Value – is often interpreted in different ways. In its most generic meaning, the term “value” (as a noun) is defined by Webster’s Dictionary as “the amount of money for which something will find a buyer“. In the real estate and appraisal world, we often work with a concept called “market value” which is described (not defined) by the Uniform Standards of Professional Appraisal Practice (USPAP), as: “A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the value definition that is identified by the appraiser as applicable in an appraisal.” There are other descriptions and definitions, which can be found through simple online research by googling “market value”. While every jurisdiction has its own specific definition, all those I’ve seen are pretty consistent with each other.
The Internal Revenue Service (IRS) and the accounting world often use the term “fair value” which is defined by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) as: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
While often interpreted differently and using different language, these definitions are quite consistent. Both specifically include the presumption of a sale or transfer of ownership of the property in question. While the interest in the property (fee simple, leased fee, leasehold, life estate, etc.) may vary, the concept of value, fair or market is eerily similar even though they are often understood differently.
For instance, while working in an eminent domain case recently, it was claimed that the condemnee should receive compensation commensurate with the cost to reproduce the property being taken despite the fact that such a reproduction would far exceed the market value of the property. The condemnee claimed that only the cost approach to value should be used in estimating the value of the property despite that approach not representing accurately the actions of market participants and the presumption of a sale.
In another case, the use of the term “fair value” was interpreted by one party to mean the investment value to that party (owner) which is defined as follows: “The value of a property to a particular investor or class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.” Note that investment value does NOT presume a sale of the property. We have also been called upon in many instances to estimate “use value” which is defined as: “The value of a property based on a specific use, which may or may not be the property’s highest and best use. If the specified use is the property’s highest and best use, use value will be equivalent to market value. If the specified use is not the property’s highest and best use, use value will be equivalent to the property’s market value based on the hypothetical condition that the only possible use is the specified use.”
In still another case, we were asked to review an appraisal that used the presumption that all the club’s members would be terminated and asked to rejoin at a substantially higher entrance fee and dues rate, using a hypothetical condition that (in my opinion) was not considered reasonable. I’m not sure what type of value that’s called.
Market value and fair value both depend on the concept of highest and best use and rely on the presumption of a sale of the property. With golf properties, especially private clubs, it is not uncommon for these terms to be confused and misused. With many private clubs in particular operating as not-for-profit entities, sometimes an ill-informed appraiser or analyst might presume that only the cost approach can be used since there’s no cash flow to capitalize. With an active and well-known market for the acquisition of previously not-for-profit private clubs by for-profit entities, there is most certainly a market from which to analyze data and incorporate the presumption of a sale.
Value (market and fair) is at once a complex (what interest is being valued) and simple (what would it sell for?) concept. It is incumbent on appraisers, attorneys and ultimately courts to properly and accurately define value and identify the interest being valued. With the complexities of golf properties and the often misunderstood market for same, this is always the first and often the most critical step in a valuation of a golf property.