Investment value
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Investment value is the value of a property to a particular investor. In the U.S., it is greater than market value because the investor is able to put the property to a use which is greater than its highest-and-best-use[1].
Generally, an investor enjoying an investment value for a property has one or more of three different advantages over other market participants:
- Extraordinary financing -- this may include below market financing terms from a lender, seller contributions to the financing, or sources of capital not available to other market participants.
- Grandfathered uses -- the investor may take advantage of uses of the property which would not be available to other buyers. An example would be a store, rented to a coffee shop or other high-rent-paying tenant, in a neighborhood which is now zoned residential. If the property changes hands, or in some cases if it discontinues its present use for a legally-specified period, then the use reverts to the legally permissible one and the grandfathering period ends.
- Agglomeration advantages -- the investor owns neighboring properties which can be profitably developed only if this particular property can be bought. Hence, the value of the property is not its intrinsic value, but the higher value which it contributes to the neighboring sites.
[edit] International Valuation Standards
The current edition of International Valuation Standards (IVS 2007) defines Investment Value in a way which allows for either a higher value than market value or a lower value than market value:
- Investment Value or Worth The value of property to a particular investor, or a class of investors, for identified investment objectives. This subjective concept relates specific property to a specific investor, group of investors, or entity with identifiable investment objectives and/or criteria[2].
Investment Value is a subjective measure of value, a 'value-in-use', whilst Market Value is an objective 'value-in-exchange'. As defined in IVS2, Investment Value is the valuation equivalent of the accountancy concept of Value-in-use. Whereas IFRSs define the accountancy concepts of fair value and Value-in-use in operational terms, IVSs define Market Value and Investment Value by way of generalised definitions.
[edit] References
- ^ Note: Highest and Best use is a term of art in appraisal, and refers to a maximally productive use determined based on a stylized set of market factors
- ^ Exposure Draft of Proposed Revised International Valuation Standard 2 - Bases Other than Market Value, June, 2006
