Nuts and Bolts of Various Types of Value in Real Estate Valuation and Business Valuation

1. Variations in Real Property Values
By Jon M. Ripans, J.D., M.B.A. Finance, Esq.
Certified General Real Property Appraiser1
To a man who has a hammer, every problem looks like a nail - Unknown Aphorist.
When we think of real estate valuation, we normally ask, "what is a property worth?"
The answer is usually the current Market Value of the Fee Simple Estate, but sometimes
what is really needed is some other type of value.
Market Value
The most common value in real property appraisal is the current Market Value of the fee
simple estate. Generally speaking, this is the all-cash price, in U.S. dollars, that a typical
buyer would pay and a typical seller would accept, each being adequately informed and
typically motivated, with no heightened need or urgency to buy or sell. The actual
definition of Market Value in The Dictionary of Real Estate Appraisal is as follows:
The major focus of most real property appraisal assignments. Both
economic and legal definitions of market value have been developed and
refined.
1. The most widely accepted components of market value are incorporated
in the following definition: The most probable price that the specified
property interest should sell for in a competitive market after a reasonable
exposure time, as of a specified date, in cash, or in terms equivalent to
cash, under all conditions requisite to a fair sale, with the buyer and seller
each acting prudently, knowledgeably, for self-interest, and assuming that
neither is under duress. 2
Sometimes, though, current market value of the fee simple estate is not the type of
value being sought because of client wishes (assignment/factual circumstances), legal
requirements or both.
1
The author has appraised $1.5 billion of commercial real estate in a wide variety of contexts, and has
served as an expert witness, court-appointed property tax arbitrator, and property tax advocate. He appears
to be the only person in the state of Georgia who is a Certified General Real Property Appraiser, Attorney
at Law and Registered Neutral (Arbitration and General Mediation).
As for long titles, Jon is the current Secretary of the Property Tax Subcommittee of the Real Property Law
Section of the State Bar of Georgia.
Jon M. Ripans is available to serve as a mediator, arbitrator, special master, receiver, or other
judicial adjunct, either by agreement of the parties or court appointment. Jon is approved to serve
as a Property Tax Hearing Officer, a special form of neutral recently created by statute.
2
Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
Copyright 2011 by Jon M. Ripans Page 1 of 4

2. Variations in Value
Temporal Variations in Value
Values may vary in time, from retrospective value to current value to prospective value,
depending upon the relevant date of value for a particular appraisal assignment. Lending
assignments on buildings that are stabilized, i.e., "leased up," usually have a date of value
that is similar to the date of the report. Assignments that have other dates of value
include buildings that not leased up (prospective date of stabilization), estate taxes
(retrospective date of death), gift taxes (date of gift), eminent domain (date of taking),
property taxes/ad valorem taxation (date of assessment, which is January 1 in Georgia).
Property Right Variations - Fee Simple versus Leased Fee and Leasehold
The type of value can also vary according to the property rights at issue. The Fee Simple
Estate is the most complete bundle of rights a property owner can enjoy and is defined as
"[a]bsolute ownership unencumbered by any other interest or estate, subject only to the
limitations imposed by the governmental powers of taxation, eminent domain, police
power, and escheat."3 If the property is leased, however, the landlord has a Leased Fee
Interest. The value of the Leased Fee Interest would essentially equal the fair market
value of the Fee Simple Estate if the subject property is leased at market rates. If the
subject property is leased for less than market rates, then the Leased Fee Interest is worth
less than the Fee Simple Estate and tenant's Leasehold Interest4 has positive value.
Conversely, if the subject is leased for more than market rates, then the tenant who is
contractually obligated to pay such rents has a leasehold estate with negative value (and
the landlord has a Leased Fee Estate that is more valuable than the Fee Simple Estate
because the landlord is "ahead of the game" in terms of contract rent versus typical
market rent).
Other Types of Value
Then, there are values that differ not just temporally or according to the bundle of rights
at issue, but involve different computations altogether or different levels of motivation.
Insurable Value and Going Concern Value require different computations than
Market Value, while Investment Value, Disposition Value and Liquidation Value involve
atypical motivations.
The Insurable Value of a property usually is the replacement (as opposed to
reproduction) cost of the vertical improvements, which do not include 1) the value of the
land, 2) most improvements to the land such as landscaping/irrigation, drives, signage
and lighting, and 3) horizontal infrastructure such as water/sewer pipes and conduits for
3
Id.
4
Leasehold Interest is defined as "[t]he tenant’s possessory interest created by a lease. See also negative
leasehold; positive leasehold." Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed.
