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Weinstein Realty Advisors
15 North Cherry Lane
P.O. Box 5005
York, PA 17405-5005
Phone: 717-848-6777
Fax: 717-845-5520
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Understanding Value for Trusts and Estates – Which
Value or Both?
Appraisals are fundamental to estimating the value of estates and trusts.
Whether for tax purposes, transfers of assets to younger generations,
partnership separations, divorce, or allocations of assets among family
members; whether amicable or adversary, an understanding of value is essential.
The nature of value is the opening paragraph of the Appraisal of Real Estate
text. This text is generally regarded as the “bible” of real estate appraisers.
Since the earlier part of the 20th century, the text now into its 11th edition,
has been the backbone to understanding value for appraisers to guide counsel,
and for counsel to guide their clients. Much of the following are excerpts from
this text, explaining these value distinctions.
Price, Market, Cost and Value
These distinctions need to be understood by legal professionals in assisting
clients. Appraisers understand these concepts, which as explained in the text
are:
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A price, once finalized, represents the amount a particular purchaser agrees to
pay and a particular seller agrees to accept under the circumstances
surrounding their transaction;
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A real estate market is the interaction of individuals who exchange real
property rights for other assets, such as money;
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Cost is used by appraisers in relation to production, not exchange; cost may be
either an accomplished fact or a current estimate;
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Price, market, and cost relationships also incorporate concepts of value. Value
can have many meanings in real estate appraisal;
the applicable definition depends on the context and usage. In the marketplace,
value is commonly perceived as the anticipation of benefits to be obtained in
the future. Because value changes over time, an appraisal reflects value at a
particular moment.
Value as of a given time represents the monetary worth of property, goods, or
services to buyers and sellers. To avoid confusion, appraisers do not use the
word value alone; instead they refer to market value, use value, investment
value, assessed value, and other specific kinds of value. Market value is the
focus of most real property appraisal assignments and its estimation is the
purpose of most appraisals.
Market Value, Use Value, and Other Values
The world of estates and trusts often have specific needs that may be go beyond
that simply of market value. A summation of each of these concepts is most
important for the practitioner and the property and business owner.
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Market Value – The concept of market value is paramount importance to business
and real estate communities. Vast sums of debt and equity capital are committed
each year to real estate investments and mortgage loans, which are based on
market value estimates. Real estate taxation, litigation, and legislation also
reflect an ongoing, active concern with market value issues. In virtually every
aspect of the real estate industry and its regulation at local, state, and
federal levels, market value considerations are of vital importance and
essential to economic vitality.
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Use Value – The realities of current real estate practice require appraisers
frequently to consider other types of value in addition to market value. One of
these types, use value, is a concept based on the productivity of an economic
good. Use value 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
property’s highest and best use or the monetary amount that might be realized
from its sale. Use value may vary depending on the management of the property
and external conditions such as changes in business operations.
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Investment Value – While use value focuses on the specific use of a property,
investment value represents the value of a specific investment to a particular
investor. As used in appraisal assignments, investment value is the value of an
investment to a particular investor based on his or her investment
requirements. In contrast to market value, investment value is value to an
individual, not necessarily value in the marketplace.
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Going-Concern Value – This is the value of a proven property operation. It
includes incremental value associated with the business concern, which is
distinct from the value of the real estate. Going-concern value includes an
intangible enhancement of the value of the operating business enterprise, which
is produced by the assemblage of the land, buildings, labor, equipment, and the
marketing operation. This assemblage creates an economically viable business
that is expected to continue. Going-concern value refers to the total value of
a property, including both real property and intangible personal property
attributed to business value.
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Public Interest Value – is a general term covering a family of value concepts
that relate the highest and best use of a property to noneconomic uses such as
conservation or preservation. The issue of public interest value sometimes
comes up in determining the just compensation required in land acquisition by
federal agencies.
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Insurable Value – this is the value based on the replacement and/or
reproduction cost of physical items that are subject to loss from hazards.
Insurable value is the portion of the value of an asset or asset group that is
acknowledged or recognized under the provisions of an applicable loss insurance
policy.
This inter-relationship of value among price, market and cost; and the
correlating depth of understanding of the numerous value concepts can vary
substantial for each estate or trust. The real estate component of estate and
trusts often require careful analysis of the purposes of the transfer.
Different values can apply, as well as multiple values.
These multiple values are the essential difference that Weinstein Realty
Advisors offers to many of its clients to effectuate effective decision making.
For most estates and trusts, the decision making process of estimating value
will require the proper balance of multiple values. These multiple values will
always include market value, and usually one of the other value concepts such
as but not necessarily limited to use value, investment value, going concern
value, or other value concepts.
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