Value in Use is one of the most misunderstood concepts in appraisal.


A common misconception is that Market Value is what a thing would sell for, while Value in Use is what it is worth to one particular party, based on their own needs, tastes and opinions. In other words, use value is commonly confused with Investment Value.

However, Value in Use is a Valuation Premise.

There are two primary valuation premises used in both real estate and business appraisals:

Value in Use
(or)
Value in Exchange

Investment Value is a subcategory of Value in Use and reflects the subjective value of the asset to a specific investor. However, Value in Use itself does not represent a subjective value, but instead represents an objective value related to the contributory value of the asset to the total enterprise.

Liquidation Value and similar value scenarios are subcategories that consider the limitation of marketing time

According to the Appraisal of Real Estate 14th Edition, the Highest & Best Use of the asset establishes which of the above valuation premises is appropriate for the measurement of the fair market value of the asset. “The essential components of the analysis of highest and best use are contained in the following definition of the term”:

“The reasonably probable use of property that results in the highest value”.


If the maximum value of the real estate asset would be its value on a stand-alone basis, then a valuation premise based on Value in Exchange would represent the highest and best use of the asset

Alternatively, if the maximum value of the asset would principally be through its continued use in combination with other assets as a group, a valuation premise that considers Value in Use, would represent the highest and best use of the asset.

Value in Use is defined by The Dictionary of Real Estate Appraisal, 6th Ed., as

“The value the real estate contributes to the enterprise of which it is a part”.


If the highest and best use of the property is as an integral part of an operating business, including real property, personal property, financial assets, and the intangible assets of the business, then the value in use premise is reflected in the Market Value of the Going Concern.

The above concepts can be summarized as follows: In order to understand the value of the component parts, it is first necessary to analyze the highest and best use. If the highest and best use analysis indicates that the asset contributes more value as part of a going concern, and that a going concern enterprise is anticipated to continue in operation with an indefinite future life, then employment of a Value in Use premise would represent the appropriate basis of the appraisal.

Alternatively, if it is determined, based on a market analysis, that continued operation of the business is unlikely, or that alternative use of the property would result in higher value, then the appropriate premise of value would be its value in exchange.

Therefore, even if the purpose of the assignment is to appraise the real estate only, for lending purposes, tax assessment purposes, or for any other reason, it is necessary to consider the whole enterprise, of which the real estate is a component.

When the Value in Use premise is used, however, USPAP’s Standards Rule 1-4(g) imposes an additional obligation: “When personal property, trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items.”

There are two significant challenges that face valuators under such a scenario.

1. First, traditional real estate appraisal techniques, by themselves, are not well suited for the valuation of business enterprises or personal property.

“Sometimes, the business and the real estate that it occupies are virtually inseparable, as in the case of a special-purpose property, for example. In these cases, the intertwined, or location-dependent, business will have more of the economic characteristics of a business entity than the economic characteristics normally associated with real estate. When the business and real estate are virtually inseparable, valuation approaches normally associated with business appraisal are likely to lead to a more reliable appraisal result than valuation approaches normally associated with the real estate appraisal.” Valuing Small Businesses & Professional Practices, authored by Shannon Pratt.3 

Specifically, buyers and sellers in the market typically focus primarily on economic characteristics that relate to the operating business. Unlike a traditional income approach for general purpose properties, for special purpose properties it is the revenues from the business that support the real estate, rather than rents from tenants. Therefore, going concern appraisals appropriately focus on business revenues. It is also recognized that a sustainable rent must be supported by the economic realities of the business.

These economic realities can be significantly affected by a number of factors, some of which are not controllable by the enterprise. Common examples include local demographics and competition.

2. Second, the requirement to disaggregate the total value into separate component parts for the real estate, personal property and intangible assets demands that the real estate appraiser either have expertise in business valuation and equipment appraisal, or to work closely with a business appraiser and possibly an equipment appraiser, in developing these component parts.

It would probably not be reasonable to assume that a real estate appraiser without knowledge or expertise in valuing a business would be able to accurately or reliably identify the contributory business value to a going concern. The same limitation would apply to business machinery or equipment, as well as the contributory value of licenses.

Further, any such allocations within an appraisal are explicitly considered by USPAP to represent appraisals of these other components.

The Appraisal of Real Estate 14th Edition notes: “Only qualified practitioners should undertake these kinds of assignments, which must be performed in compliance with the appropriate professional standards. It may be necessary for a real estate appraiser to collaborate with a personal property appraiser or a business appraiser or both on such an assignment.”

In those cases where real estate appraisers, business appraisers and equipment appraisers work on the valuation of an enterprise, or on an allocation of the assets of the enterprise, it is crucial that these appraisers communicate and collaborate with one another. Appraisal Standards explicitly discourages appraisers from simply adding together separate values for each of the components.

The Allocation Process

The allocation process recognizes that each of the components of the business, including the real estate, the machinery, equipment or FF&E, as well as the intangible assets, must all be supported by the cashflows of the business. And that total cash-flow effectively represents the aggregate of multiple income streams attributable to each component.

An important concept that is useful for effectively allocating those cashflows is recognizing that they are each essentially factors of production, and those factors of production represent a hierarchy. As such, all business cashflows must first be allocated toward supporting the underlying land value before any cashflows can be allocated to supporting the value of the building.

Further, no cash-flows can be allocated toward supporting the personal property, in terms of providing a return of and on the necessary investment in those items, until after the value of the building has been supported.

When the highest and best use of a property is continued use as part of a going concern. Business valuation methodologies represent an indispensable tool for solving the valuation problem. Therefore, experience and expertise with business valuation, in combination with traditional real estate valuation techniques, along with machinery and equipment appraisal expertise, is crucial to addressing the complex valuation issues associated with these property types.

Bruce E. Jones MAI, ASA, BCA, CMEA – is one of the few highly experienced real estate appraisers who also holds designations as a Business Appraiser (Business Certified Appraiser (BCA), and as a Certified Machinery/Equipment Appraiser (CMEA).

The BCA designation is awarded by the International Society of Business Appraisers (ISBA) and is one of only a few designations that are recognized by the Small Business Administration (SBA) as a “Qualified Source” for business appraisals.

When a business valuation is required by the SBA, the business valuation must be prepared by a “qualified source.” A qualified source is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations:

  • Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
  • Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
  • Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;
  • Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts;
  • Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.

A work-around, which has been commonly employed by the SBA in recent years, is to engage both a real estate appraiser and a business appraiser separately. However, there are several problems with this strategy. First, having two appraisals brings with it likely reconciliation issues due to a lack of communication between the business appraiser and the real estate appraiser. The risk is that some assets will be included in both appraisals, or in neither appraisal. The other significant issue for smaller assets is related to the higher costs of hiring two separate appraisers.

In an article entitled “How Too Many Cooks Can Spoil The Broth: A Case Study”, written by Franz H. Ross, MAI, CBA, CVA, MRICS and published in Business Valuation Resources in their Special Report entitled: Valuing Companies with Real Estate: Appraisal Experts Untangle The Issues, Mr. Ross provided the following example.

For example, a dust collection system in a manufacturing plant may potentially be considered real estate, or it could potentially be considered equipment. Arguments can be made for either treatment, and, frankly, either is acceptable. However, including the system in both appraisals results in an over-statement of the overall value. Similarly, if the two appraisers do not compare notes, it would be easy to omit the value of the system from the appraisal, resulting in an under-statement of value.

3 This text is widely considered an authoritative guide and one of the premier reference books on the subject of business valuation.

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