• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Value In Use

Status
Not open for further replies.

Abester

Senior Member
Joined
Jun 12, 2003
Professional Status
Certified General Appraiser
State
Florida
In Indiana, assessments are based on


“The market value-in-use of a property for its current use, as reflected by the utility received by the owner or by a similar user, from the property.”

and

“Use value: the value of a property assuming a specific use, which may or may not be the property’s highest and best use on the effective date of the appraisal.”


My question is related to functional and external obsolescence. If I am appraising a large industrial property, say 500,000 sf, that is superadequate for the local market and would likely reflect significant obsolescence in a “vale in exchange” scenario, is it appropriate to apply those same (or similar) factors in a value in use scenario, particularly when highest and best use is specifically not an issue as in the case of Indiana assessments?

In this example, the original owner is still using the property in its entirety and does not “suffer” from any of these obsolescence factors in its use, presumably fully reflecting “the utility received by the owner.”
 

Abester

Senior Member
Joined
Jun 12, 2003
Professional Status
Certified General Appraiser
State
Florida
Let me ask another way... I have read in some of the old posts that the general consensus was, in a value in use scenario, no functional or external obsolescence should be applied. Is that still the prevailing position? I wish Stephen Hawking was here to help me.
 
Joined
Jun 2, 2007
Professional Status
Certified General Appraiser
State
Florida
I remember a long time ago in a Big-Six accounting firm a few young appraisers were trying to explain to a manager that the value that had been pre-determined (and the client needed) was not the same as market value.

Frustrated, the manager (an accountant) asked, "Well, that's the value to the client so what are we going to call it if not Market Value?"

"Ummm... it's more of a Value in Use concept," was the meek answer.

"Wonderful, re-write the report and call it Value in Use."

I understand that once they learned how easy it was to get around those pesky appraisal ethical standards Value in Use became the go-to for a while.

In other words, you can do whatever you can make a case for. If you are going for a lowball number, load on the obsolescence and use big words.
 

Mark K

Elite Member
Joined
Jan 27, 2004
Professional Status
Certified Residential Appraiser
State
Indiana
I would not try to use the Assessor's method to credibly value property in this state.

For example, they use this 'value in use' to value ag land at $1,850/acre even if its located in an industrial park where all of the surrounding land is selling for $100K /acre. Its also used to artificially inflate or deflate values when the occasion arises.

Another example is junk land with a pole barn where someone is running a welding or mechanic shop. Land is actually worth maybe $10K/acre but since its being "used" for commercial purposes, the land is now commercial and assessed at $125K/acre.

I'll let others chime in on the other questions.
 

Abester

Senior Member
Joined
Jun 12, 2003
Professional Status
Certified General Appraiser
State
Florida
Agricultural land has a "value in use" in Indiana based on its productivity factor and not its market value even though farmers ARE paying much more than the ag rate for agriculturally used land. It is true - I have never wrapped my head around that one.

And, I appreciate your posts, but the question remains. In a value in use scenario, should functional or external obsolescence be applied... particularly if this is first generation space that is 100% used and was built to the owner's specifications?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I have never wrapped my head around that one.
Ag rates allow farms to survive.
If valued in exchange, My taxes might exceed $10,000 or roughly double its annual net income. As is annual rents for the soil type, x the rents so if local pasture is $30/year the land clue is $30 x 10= $300/acre. So if it applies to a huge percentage of agricultural property, passive owners are squewed welly bad. Results of higher taxes? A sudden glut of land on the market, gobbled up by the wealthy as passive landowners scramble to shed a sudden liability. Land prices crash, food prices explode, and farmers would be serfs on their own land. Wealthy would lobby for tax credits and tax relief, get it, make millions. It would be the world's largest transfer of wealth since Spain robbed the Aztecs and Incas.

Value in use relates to its future benefits, income or shelter. So, yes, it would be sans any defects in design or location.
 

Mark K

Elite Member
Joined
Jan 27, 2004
Professional Status
Certified Residential Appraiser
State
Indiana
Agricultural land has a "value in use" in Indiana based on its productivity factor and not its market value even though farmers ARE paying much more than the ag rate for agriculturally used land.



Ag land value in IN is determined by the state legislature and the value this year is $1,850 and scheduled to drop next year.

This number is adjusted by productivity factors and then the taxes are capped at 2% of this artificially low assessed value.

Very common to see 'ag' land that's assessed at $2,000/acre +/- sell for $30,000 - $100,000 per acre for development.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
100,000 per acre for development.
So land that can produce a modest crop (or land that actually isn't actively farmed nor is soil capable of big crops making 60 bu. soybeans at $8 (about 50% expenses) nets $240/acre. At $100,000 x 20% assessment x 0.05 = $1,000 per acre taxes? Seriously? With $3.60 break even on corn/bushel, and current market about $3.90, lemme see, $1,000 per acre, means an acre needs to produce 3,334 bushels to pay the taxes? Hmm. I've yet to see my first 300 bu. corn outside a test plot, so if you want to collapse a huge part of the states economy since more than farmers depend upon agriculture. Of course, land prices would collapse.

One of the reason so many farms went into foreclosure during the depression was high property taxes. Yeah, $50 a year didn't sound high to us today, but if you had no job nor income and the food you raised was being consumed by your family, $50 was a huge sum. You going to pay your tax by selling the milk cow? Then have nothing to eat nor milk for the babies? No. The tax did not get paid, and land was so worthless no one would buy it. I found 20 acres of my farm went back for taxes in a larger parcel and the whole thing was less than $100. The mortgage on another was owned by a bank that went under and I was perplexed by the lien being over $1,000,000. I finally realized the bank was foreclosed on, not the borrower but by defaulting they added to the assets and woes of the lost bank which apparently was holding tons of land they could not get rid of. You might see a repeat of that with market value for land. Or you could use the subterfuge of my state regarding bank accounts. The constitution requires all "property" be assessed and taxed. That meant if your bank account held $1000 in it on January 1, you owed personal property taxes on it. The legislator failed to get a ballot initiative to amend the constitution, so they ended up setting the assessment ratio to zero for cash, CDs,etc. and bank accounts. Legally, it could probably be challenged according to a lawyer friend of mine.

Even at 2% you are talking $37.50 an acre. With grazing land here running $40/acre or less, obviously farming is a costly hobby in Indiana.

Back to the OP. If the property is being used, then the functional issues that relate to that property use cannot be discounted. A day care might have a functional issue in a residential zone, but they are saying that has to be ignored, right?
 

Abester

Senior Member
Joined
Jun 12, 2003
Professional Status
Certified General Appraiser
State
Florida
I am trying to find what you think is the practical difference between value in use versus value in exchange, particularly as it relates to a 1st gen industrial facility that was specifically built for that use. It sounds like the consensus is that obsolescence should not be applied in this case for a value in use appraisal. If I am misinterpreting that, please let me know!
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
practical difference between value in use versus value in exchange

Any functionality related to the business is ignored. A factory built with trade fixtures to a certain business, say they build flat utility trailers. They have a paint room built into a red iron building with 10' walls. The paint room is specific to that use. Functional obsolescence to any but the biz. OTOH, a ten foot wall would likely be an issue for getting a larger forklift in, and gives little headroom space for winch cranes, etc. Both are issues, but the former isn't for value in use and would be included. The latter however, may be an impairment in use as well as any future buyer. Both would be FO "in market".
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks