Project Description

WHAT’S SO SPECIAL ABOUT SPECIAL-PURPOSE PROPERTY

ABSTRACT: The concept of a special-purpose property is often confused with the concept of a special use or limited- market property. In practice, special-purpose, special use, and limited-market properties are not necessarily interchangeable. This article clarifies what constitutes special- purpose property, and it outlines a process to identify special-purpose property for valuation by focusing on the property itself, not the use or user.

Appraisal assignments may involve the valuation of special-purpose properties. When potential special-purpose properties are appraised, market research may be part of the scope of work to support the conclusion that they are indeed special purpose.1 Recognizing or identifying a special purpose for a subject property as well as for potential sales comparables contributes to development of credible assignment results. This article outlines a process to logically determine if a property is a special-purpose property. The discussion also provides property examples to further illustrate the considerations and the identification process.

There are many properties deemed to be “unique,” either by an appraiser or a court, based on some interpretation such as a unique physical design or a special utility.2 Often terms such as special use or limited market are loosely associated with special purpose without support.3 The Dictionary of Real Estate Appraisal, 5th ed., defines special-purpose property as follows:

A property with a unique physical design, special construction materials, or a layout that particularly adapts its utility to the use for which it was built; also called a special design property.4

A special-purpose property is likely to have a limited market and may be considered a special use, but neither elevate the property categorically to a special-purpose property. The identification of a special-purpose property requires a process to properly determine what constitutes a special-purpose property in a consistent manner, outside of personal opinions, biases, or third-party directive. Therefore, this article begins by reviewing in what context special-purpose property is discussed in the literature.

Literature Review

There is a set of prior works written on special-purpose and special use property valuation issues. Some authors focus on legal case results within the context of eminent domain, others in the context of ad valorem. The main issues discussed are appropriate valuation approaches and a need to decouple business enterprise value (BEV) from real property.5 In their Appraisal Journal article, Duvall and Black comment on “special use” properties and legal decisions in the context of eminent domain.6 Their overall discussion of court decisions illustrates that the courts are not the place to discern distinctions between special use and special-purpose property. As the authors state, “Although there is some variation among the states, the vast majority of jurisdictions equate ‘special use’ with a property for which there are insufficient comparable sales on which to base a finding of market value.”7 They point out that despite case law, there are no fixed rules regarding whether one type of property is legally a “special use” property, and that most courts prefer a market approach but may modify the approach by permitting sales from other geographic locations or with different uses. They remind us that in most jurisdictions, “if the parties are unable to find evidence of comparable sales of property with similar uses in the vicinity, then the property is a special use property and the parties may offer evidence other than market data to establish value.”8 This lack of sales comparable leads to a reliance on the cost approach.

Derbes, in his discussion of industrial plants, divides the process for deciding whether a property is special purpose into an examination of whether the properties are viable or nonviable. A viable property is likely to have a highest and best use in the as is condition. Derbes notes that owners of viable properties tend to continue operations and retain them, so the sales comparison approach is rarely applied to these viable properties because of a lack of sales comparables. He warns that rarely does another sale property share the same attributes as the unique subject property, and very different property uses often do not qualify as a comparable. In addition, a sale property may not be physically possible to convert to the same use as the subject. For viable properties, the estimated cost of retrofitting sales comparables to a similar utility needs to be added to the basic sale price of the comparable property. These viable industrial properties sell as a total enterprise, including intangibles and personal property. He concludes that the highest and best use for these properties is the use for which they were constructed unless proven otherwise.

Derbes goes on to discuss that nonviable property has a highest and best use that is an alternate use to the existing plant, and the comparables are not the same use as the subject property’s former utilization. He stresses that large nonviable manufacturing plants sell for an alternative use, do not compare to viable plants, and operate in a different submarket. Derbes concludes by reminding the reader that the basic economics of the sales comparison approach requires a determination of the highest and best use in specific terms, not merely industrial.9

Lipscomb in his article points out that second-generation industrial buildings (those not used for the original purpose, or nonviable according to Derbes) require a comprehensive highest and best use analysis, including the functional utility of the subject and the feasibility of conversion to an alternate use.10 He develops a list of items for analysis, including guidance in selecting sales comparables of similar building size; the land-to-building ratio which can vary when land is needed for labor-intensive manufacturing requiring storage of raw materials or finished goods; and special attention to usable land in developing a land-to-building ratio. Lipscomb concludes by emphasizing that for alternative uses, limited value should be placed on any special-purpose features. Zimmer also points out that a focus on land-to-building ratio and location is critical when analyzing industrial storage or warehouse facilities using the sales comparison approach.11 He goes on to illustrate potential errors when sales are analyzed on a price-per-square-foot basis with the sales comparison method as the only approach used for valuation.

Robinson and Lucas give instruction on appraising special-purpose industrial properties for ad valorem purposes and contend that most special-purpose property is overvalued.12 They further explain that the use of either the sales comparison approach or income capitalization approach often cannot conclude a supportable value conclusion. The sales comparison approach is typically lacking for transaction data. In addition, the primary motivation of many buyers of these properties is to increase the profit of their overall business, resulting in a willingness to pay more for the property than they otherwise would; in other words, there is a non-realty (business enterprise) increment in the purchase price. As stated by the authors, “What they are often purchasing are synergistic intangibles that are not part of the real estate…itself.”13

There is a similar scenario for an income capitalization approach, where it is quite difficult to properly allocate the income of an owner-occupied facility between the business and the real property, and likewise hard to estimate the “economic rent” of rented facilities. The shortcomings of the sales comparison and income capitalization approaches lead to a reliance on the cost approach. They conclude by saying the cost approach, unlike the other approaches, at least starts with an estimate of realty only.

Clark and Knight also warn that a business enterprise component is pervasive in special-purpose property.14 They demonstrate a method to segment a going concern into the real estate, furniture, fixtures, equipment, and business enterprise value. They also state that the sales approach is especially problematic because sales can be sparse and the value implied by the transaction is that of a going

concern. The income capitalization approach can also be problematic because the income is for the going concern and one needs to allocate value to the various components. They conclude by warning that the alternative, the cost approach, as a proxy for value, may be flawed if there is little relationship between cost and market value.

Crafts reviews tax appeal rulings in New Hampshire pertaining to unique properties.15 He explains that the courts have made their own rulings on what are limited-market and special-purpose properties. He illustrates that court cases have opined on a wide variety of properties as to being special use or special purpose. This circumstance illustrates that court cases may not be the best way for the appraiser to find guidance on terms such as limited market, special use, and special purpose, which courts may use interchangeably when in fact the terms are not the same. As Derbes points out, “The last place to look for a solution to the valuation of special-use properties is court decisions… if a court decision is ill-advised and contrary to good economic principle, such a decision is hardly a good criteria for appraisal thinking.”16 Crafts does point out that in a particular case (Walmart Real Estate Business Trust v. Town of Conway) the board of appeals did recognize a property as a limited-market property, but not a special-purpose property.

Summary of Literature

Prior writings have focused on the inability of obtaining sales comparables and on which approaches to value are feasible. The authors mentioned above agree that the sales comparison approach, which is a market-driven approach, may not be feasible given a lack of sales comparables. Some warn that the income capitalization approach captures the value of a going concern where the real estate, intangibles, and personal property are intertwined, needing to be decoupled for viable properties. The cost approach may be used because of the failings of the other approaches to value. In particular, the cost approach can isolate the real estate portion of a going concern, although the appraiser may fail to accurately determine depreciation estimates leading to large price errors.17 In conclusion, the literature has focused on valuation methodology in different appraisal settings and is not organized around the identification of special-purpose property.

Special Purpose Identification Process

We start the identification process by reviewing frequently used definitions of special-purpose property to assess if further analysis of the subject property is warranted. If the appraiser concludes the subject property may be a special-purpose property, the appraiser then researches to fi if sales comparables of the same industry sector are available.18 Because of a potential scarcity, these sales comparables are more likely to be from a broad geographic region.19 The appraiser needs to determine if the subject property can be economically converted to another use. If the conversion is not financially feasible, the appraiser can conclude the subject property to be a viable special-purpose property. If the conversion is feasible, the appraiser has to determine if the current use is maximally productive. Now let’s review the identification process in more detail.

Definitions

The first step of the identification process is to review the available definitions of special-purpose property to assess whether the subject property fits the categories described.

As previously mentioned, The Dictionary of Real Estate Appraisal, fifth edition, describes special purpose property as “property with a unique physical design, special construction materials, or a layout that particularly adapts its utility to the use for which it was built.”20 The “Glossary” of the International Valuation Standards (IVS), eight edition (2007), defined specialized property as follows:

A property that is rarely if ever sold in the market, except by way of a sale of the business or entity of which it is part, due to uniqueness arising from its specialized nature and design, its configuration, size, location, or otherwise. Examples of specialized properties include power stations, docks, specialized manufacturing facilities, public facilities, churches, museums, and properties located in particular geographic locations for operational or business reasons.21

These definitional names illustrate the lack of clarity for special-purpose and special use property. Therefore, this article proposes the following alternative definition:

A special-purpose property is defined as a property that has limited utility and marketability other than for its original use. These properties may include a hazardous waste facility, an oil refinery, or a specialized manufacturer. Often these properties are “build to suit,” which generate a very limited set of alternative users. In fact, most of the time a special-purpose property needs significant investment to be converted to an alternative use, making most conversions financially infeasible. To be special purpose, the property itself, not the use, needs to be unique.

The following characteristics are used to identify a special-purpose property:

  • Unique physical construction design and functional
  • Limited marketability, other than for the original
  • Maximally productive in comparison to alternate uses after conversion costs are

If the subject property passes the first level of screening, which is definitional review, then the second step of the identification process is performing a sales comparison search for similar property sales.

Sales Comparison Search

It is customary for an appraiser to perform a sales comparison search to determine if any potential sales comparables are available. A limited or nonexistent set of potential sales comparables gives evidence that the appraiser is dealing with a limited market, and maybe a special-purpose property. This is further reinforced when sales comparables can only be found by searching a broad geographic area or industry competitors. This then leads to questions as to who is the likely buyer of the subject property—an owner-user of the current use or an alternative user who seeks to convert the property.

A lack of sales comparables for the subject property’s current use implies that the second phase of screening is met. Too often, claiming a property has limited marketability based on a lack of sales comparables for its current use results in the conclusion that it is a special-purpose property.22 Just as problematic is concluding a special use property must be a special-purpose property. They are not necessarily synonymous, although court rulings have failed at times to distinguish a difference. The appraiser now needs to analyze alternative uses.23

Conversion

So what’s so special about special-purpose property? A special purpose is property-specific, not zoning specific special-purpose property, by definition implies that the physical design and the potential future users determine it is special. What is so special about a special-purpose property is that any conversion of that property would be financially infeasible or less productive to a market value buyer within the foreseeable future. The productivity to the current user may include business value greater than the real estate value, requiring a market participant to overbid for the real estate. 24

A unique design feature or two is not enough to default to a special-purpose property under the proposed definition. Key considerations in the propose definition are design features or lack of locational compatibility that reduce utility to alternative users. Utility to alternative users is affected by the costs to remove current fixtures and equipment. For some buildings that are custom designed, the removal of fixtures or equipment can create a costly need to open the walls or the roof systems. Costs of alternative uses also can be impacted if any materials removed for conversion have the possibility of being a hazardous material, such as asbestos insulation. A seller may not want to remove environmentally sensitive items because their disturbance could cause physical exposure or a liability that a buyer does not want to inherit.

Upon determining if a conversion is financially feasible, the appraiser selects sales comparables based on either the as is or financially feasible alternative use. If conversion is judged to be financially feasible, then comparables are selected of the alternate use, and they are adjusted for the costs to convert the subject property to the alternate use. A failure to take into account that the subject is not physically ready for the alternative use is misleading and results in an overestimation of value for the subject property and an error in any highest and best use conclusion.25

Even for a viable special-purpose property, it is likely that adjustments will need to be made to the comparable sales. This is because it is quite unlikely that all of the comparables will be completely equivalent to the subject in use and functional utility. A positive adjustment is made to sales comparables to compensate for the typically superior functional utility of the special-purpose property; although it is possible that a comparable could be superior, requiring a negative adjustment. A lack of adjustment to sales comparables due to functional utility differences or changing to an alternative use may be a substantial error that violates USPAP.26

In review, the proposed decision process to determine if a property is special purpose is summarized in Table 1.

