items checklist in four categories (general characteristics, public green area characteristics, access to services and undesirable features) was completed by two independent trained observers in 28 randomly selected locations. Results: The items in the final checklist had kappa statistics ranging from 0.63 to 1, with an exception of the item assessing "presence of beggars, homeless or working/street children", with kappa as low as 0.27 due to variability of their presence in different times. Average Kappa statistics was 0.78 for general characteristics, 0.79 for public green area characteristics, 0.84 for access to services, and 0.54 for undesirable features. Conclusion: Neighborhood and health observation instrument seems to have good reliability in city of Tehran. It can probably be used in other large cities of Iran and similar cities elsewhere.