Which Value?

It is a common misconception that every commercial property has a single value. Not so! Yet we are frequently asked by professionals, such accountants and lawyers, as well as real estate owners, what it will cost to appraise a (specified) property. The International Valuation Standards (IVS), adopted by Canada, and incorporated into the Royal Institution of Chartered Surveyors’ Global Valuation Standards, specify six types of real estate value (Market, Rental, Equitable, Investment, Synergistic, and Liquidation). The Appraisal Institute (of America) has identified ten distinct, and valid, property valuation bases in common use in North America. Legislation, case law and the purpose of the real estate assignment, result in many variations of these property valuation bases. Any conversation about valuing your property has to start therefore with an understanding of the purpose of the valuation assignment or you can end up with a conclusion which is worthless at best, or seriously misleading at worst. Our property advisory Valuation Team will advise you as to which of the following is the appropriate valuation base for your purpose:

Market Value (Highest and Best Use)

Market Value (Highest and Best Use) is the highest price you would get for your property on a specific date, if it was offered for sale, properly marketed, and exposed for a sufficient period of time to alert and allow all potential purchasers to submit offers. It assumes that both seller and buyer are knowledgeable of property values, that neither are under pressure to sell or buy, are typically motivated, and are each acting in their best interest. It assumes a cash purchase, or typical mortgage financing, in Canadian dollars. It also anticipates that the purchaser will be able to put the property to its “Highest and Best”, which may for example, include redevelopment, if this will create a higher value than the existing use of the property e.g. an industrial property now located in a growing commercial area. Be aware however, that finance companies are typically not prepared to base their mortgage financing on Market Value, if the Highest and Best Use is predicated on redevelopment.

Market Value is not the price you could expect to get if the purchaser was (1) an adjoining owner, (2) undertaking a land assembly, (3) a relative or business associate, or (4) knew something that the vendor should have known but did not, (5) did not know something known to the vendor of which the purchaser should have been aware, (6) wanted a “vendor take back” mortgage, (7) intended to lease back the property to the vendor, (8) enjoyed a negotiating advantage because, for example, the vendor was in dire financial straits, … and so on.

Market Value (Value in Use)

Market Value (Value in Use) is similar to Market Value (Highest and Best Use) but is based on the assumption that your property could only be utilised for its existing purpose. If your property’s existing use is special-purpose and/or trade related with a limited number of potential purchasers e.g. fish plant, meat packing plant, hotel, service station, etc., finance companies may be reluctant to base their mortgage financing on this use, even if it is the Highest and Best Use, since the property may have a substantially lower value if the business fails. On the other hand, if they are essentially loaning on the business, and as part of that calculation wish to quantify the value of the property as an asset of the going concern, the Market Value (Value in Use) will be the key metric. The same criteria will also apply in the case of a business valuation, even if the property has a higher value for an alternate (Highest and Best) use. In both circumstances it may also be necessary to express the Market Value (Value in Use) as a Market Rent, so that the party evaluating the business can formulate an opinion as to whether the operation can “afford” the property as part of its going concern value.

Market Rent

Market Rent is the estimated rent you would get for your property, or space within your property, at a specific date, assuming conditions similar to those governing Market Value, such as a willing lessor and willing lessee. The rent can be calculated on a “net absolute to landlord basis” i.e. the tenant pays all property operating costs including property taxes, either directly or as a separate Service Rent; a “gross to landlord basis” i.e. the landlord pays all property operating costs including property taxes; or a mixture of the two (described as a “net absolute to landlord basis other than…”). The anticipated lease term also has to be specified since it will often impact the Market Rent.

Equitable Value

Equitable Value is the estimated price for the transfer of a property asset (or liability) between identified, knowledgeable and willing parties that reflects the respective interests of those parties. Examples include the price for a fee simple interest, subject to a long term ground lease, to be sold by the freeholder to the current leaseholder; or the price for the leasehold interest to be sold to the freeholder … or the price for a part share in a property, where the price which is equitable between the vendor and purchaser may be different than the price that may be obtainable on the open market.

Investment Value

Investment Value is the value of the property to a particular investor, or class of investors, for identified investment or operational objectives. It reflects the benefits received by the property owner from holding the asset, and since it does not involve a presumed sale, may or may not be reflective of Market Value. For example, the value to the owner of holding an income producing property, often differs from the property’s Market Value. Investment Value is usually used to measure investment performance.

