Special Purpose Property Appraisal

Roman Catholic Church Ripley
Roman Catholic Church Ripley : Example of a special purpose property (Photo credit: Wikipedia)

A Special-Purpose Property is defined by, “The Appraisal of Real Estate, 12th ed. published by the Appraisal Institute” as follows:
“A limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built (also known as Special-Design Property).”

And further defines a Limited-Market Property as follows:
“A property that has relatively few potential buyers at a particular time, sometimes because of unique design features or changing market conditions. Many limited-market properties include structures with unique designs, special construction materials, or layouts that restrict their utility to the use for which they were originally built. These properties usually have limited conversion potential and, consequently, are often called special-purpose.”

Furthermore, an SBA SOP defines a “special-purpose property” as “a property that is appropriate for one use or limited use: a building that cannot be converted to another use without a large capital investment.” In the context of improved real estate it is typically a building with limited uses and marketability, such as a church, theater, school, or public utility. Most of the property types just listed are of a non-profit nature. However, some special purpose properties can be for profit and income generating.

There are generally two types of value sought for Special Purpose appraisals. The Real Estate Appraisal Business is proficient in both.

1. Value In Use Appraisal: The first type of value sought requires a specialized appraisal usually identified as a Value In Use Appraisal. Value In Use is defined by the “The Dictionary of Real Estate Appraisal published by the Appraisal Institute” as follows:
“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. Special-purpose properties such as churches, schools, and public buildings, which are seldom bought and sold in the open market, can be valued on the basis of value in use. The value in use to a specific person may include a sentimental value component. The value in use to a specific firm may be the value of the plant as part of an integrated multi-plant operation.”
And it goes further and defines Use Value as follows:

• “In economics, the attribution of value to goods and services based upon their usefulness to those who consume them.
• In real estate appraisal, the value a specific property has for a specific use; may be the highest and best use of the property or some other use specified as a condition of the appraisal; may be used where legislation has been enacted to preserve farmland, timberland, or other open space land on urban fringes.”

2. Going Concern Market Value: The second type of value sought is a Going Concern Market Value. Going Concern Market Value is defined as:
“The value of a property as it is currently used, not its value considering alternative uses. It is a concept based on the productivity of an economic good with its associated land and improvements. It is the value a specific property has for a specific use. In estimating use value, the appraiser focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the highest and best use of the property or the monetary amount that might be realized from its sale. Going concern value may vary depending on the management of the property, the entity utilizing the property, and external conditions such as changes in business operations. Therefore, it typically encompasses much more than just the land and improvements.”
In short order a value in use or going concern value appraisal is a valuation assignment that analyzes 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. Some special criteria that must be considered in the process of completing an appraisal under the value-in-use definition include:

• Is the property fulfilling an economic need?
• Does the property have a remaining economic life?
• Is there current responsible ownership?
• Would the diversion of the property to an alternative use be economically feasible?
• Has consideration been given to the property’s functional utility? And,
• Are the net earnings of the business enterprise sufficient to show a fair return on the tangible asset’s value?

Diorio Real Estate Appraisal Services (203) 755-7965 525 Meriden Road, Waterbury, CT 06705

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