 

Table 1 Special-Purpose Decision Process

 

  1. Review definitions to determine if the subject property

  2. Search for comparable properties within a designated If none or few are available expand the search geographically based on likely buyers of the current use.

  3. Analyze the likely buyer/users of the current use, geographic location of their operations and whether they have purchased or sold similar

  4. Determine if the subject property’s cost of conversion is financially

  5. If the operation is no longer viable, demonstrated by abandonment or lack of economic viability of the specific industry, conclude a land value minus demolition or a change in

  6. If financially feasible to convert, determine the likely uses, and select comparable property sales based on this alternative Then compare the value with conversion to the value of the current viable use.

  7. If not financially feasible to convert, but the current use remains viable based on an on-going operation, conclude special purpose.

 

Examples

The following property examples illustrate issues that can become part of the decision process.

Churches

Churches are many times used as examples of unique property. But does that mean churches are special-purpose properties? Not necessarily. Changing times have shown that an ornate, former church may be used as an art studio, an office a meeting hall, and even a night club or a restaurant. Notwithstanding, alternative uses of traditional or historic churches may be limited depending on how desirable the location and amount of conversion needed for a given use. Assuming that a church is special purpose may be erroneous. In addition, many modern churches are housed in buildings that are suitable for a variety of uses including schools, warehouses, and business organizations. Each parcel of real estate may be considered unique in some way. But being unique does not make a property special purpose. The appraiser needs to ask if the use is so unique that there are few sales comparables, or locationally incompatible for other uses, or the conversion costs too high for an alternative use to be financially feasible.

Gas Stations

There have been legal cases where the local government or court focused on a “special use” property in comparison to a set of alternative uses. For example, Duvall and Black cite an instance where a “mom and pop” service station was deemed “special use” by a court.27 One may argue it is special in comparison to other gas stations or in terms of other potential uses, but is it special in terms of what appraisers are able to defend? A mom and pop gas station may be special in terms of ownership entity, but the focus should be on the property. First, are there other gas station sales? Next, is it viable as a gas station going forward? Would other gas station buyers purchase the property in the as is condition, or modify it for continued gas station use? Last, is it financially feasible to modify the property for an alternative use? If gas station sales comparables are not available and conversion is financially infeasible, only then a conclusion of the current use as special-purpose property is warranted.

Gentlemen’s Club

A “gentlemen’s club” or “strip joint” may appear unique in comparison to other land uses in the area, but does that make it a special-purpose property? Again, to be a special-purpose property, the property itself—not the use—needs to be unique. The test of conversion to alternative uses needs to be examined. There may be some fixtures unique to the business, but the appraiser should consider whether the fixtures can be removed or incorporated into a future use. For instance, could the property be used as a restaurant? The appraiser would ascertain whether the location within the market is reasonable for a restaurant, or if not, what other conversions make sense. If there are favorable alternative uses for the property, then it is not a special-purpose property. This logic surely narrows the number of properties that are truly, by definition special purpose.

Aircraft Hangar

An aircraft hangar has a specific design that is likely to include a large open space, auxiliary offices, and storage.28 A likely alternative user would be another aircraft-related business because of the property’s unique location. For example, alternative uses might include an aircraft mechanic fi or a specialty aircraft products firm where the client and aircraft would visit or the aircraft would temporarily stay in order to have the service performed. The question arises whether the productivity of the alternative users is reasonable for the given space. If the given space is underutilized the benefits of the conversion may not be enough to justify the cost of the improvements or the effective rent the user is willing to pay. The property may have limited equipment that can be physically removed, but space utilization can be lacking. This utilization, or “productivity,” is part of a highest and best use analysis and not a business value analysis.

Now let’s use a specific property as an example of the identification process.

Ice Factory Case Study

An owner-occupied ice manufacturer and distributor is housed in two en bloc industrial warehouse buildings in Tacoma, Washington. The locally owned company has occupied this build-to-suit property since 2010. The location is isolated to some extent, located on a highway, not close to retail clustering, and with little site view. The total land area is 3.21 acres. Building one is a refrigeration warehouse with two loading docks that are designed for ice shipment. Building two is an ice generation facility. Its 25-foot to 30-foot ceilings accommodate special machinery for generating, packaging, and shipping ice. The site has sufficient parking, outside storage capability, and a retention pond for runoff. Based on a definitional review, the property may be a special-purpose property.