Synergistic Value

Synergistic Value is the result of combining two or more property assets, or interests therein, where their aggregate value is more than the sum of their separate values. If the synergies are only of value to one specific purchaser then the Synergistic Value will differ from Market Value, as the Synergistic Value will reflect the particular attributes of the property that are of value only to that purchaser. An example would be a purchaser acquiring a contiguous property, where the combined value of the two properties is greater than the sum of their individual parts. The incremental value is often called “plottage” or “marriage” value. Another example would be a land assembly for a redevelopment project; the purchaser will usually pay the individual property owners a premium over Market Value to secure their asset and enable the redevelopment to proceed.

Liquidation Value

Liquidation Value is the amount that would be realised if the property was sold piecemeal, or as a whole under duress. It has to take into account the costs of getting the property into saleable condition as well as those of the disposal activity. Liquidation Value must be expressed as one of the following:

  • ‚ÄčAn orderly transaction with a typical marketing period, or
  • A forced transaction with a shortened marketing period. This would be the more typical of the two circumstances. The seller is under extreme compulsion to sell, potential purchasers are aware that such is the case, marketing efforts are constrained by time, and the property has to be sold irrespective of marketing conditions. Liquidation Value will usually be lower than Market Value.

Fair Value

Fair Value is a construct of the International Financial Reporting Standards (IFRS) and is defined “as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date”. Since January 1st. 2011 property assets in Canada held by Publicly Accountable Enterprises (publicly traded companies, credit unions, insurance companies, trusts, REITs) have to be valued each year for balance sheet purposes in accordance with the IFRS. Privately held companies can opt to adopt the IFRS but having done so cannot easily revert back again. If the asset is “Investment Property [IAS 40]” i.e. is not held by the business to conduct its operations, it can (optionally) be shown at its historic cost but its Fair Value must also be shown in the company’s financial statements. Fair Value in this instance is synonymous with Market Value (Highest and Best Use). If the asset is classed as “Property Plant and Equipment [IAS 16]” i.e. is an operational asset, and therefore not “Investment Property”, the owner can adopt either the (historic) “Cost” or a (Fair Value) “Revaluation Model”. If they adopt the Revaluation Model the property has to be revalued annually, but in this instance Fair Value will be synonymous with Market Value (Value in Use) unless the owner intends to liquidate the asset or cease trading.

Assessed Value

Assessed Value is the value assigned to the property for municipal, and sometimes provincial, realty and occupancy ad valorem tax purposes. The basis for the Assessed Value varies by province. Some Assessment Acts and or court decisions, such as those in the Atlantic Provinces, mandate that it be based on Market Value (Value in Use), whilst others, such as Ontario, stipulate Market Value (Highest and Best Use) … unless the Minister has issued property type specific regulations dictating otherwise. The valuation Base Date differs by province too; some Provinces specify January 1st of the taxation year, others up to five years prior … and the State (of property) Date varies as well. Moreover most Provincial Assessment Acts also contain a “uniformity” provision, with the intent that comparable properties bear similar assessments, and in practice this, rather than Market Value, is the benchmark used by the Assessment Authorities. In any event, since Assessed Values are the result of a mass appraisal process: any relationship between a commercial property’s Assessed Value and its Market Value is likely to be fortuitous coincidence. If your financial advisor advocates using Assessed Value as a surrogate for Market Value, fire them!

Actual Cash Value

Actual Cash Value is utilised to calculate compensation for fire insurance purposes in the event of a total building loss where the owner does not intend to rebuild. It is variously interpreted by the courts to mean two entirely different things: defining it is therefore analogous to nailing jelly to a wall. Unless it unduly penalises the insured, the courts usually interpret Actual Cash Value as the Market Value (Value in Use) of the building. However a substantial minority of court decisions have computed Actual Cash Value by deducting only physical depreciation from the building’s Replacement Cost New.

Expropriation Value

The Federal and most Provincial Expropriation Acts mandate that the property owner be compensated for the land acquired on the basis of Market Value … usually on the premise of Highest and Best Use. However it is a fundamental principle, well recognised in Case Law, that the purpose of compensation is to render the expropriated party “whole” i.e. place them in the same position monetarily after expropriation as they were prior to it. The acquiring authority is therefore obligated to compensate the property owner for all of their loss, not just for the value of the land taken. These other Heads of Claim may include (1) “Home for a Home”, (2) Disturbance, (3) Reasonable Cost of Reinstatement, (4) Injurious Affection, (5) Special Economic Advantage and (6) Professional Fees. “Betterment”, the increase in the value of part or all of the property remaining after expropriation usually has to be offset against part or all of the compensation, depending on the applicable Expropriation Act.