6 Special Purpose Property Tips for Commercial Appraisal Reviewers

Modern hospital building

As a commercial appraisal reviewer, before you accept a review assignment of a special purpose property, you should become very knowledgeable in understanding the “business component” of these types of properties. This is especially true where there is a business component to be considered, as would be the case with senior living, hotel valuation, or hospitals.

Business components in special purpose properties are often referred to as “intangibles.” Below, we provide an overview of intangibles and outline six special purpose property tips for appraisal reviewers.

Intangibles

The Dictionary of Real Estate Appraisal, 6th Edition defines intangible property as “nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment.”

In a special purpose property such as senior living and hotels, intangibles are branding, franchising, and management. Within the appraisal industry, there is an ongoing discussion on identifying intangibles, ownership of intangibles, and the valuation of intangibles. Again, an appraiser looking to specialize in these property types, should become very familiar with the ongoing litigation related to properties with intangibles.

For more information on intangibles, please refer to this whitepaper: Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals by the IAAO Special Committee on Intangibles.

Special purpose property tips

Before you accept a review appraisal assignment for a special purpose property, here are some tips to guide your decision:

1. Get assistance

If you haven’t appraised the property type in the past, it’s inadvisable to proceed without finding a consulting partner who has experience in appraising the special purpose property. Remember, as a reviewer, you must notify the client of your lack of knowledge and/or experience and disclose the necessary and appropriate steps to remedy your lack of competency. The client must be informed in advance and approve that it is acceptable for you (the reviewer) to acquire the knowledge and/or help to complete the assignment competently.

Gain the education you need to become a successful reviewer with our online CE course, Introduction to Commercial Appraisal Review.

2. Dated sales/changed market

Special purpose properties don’t tend to change hands very often. Changes in market conditions and the necessity of using dated comparables can complicate the assignment.

3. Not “value in use”

“Value in use” is 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. Special design and configuration of the property aren’t the same as “value-in-use,” an accounting term signifying credit value from cash flows. Sometimes, particularly in the context of litigation, a potential client or the WUR appraiser will assume market value and value-in-use are the same.

Value in use requires considering the business as a going concern. In general, a value-in-use or going concern value appraisal expects the value to be based on the value a specific property has to a specific user, as opposed to the value it offers to the market in general (market value). A value-in-use does not represent what the real property may exchange for on the open market. Experts in value-in-use often have earned specialized designations for completing these types of appraisal assignments.

4. Second generation use

Second-generation use of a property is not the same as when it was created for the first-generation user. The task is not only adjusting the price per unit or foot, but identifying the distinguishing feature(s) that makes a typical buyer of the special purpose want the property. The market for a Burger King is not the same as the market for Pop’s Burgers. In the fast food arena, the building types are usually specialized with widely different layouts, construction, and design. It is important to consider only second-generation supply, demand, and comparables.

5. Consider alternate uses

Usually a special purpose property will be repurposed by an owner-occupant. Review the WUR to determine if alternate uses were considered. For example, a religious facility may be repurposed to a wedding or event center, daycare center, flex-space commercial property, or other uses.

6. Use the cost approach

Even though it is often reported that the cost approach has applicability in estimating the value of special purpose properties, sometimes it is the only credible approach to value by default. It is critical that the WUR properly accounts for all forms of depreciation when using only the cost approach.

Are you interested in offering review services as part of your real estate appraisal business model? Gain the education you need to become a successful reviewer with our online CE course, Introduction to Commercial Appraisal Review.

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