A likely buyer of the current use would be another ice company trying to get a strategic position in the region, such as a nationwide ice distribution corporation. Comparable sales research shows there have been no local or regional transactions, even though the local industrial market had a strong year through 2013. No private ice storage facilities were completed in the prior year. Calls to potential buyers showed little interest in this property, although it has a modern and efficient design. As a result, the property passes step two of the identification process for special-purpose properties due to the limited (or no) comparable sales for the current use.

Next, a conversion analysis is performed to consider possible alternative uses. The Seattle Tacoma-Bellevue MSA is rated the sixth best investment market in the country, and the Urban Land Institute touts this MSA’s industrial property as the champion of all investments in the region. The Pierce County (Tacoma) industrial market was strong through 2013, with a positive absorption rate of 481,491 square feet. The overall vacancy rate was 4.74% at the end of 2013.29

There are 26 new industrial projects in the MSA market, supplying nearly 19 million square feet of additional industrial space. Many large tenants in the Pierce County submarket are looking for industrial space to develop, and no private ice storage facilities were completed in 2013. It can be concluded, therefore, that demand for space is strong. The next step is to determine the cost to convert.

The conversion costs include the cost to remove specialized equipment that may result in some damage on removal or transport, resulting in depreciation. The large, cold storage room is greater in size than other competing facilities and built for expansion, therefore it is considered a super adequacy by other cold storage users, resulting in functional obsolescence. The adjoining building where ice manufacturing is conducted does have high roll-up doors and ceilings, which are favored by alternative users; however, there are equipment pads that may need to be removed for an alternative use. The site has ample parking and can accommodate on-site storage but is not a good retail location.

An economic analysis is performed looking at the possibility of separating the property for two users. One building is for a cold storage operation and the other is for light industrial or warehouse use. This analysis proved that the likely aggregate rent with separate users is less than the effective rent the current user said he would be willing to pay if he were a tenant and not the owner. Interviews with the owner showed an unwillingness to separate the property for multiple users because of underutilization and likely lower rents in comparison to an ice manufacturer. Therefore, it is concluded that alternative uses with conversion costs are infeasible or result in less utilization and lower effective rent.

A consolidated example of the valuation analysis is shown in Table 2, Table 3, and Table 4. The cost approach and sales comparison approach to value for the current use is summarized in Table 2 and Table 3, respectively. Comparing the cost approach with the sales comparison approach shows a reasonable range for market value after a significant adjustment to sales comparables for functional utility. The reasoning for the positive functional utility adjustment is a lack of sales of existing property that are close substitutes.

This conclusion is also acknowledged in The Appraisal of Real Estate, which states, “The highest and best use of a special-purpose property as improved is probably the continuation of its current use if that use remains viable and there is sufficient market demand for that use.”30 This would “likely include some forecast of continued economic demand, which may be demand for the finished product.”31 The current use, a specialized use will remain the highest and best use until more economically viable alternative uses emerge or the current use is no longer economically viable.

The market value estimate of an alternate use of the subject property by the sales approach is shown in Table 4. After an adjustment to sales comparables for conversion needs, comparing the results of Table 3 to Table 4 shows that the highest and best use is the current use. Therefore the result of this analysis is a conclusion that the subject remains a special-purpose property.

table23

table4Comparable Property

So far we have focused on the subject property for determination of special purpose. The appraiser also needs to consider whether the sales comparables selection is for an as is use or the most likely alternative use. Again, if there are no local sales comparables of the as is use, there is a need to expand the geography where potential sales comparables may be located. Since the subject property may be special purpose, it is not likely to have local as is sales comparables and geographic expansion of the search is warranted. The likely buyer may be a regional or national entity. This purchaser type demonstrates that their market is not local and justifies a broader geographic search.

If it is financially feasible to convert the subject property to an alternative use the appraiser needs to take into account the conversion costs to create this alternative use. The value of a sales comparison would then need to be adjusted downward for the conversion costs from the financial estimate of value based on the costs required to convert the subject to the alternative use. This also means the appraiser needs to be careful with the assumptions for alternative uses within a property type. For example, an industrial use may fall within industrial warehouse zoning, thus a warehouse is a permissible use. But it is not the same use, and more important not the same likely buyer/renter as the subject property. Even within warehouse or manufacturing there are segments of likely buyers who require on-site storage of raw or finished products in comparison to other potential users who are strictly warehouse operations.32 These buyers are not the same in their desires or needs for land and improvements or land-to-building ratio, nor willingness to pay for land.

