Joanne L. Palmes MA4A Valuation Method Activity Bases of Value is a statement of the fundamental measurement assumptions of a valuation, and for many common valuation purposes these standards stipulate the bases(basis) of value that is appropriate. 1. Market Value – The estimate amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Example: John lists his car to sell at 10,000. However, there are no buyers interested in paying the 10,000 but he receives two offers for 8,000. In this case, 8,000 would be the market value. if 935 customers bought a company’s MRI scanner last year, the market volume was 935. If each scanner sold for 1 million, the market value was 935 million. 2. Market rent - Market Rent is the rental rate for a commercial property that is set by the market. It is determined by the supply and demand of the property and takes into account factors such as location, size, condition and local economic conditions. Example: A two-bedroom fair market rent in a rural area could be 800, while it could be 1,300 in a more expensive metropolitan district. The tenant pays all property operating costs including property taxes, either directly or as a separate Service Rent or the landlord pays all property operating costs including property taxes 3. Equitable Value - the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. Example: The price for a fee simple interest, subject to a long-term ground lease, to be sold by the freeholder to the current leaseholder. 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. 4. Investment value/worth - 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. Example: The value to the owner of holding an income producing property, often differs from the property’s Market Value. A certain buyer may place a higher value on the property than would a typical informed purchaser. This could happen in the real world when a firm decides to expand its premises into a larger newer building that has just gone on sale across the road from the current company offices. The company might be willing to pay a higher price than the market value so that it could ensure competitors stay out of the market and do not secure the building before they can conclude the transaction. In such a scenario, this extra value becomes derived from the strategic advantage that the firm will realize by having the property. 5. Synergistic Value - 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. Example: 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. 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. 6. Liquidation Value - the amount that would be realized 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 Example: 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. An orderly transaction with a typical marketing period 7. Fair Value – The estimated price for the transfer of an asset or liability between identifies knowledgeable and willing parties that reflects the respective interest of those parties. Example: Mr. Y bought a derivative contract at 100,000 in November 2022. The contract is for three months. The accounting year starts in January. At the end of December, the contract value is 90,000. Thus, Mr. Y fair value would be, As Mr. Y is following Fair Value accounting, he must mark the market at the end of the financial year. At the end of the year, the contract’s Fair Value is less than what is shown on the Balance Sheet. So, Mr. Y will have to record an unrealized loss of 10,000 in Profit and Loss Statement and must reduce the value of the contract in the balance sheet by 10,000. November 2022 In Balance sheet – Contract 100,000 January 2023 In Balance Sheet – Contract 90,000 In Profit and Loss Statement = Unrealized Loss 10,000 If a seller chooses to sell his property for 400,000 during a period of low demand in the real estate industry, the property may not be sold. However, if it is offered for 600,000 at a peak moment, it may be sold for that amount.