(Chicago: Appraisal Institute, 2010).
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3. natural gas, electricity and telecommunications. A bank that is underwriting a loan may
want an opinion of Insurable Value for purposes of loan covenants.
Going Concern Value is a form of business value and involves not only the real
property, but also personal property such as furniture, fixtures and equipment (FF&E), as
well as intangible values. Going Concern Value is relevant in a variety of situations in
which real property and personal property are strongly interwoven with business value.
One example would be a convenience store with gas, which requires gasoline dispensing
equipment, underground tanks, tank monitoring systems, canopies, and, in most
jurisdictions, fire suppression equipment. Going Concern Value is important when the
value being sought is not a direct ownership interest in the real property but the value of
stock or equity position in the business entity (LLC, partnership, joint venture,
corporation, etc.) that owns (or operates) the property. Going Concern Value is
frequently encountered in connection with estate and gift taxes, business acquisitions,
buy-ins, and buy-outs.
As for atypical motivations, Investment Value is "[t]he value of a property interest
to a particular investor or class of investors based on the investor’s specific requirements.
Investment value may be different from market value because it depends on a set of
investment criteria that are not necessarily typical of the market."
Disposition Value and Liquidation Value differ from Market Value in that
Disposition Value involves a seller who "is under compulsion to sell" and Liquidation
Value involves a seller who "is under extreme compulsion to sell."
Values That Are Specified by Law
Finally, there are values that are imposed by law. A useful contrast can be found by
comparing "true market value" under Georgia foreclosure law and "market value" for
purposes of ad valorem taxation in Georgia.
In Georgia, foreclosure confirmations require a showing that the value realized or
credit bid under power of sale was the "true market value."5 "True market value" means
"fair market value."6 But, when it comes to property taxes, Georgia is considered to be
an "existing use state."
Implicit in the appraisal definition of market value is the concept that the subject
property is being put to its highest and best use, but "market value" for purposes of ad
valorem taxation in Georgia is based upon the "existing use," which may not match the
highest and best use for a particular property. Think of a single-family residential house
on a major connector road with high traffic volume that could be converted to some sort
5
See O.C.G.A. Section 44-14-161.
6
See Wilson v. Prudential Indus. Properties, LLC, 276 Ga. App. 180, 181, 622 S.E.2d 890 (2005); Aaron v.
Life Ins. Co. of Georgia, 138 Ga. App. 286, 226 S.E. 2d 96 (1976). See also Gutherie v. Ford Equipment
Leasing Co., 206 Ga. App. 258, 260(1) (424 S.E.2d 889) (1992) (citing IRS Treasury Regulation 20.2031-
1(b) estate tax definition of “fair market value” in foreclosure confirmation.)
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4. of office or commercial use, or, torn down and either rebuilt with an office or retail
structure or assembled into a larger tract.
Highest and Best Use is defined as:
The reasonably probable and legal use of vacant land or an improved
property that is physically possible, appropriately supported, financially
feasible, and that results in the highest value. The four criteria the highest
and best use must meet are legal permissibility, physical possibility,
financial feasibility, and maximum productivity. Alternatively, the
probable use of land or improved property—specific with respect to the
user and timing of the use—that is adequately supported and results in the
highest present value.
Highest and Best Use, however, is not used in determining value for property taxes under
O.C.G.A. Section 48-5-2(3)(B), which provides:
(B) The tax assessor shall consider the following criteria in determining the fair
market value of real property:
(i) Existing zoning of property;
(ii) Existing use of property, including any restrictions or limitations
on the use of property resulting from state or federal law or rules or
regulations adopted pursuant to the authority of state or federal law;
(iii) Existing covenants or restrictions in deed dedicating the property
to a particular use;
(iv) Foreclosure sales, bank sales, other financial institution owned
sales, or distressed sales, or any combination thereof, of comparable real
property;
(v) Decreased value of the property based on limitations and
restrictions resulting from the property being in a conservation easement;
and
(vi) Any other existing factors deemed pertinent in arriving at fair
market value.
The difference between existing use and highest and best use is also present in the case of
conservation use property under O.C.G.A. Section 48-5-2(1) and transitional use
residential property under O.C.G.A. Section 48-5-2(2).
Conclusion
Although the current Market Value of the fee simple estate is the value that is most
commonly addressed by real property appraisals, there are other types of values and
variations of value that should be kept in mind by users of appraisals and others, such as
attorneys, judges, special masters, receivers, etc.
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