Finally, even if a conversion is financially feasible, it may not be maximally productive. As illustrated within the ice house example the alternative use or ability to divide a property into multiple uses does not mean the highest and best use is the alternate use. The continuation of the current use is held to be an economically viable industry and is the highest and best use.33

Summary and Conclusion

Special-purpose properties can be oversimplified as properties that appear to be unique or where the business is thought of as “special” as opposed to the property itself. There is a need for a consistent process to focus on the physical property and location, not just on the current use, when analyzing property. Any selection of comparable properties, in particular those used in an alternative use, requires analysis of what it would cost for the subject property to be readily available for that alternative use. In contrast, viable special-purpose property sales comparables are likely to need adjustment to create the same functional utility as the subject property. In either scenario a failure to make an adjustment creates results that are misleading and in error, leading to a faulty highest and best use conclusion.

 

Ron Throupe, PhD, MAI, MRICS, is managing partner of American Valuation Partners (AVP) and a senior vice president at National Valuation Consultants (NVC) in Denver, Colorado. He was previously the director of operations of Mundy Associates and later Greenfield Advisors, in Seattle. He specializes in real estate valuation in litigation, including eminent domain and detrimental conditions. Throupe is an associate professor at the Franklin L. Burns School of Real Estate and Construction Management in the Daniels College of Business at the University of Denver. He has a PhD and an MBA in real estate and finance from the University of Georgia, along with a BS in civil engineering from the University of Connecticut. Contact: rthroupe@du.edu

Kaifeng (Kay) Zhang, Candidate for Designation, received her MSRECM from the Burns School of Real Estate and Construction Management in the Daniels College of Business at the University of Denver. Zhang was a graduate scholarship award winner of the Appraisal Institute Education Trust in 2013. She is an acquisition analyst with Grand Peaks Properties in Denver, Colorado and also an associate with American Valuation Partners (AVP) on complex real property valuation in litigation. She previously worked at Colliers International–Hong Kong.

Contact: kay@avpartners.biz

 

Xue Mao, Candidate for Designation, is a 2015 recipient of a course scholarship from the Appraisal Institute Education Trust. Mao currently is a candidate for an MS in real estate and the built environment; she has an MBA in real estate from the Burns School of Real Estate and Construction Management in

the Daniels College of Business at the University of Denver, and a BS in civil engineering from Southwest Jiantong University. Mao is an associate at American Valuation Partners (AVP) where she specializes in complex real property valuation in litigation and has previously published work on the real estate damage potential of hydrofracking. Contact: mao@avpartners.biz

 

 

 

