Market Value in Use vs. Market Value As Is

[jb2010]

What's the difference?

 

[Artemis Fowl]

More knowledgeable persons will answer but basically:

Value in Use is the worth of a property as it is currently being used.
Example: A tract of land being used as a farm may be worth $2000/acre.

Market value and Highest and Best Use analysis considers possible uses other than current use.
Same tract as above subdivided for residential use may be worth $40,000/acre.

 

[Kali the Boston Terrier]

For instance I just valued a restaurant. Its highest and best use was to raze the building and re-develop the land. That value reflected in the razing the building would be "as is", although some may "as its highest best use of".

However because of restrictions (newly placed conservation easement) the property could not be re-developed, thus eliminating the value of the re-development potential. Because it could not be developed and the restaurant would generate the highest return of the site, we had to value what the value of the restaurant would be, independent of the re-development potential. So its value in use would be as a restaurant.

The details of the appraisal are much more complicated, but hopefully that helps.

 

[Vernon Martin]

Value in use is not necessarily equal to market value. It's the value of a particular property to its user, particularly when it has been designed or adapted to the specific requirements of the user.

I usually see situations where the value in use is higher than market value due to unique features that would not contribute to market value. Older or specialized industrial properties are an example; the building may be configured to a particular industrial process that will probably not be relevant to the building's next owner.

 

[Lucien Hamernik]

As I understand it, some special criteria must be considered before completing an appraisal under the value-in-use definition:
1. The property is fulfilling an economic need.
2. The property has a remaining economic life.
3. There is responsible ownership.
4. A diversion of the property to an alternate use would not be economically feasible.
5. Consideration has been given to the property's functional utility.
6. The net earnings of the business enterprise are sufficient to show a fair return on the tangible asset's value.

It is the value a specific property has to a specific person or specific firm as opposed to the value to persons or the market in general. And it is not intended to represent the amount the real property might exchange for on the open market.

 

[Thomas N. Morgan]

Vernon & Hanernik gave you very good answers. I suspect your question may have arisen due the improper (incorrect) usage of these two terms in a recent Continuing Education Class.

 

[Lost Cause]

Vernon and Lucien give good advice.

I would further note that while there's "Market Value" and "Value In Use", that "market value in use" is pretty much a meaningless term.

Also, as has been pointed out before, Value In Use is not intended to represent an amount real property might exchange for on the open market. This means that Value In Use is of little use to any lender considering a mortgage loan.

 

[Terrel L. Shields]

Value in Use isn't "Market Value". It can be investment value, or on-going value. The term "Market Value" and "Value in Use" are pretty much mutually exclusive. Although the Value in Use can be construed as "Market Value" in properties so unique there is no real "market" for them - churches, public buildings, etc.

The best example I can give is an industrial building specificially designed to say, can evaporated milk - like Pet Milk or Carnation in a can. It would have specialized equipment and be designed to have a facility to receive the milk (reciever room), a test lab, cookers to cook the milk down and pasturize it, then to homogenize it, then to the canning room where it is canned, boxed, and labeled with 40 different brands or so [even if people argue that Pet Milk is better than IGA Milk - same stuff] and stored until shipped off.
Since canned milk is used less and less every year, such plants are obsolete. So what do you do? The plant has a value as is in use...and the assessor typically would appraise it that way. It has a value in use so long as the plant operates. But if the plant closes and the equipment is removed, its specialized construction makes the canning plant difficult to adapt to other uses. Therefore, its "market value" is quite low in comparision to its value in use.
On the other hand, a large free span building of say 40,000 SF might serve as a plastic bag plant, a storage facility, a small welding shop or electronic repair facility. Its market value is much more likely to be in unity with its "value in use" because it needs no modifications to be used for a wide variety of commercial / industrial applications.

 

[Michigan CG]

....However because of restrictions (newly placed conservation easement)....

Would not that therefore change the Highest and Best Use from razing the building to keeping it the same because of the easement, thus the Legally Permissible use?

The restaurant is legally permissible (or grandfathered in) but with the new easement, razing the building and redeveloping would have restrictions; therefore the Highest and Best Use is for the restaurant.....?

 

[Kali the Boston Terrier]

Well of course...it was an over simplified explanation for a member of the general public. The intent of the question was not for a long discussion on HBU and appraisal theory, but the difference between two defintions.