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The purpose of an appraisal is usually to provide an opinion of value. There are different types of values including market value, use value, going-concern value, investment value, assessed value, and market rent.
Market value is defined as:
"The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and for self-interest, and assuming that neither is under undue duress.”
Use Value is the value of a specific property for a specific use. In estimating use value, the appraiser focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the highest and best use of the property.
A going-concern is an established or operating business with a undetermined future remaining life. Certain types of properties such as hotels, motels, restaurants, manufacturing enterprises and the like have physical real estate assets which are an integral part of an on-going business. The market value of such a property including both the tangible and intangible assets is commonly called its “going-concern” value. In a going-concern value, there is an assumption the business enterprise is expected to continue operating into the future. Liquidation value assumes that the enterprise will cease operations. Often a division of realty and non-realty components of value is required.
Investment value represents the value of a specific property to a particular investor. It is also known as the value of a property to a particular investor based on that person or entity's investment requirements. These specific requirements are frequently different from a market value.
Full Cash Value:
The full cash value is the value that is established by a local assessor for tax purposes. It is this value that can be protested and, if successful, the property owner will ultimately reduce property taxes. Assessed values are a fraction of Full Cash Values.
Market Rent Studies:
Market rent is the rental income that the property would command in the open market indicated by current rents that are either paid or ask for comparable space as of the date of the appraisal. Market rent is distinguished from contract rent which is the actual income specified in the lease. Market rent is sometimes referred to as “economic rent”.
Feasibility analysis is defined as an investment's ability to produce sufficient revenue to pay for all expenses and to provide a reasonable return and recapture of the investment. A project is considered economically feasible when the market value of the project when completed or after achieving a stabilized operating condition equals or exceeds all costs of production including entrepreneurial profit.
Analyzing the feasibility of a proposed use requires the appraiser to forecast future market conditions and the timing required to achieve either lease-up of vacant space or sales of the proposed units.
Market and Marketability Studies:
A marketability study requires an appraiser to investigate how a particular property can be sold or leased under current or anticipated market conditions. Included in this marketability study is a market analysis which provides a broad picture of the demand and supply conditions affecting a particular property type such as industrial, retail or office properties. In a market study, the appraiser focuses on the overall market, not a particular or specific property.
A marketability study is based on the analysis of four factors which affect a particular property – utility, scarcity, desire and effective purchasing power. Utility and scarcity are supply-side factors, while desire and effective purchasing power are demand-side factors.
The utility of a property is its usefulness in the market. For vacant land, this can involve a study of its locational attributes and linkages to other complimentary properties. Scarcity is the availability or lack of availability of a particular property type. Vacancy rates are a measuring stick of current scarcity. Desire is the wish of individuals to own or rent a particular type of property. Effective purchasing power is the ability of consumers to pay for the property, either for purchase or rent.
A marketability study should address such issues as:
- Who will the end uses be?
- What is the demand for the proposed property that is to be marketed?
- What is the supply of competitive properties?
- What is the estimated absorption rate for the proposed property?
- Are there alternative uses for the property that would provide a higher return for the same or less risk?
Many government agencies have the power of eminent domain. Eminent domain is the right of the government to acquire to acquire private property for public use by paying just compensation. Just compensation is normally defined as the market value of the property which is being acquired. Appraisers may be hired either by the condemning agency, that is the government agency, or the owner of the property which is to be acquired.
The Uniform Relocation Assistance and Real Property Acquisition Act of 1970 and the corresponding legislation adopted by all 50 states requires agencies to have an appraisal of the property made before the agency can make an offer to purchase private property.
Various states operate under either the federal rule for measures of just compensation or the state rule. Arizona operates under the state rule. Typically, the procedural steps in estimating just compensation are as follows:
1. Estimate the market value of the property to be acquired before the acquisition.
2. Subtract the value of the part to be acquired as part of the whole
3. Estimate the remainder value as part of the whole.
4. Subtract the estimated remainder value after the acquisition.
5. Add the damages to the remainder.
6. Subject special benefits, if any, to the remainder.
7. Estimate net damage to the remainder.
8. Add the value of the part taken.
9. Estimate total just compensation.
In valuing the part to be acquired, normally, the part to be acquired is valued as part of the larger parcel. However, court rulings sometimes conflict with this position. If the part to be acquired has an independent economic use and its market value as a separate entity is greater than its value as part of the whole, it has been held proper to value the part to be acquired as a separate tract and not as part of the whole.
Determination of what constitutes a larger parcel is, therefore, an important role of the appraiser. According to the Dictionary of Real Estate Appraisal,
“In condemnation, that tract or tracts of land which are under the beneficial control of a single individual or entity and have the same, or an integrated, highest and best use. Elements for consideration by the appraiser in making a determination in this regard are contiguity, or proximity, as it bears on the highest and best use of the property, unity of ownership, and unity of highest and best use.”
Litigation appraisals may involve condemnation procedures although they may also involve other types of legal disagreements. These include divorces, partnership dissolutions, and the like. Litigation work includes various activities or services such as serving as an expert witness, helping property owners to appeal tax assessment values, appraisal review, and other types of services for litigation support. Litigation support often includes advising an attorney on matters of Standards of Professional Practice, helping to frame questions for attorneys who are to interrogate other appraisal experts.
Appraisal consulting requires an appraiser to identify a problem to be solved and the scope of work necessary to solve the problem and correctly complete the research and analysis necessary to produce creditable results. Under the 2005 Uniform Standards of Professional Appraisal Practice, a consultation assignment requires an appraiser to develop, without advocacy, an analysis, recommendation, or opinion where at least one opinion of value is a component of the analysis leading to the assignment results. Under Standard 4 of the Uniform Standards of Professional Appraisal Practice, appraisal consulting does not apply to services provided by an appraiser acting under the standards of other professions or other activities. For example, when an appraiser who is also an investment consultant provides a service that does not require an opinion of value, that appraiser acting as an investment consultant is not performing an assignment addressed by this standard.