  1. “The scope of work must include the research and analyses that are necessary to develop credible assignment ” Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (USPAP), 2014–2015 ed. (Washington DC: The Appraisal Foundation, 2014), U-14.
  2. Unique generally can be defined as, “without a like or equal; unmatched; unequal; uncommon or ” New Webster Dictionary (New York: Delair Publishing Co. Inc., 1976), s.v. “unique.” A court finding that a property is unique may affect the valuation method that the court considers acceptable. See Richard 0. Duvall and David S. Black, “Methods of Valuing Properties Without Compare: Special Use Properties in Condemnation Proceedings,” The Appraisal Journal (January 2000): 1–9.
  3. Limited-market property is “a property or property right that has relatively few potential buyer” Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), s.v. “limited-market property.” Special use is a zoning term associated with permitting or allowing a continuing use. For example, The Dictionary of Real Estate Appraisal, 5th ed., defines special use permit as “permission granted by a local zoning agency that authorizes a use as a special exception to the applicable zoning. A special use permit in a residentially zoned area might allow for construction of a church or hospital. Such uses are considered conditional uses, only permitted upon the approval of the zoning authority.” Ibid., s.v. “special use permit.”
  4. Ibid.
  1. Business enterprise value is “the value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled work force, working capital, trade names, franchises, patents, trademarks, contracts, leases, customer base, and operating ” Ibid., s.v., “business enterprise value.”
  2. Duvall and Black, “Methods of Valuing Properties Without ”
  3. Ibid., 2.
  4. Ibid., 3.
  5. Max Derbes Jr., “Non-Comparable Industrial Sales,” The Appraisal Journal (January 2002): 39–45.
  6. John Lipscomb, “Second-Generation Industrial Buildings: Value Determinants,” The Appraisal Journal (July 2002): 298–303.
  7. Derek W. Zimmer, “Avoiding Traps when Using Sales Comparison to Value Storage and Distribution Facilities,” The Appraisal Journal (July 1991): 390–394.
  8. Rudy Robinson III and Scott R. Lucas. “Appraisal of Special-Purpose Industrial Facilities for Ad Valorem Purposes,” The Appraisal Journal (October 2003): 321–327.
  9. Ibid., 323.
  10. Stephen Clark and John R. Knight, “Business Enterprise Value in Special Purpose Properties,” The Appraisal Journal (January 2002): 53–59.
  11. John Crafts, “Tax Abatement Issues that Impact Limited-Market and Special-Purpose Properties,” The Appraisal Journal (Spring 2013): 143–150.
  12. Max Derbes Jr., “Non-Comparable Industrial Sales,” 228.
  13. Very specific attention needs to be devoted to depreciation, especially external A failure to do so can lead to an overstatement of value.
  14. Derbes reminds the reader that the basic economics of the sales comparison approach requires a determination of the highest and best use in specific terms, not merely For example, heavy manufacturing is not the same as light industrial warehouse, although the general use may both be categorized as industrial. This is also acknowledged within The Dictionary of Real Estate Appraisal, 5th edition, which defines submarket as “a division of a total market that reflects the preferences of a particular set of buyers and seller, e.g., fast food restaurants as a submarket of the overall restaurant market.” s.v. “submarket.”
  15. Appraisers with an assignment in a small market need to broaden their search first to other small markets as a proxy for the subject If not sufficient, then to larger markets although there may be a need for a locational adjustment.
  16. The Dictionary of Real Estate Appraisal, 5th , s.v. “special-purpose property.”
  17. The 2007 IVS Glossary is available in The Dictionary of Real Estate Appraisal, 5th , 256. The current edition of the IVS does not include a glossary; however, the International Valuation Standards Council’s 2015 “International Valuation Glossary” uses the same definition of specialized property, see http://www.ivsc.org/glossary#letter_s.
  18. See Crafts, “Tax Abatement Issues that Impact Limited-Market and Special-Purpose Properties,” which explains that some states have separated limited marketability and special purpose as a hierarchy.
  19. “In the analysis of the highest and best use of the property as improved, an appraiser considers the alternative uses by applying the same tools applied in the analysis of the highest and best use of the land as though vacant, e., the four tests. The future economic performance of the existing improvements is the core concern in testing the alternative uses of the property as improved.” Appraisal Institute, The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013), 346.
  20. The Appraisal of Real Estate, 14th , states, “If demolition is ruled out, then changes to the existing improvements which may include a change of use should be tested next. The recognized forms of modification are conversion of the property to an alternative use, renovation of the improvements, and alteration of the property. For any of these options to be financially feasible, the change must add at least as much value to the property as it costs. In other words, the value after conversion, renovation, or alteration less the costs of the modification must be greater than or equal to the value of the property as is. The cost involved in any form of modification can include an estimate of profit or entrepreneurial incentive.”
  21. Ibid., 346–347.
  22. This can also be thought of as a cost to cure.
  23. Standards Rule 1-1(b) states that an appraiser must “not commit a substantial error of omission or commission that significantly affects an ” USPAP, U-16.
  24. Duvall and Black, “Methods of Valuing Properties Without Compare,”
  25. Timothy Lindsey, “An Introduction to the Valuation of Aircraft Hangers—Part 2,” The Appraisal Journal (Spring 2008): 132–154.
  26. Colliers International, Q4 2013 Industrial Research and Forecast Report (Seattle: Colliers International, 2013),
  27. For an example of land-to-building ratio analysis of industrial warehouses, see Zimmer, “Avoiding Traps when Using Sales ”
  28. Derbes Jr, “Non-Comparable Industrial Sales.”

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