Practical Applications For Value-In-Use And Value-In-Place
Thursday, July 16, 2020 in Education
When is it appropriate to use value-in-use or value-in-place? The terms can be confusing as they relate to internal relevant characteristics, or forces that effect value. Most appraisers will not have many occasions to consider value-in-use or value-in-place. However, having a good understanding of the terms and their respective uses will make it more likely that you will recognize the need for them if the opportunity arises.
In our appraisal practice, reports are occasionally written or verbal appraisals performed when value-in-use or value-in-place are appropriate. These appraisals, when addressing a loss, frequently make use of the Broad Evidence Rule, or McAnarney Rule (based on McAnarney v. Newark Fire Insurance Company), which states that there are no fixed or rigid guidelines for the determination of the amount of recovery in case of loss. The appraiser can therefore consider all aspects of value, the facts and circumstances, in addition to non-traditional factors such as value to the owner. When all of the relevant evidence is presented and thoughtfully considered, it will lead to the correct assessment of a property’s owner value.
From the ISA Core Course manual, value-in-use, commonly known as “owner value” is defined as “the value of property taking into consideration the extent to which the property contributes to the personal needs, satisfactions, or requirements of the owner.” It further states that “value-in-use could greatly exceed market value depending on the owner’s personal feelings such as sentimentality.” Even though appraisers are taught to leave sentimental value out of their appraisals, value-in-use allows us to consider it. If that is the case, you might ask, where do appraisers find comparables that include sentimental value? In practical use, those comparables do not exist and so a different approach must be taken. Even though sentimental value has a recognized effect on an owner’s level of worth, an appraiser is hard pressed to put a number, or value, on sentiment. However, you can propose a premium, using value-in-use to support your value conclusions.
Consider the following case in which I was recently involved: The widowed father of adult children remarried and then predeceased his new wife. Although she signed a prenuptial agreement promising to return certain items of personal property to the children, she broke her word, hence the lawsuit. The children sued for the value of the property. I was initially engaged to estimate the replacement cost and determine the fair market value of the items considered by the family to be heirlooms. The children cherished this property and wanted it returned to them, or be compensated for the value. Much of the property in question had very little worth to anyone outside of the family. These items consisted of WWII military medals, a burial flag, a personalized commemorative handgun, several amateur oil paintings painted by their mother, and various framed photographs including a college class photograph. Comparable sales data for these items could be found in the secondary market such as eBay. As for the paintings (which were not well executed) an argument could be made for no commercial value, but they were considered the most valuable by the children. The other items were not as personal, but just as important to the family and included a bronze sculpture, marble pedestal, Hasselblad camera and collector’s plates. Comparable sales data was easily found for these items as well.
The children presented an inventory to the court containing 42 items with values that clearly displayed their level of sentimentality. The total value of the items on their list surpassed $200,000! The wife hired her own appraiser who provided a replacement cost slightly above $11,000 and a fair market value just under $3,000. My replacement cost appraisal with value-in-use totaled approximately $22,000, and the fair market value with value-in-use totaled about $8,000. At the end of the day, we did not even come close to the children’s stated value, which admittedly was excessive. It is difficult to determine sentimental value without input from the owner of the property. A case had to made that the loss of the family heirlooms caused a hardship to the heirs and that value-in-use was appropriate to consider. Although appraisers are taught not to appraise by formula, ultimately a percentage was applied.
Value-in-place is a type of value-in-use. It is defined as the value of property taking into consideration the extent to which the property contributes to the success of a business. Value-in-place recognizes a premium in value over the property’s value if it were not “in place” and making the contribution. With value-in-place, it is easier to value the property because concrete costs can be added to the value basis, for things like delivery and installation of equipment.
For example, a law practice is losing one of its partners. The partner is going to be compensated for his share of the value of the business as the other partners buy out his share. Compensation must be determined with fairness to all parties concerned. Often, a business valuator is engaged to appraise the intangible assets of the business, and a personal property appraiser will appraise the tangible property such as computers, other office equipment, furniture, artwork, etc. There is additional value to consider, or a premium, because the equipment is already installed and operational. The telephones, by themselves, have a fair market value or market value, but when hardwired and part of a working telephone system, they become more valuable to the business.
Another application for value-in-place is when a homeowner is selling their house furnished. I receive frequent requests, especially for verbal appraisals, from sellers needing to know the value of furnishings offered to a prospective buyer, separate from the real estate. Generally, appraisers can start with market value and add a premium for furniture and furnishings that are “in place”. The furniture compliments the décor, complete with matching paint color, window treatments and carpeting. There is added value to the buyer for convenience. No one has to go shopping, hire a decorator and pay delivery costs.
These are just a few examples of how value-in-use and value-in-place could impact an appraisal assignment. Although they may not be used often in your practice, they are important components of value that warrant consideration. Not addressing the value-in-use or value-in-place could result in an inaccurate valuation and a disservice to your client.
By Diane P. Marvin, ISA CAPP