Value in Use vs. Value in Exchange: Do the Courts Know the Difference?

Value in Use vs. Value in Exchange: Do the Courts Know the Difference?

September 01, 2015

Market Value in Exchange is typically the standard for most litigation involving real property, including tax appeal, bankruptcy, shareholder disputes, construction defects, and environmental contamination. However, many property valuation practitioners (appraisers and attorneys alike) wonder whether the courts truly understand this standard and how it contrasts with Market Value in Use. Put another way: Do the courts truly focus on current market value to the typical buyer as opposed to value to the current owner/user? Huge consequences can flow from judicial (in)action, as reliance on Market Value in Use when the standard should be Market Value in Exchange can have dramatic value implications. But do the courts get it?

As indicated in The Appraisal of Real Estate, 14th Edition1, the traditional definition of market value is as follows:

The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgably, and for self-interest, and assuming neither is under undue duress.

This definition represents the concept of value in exchange. The concept of value in exchange is made explicit in the definition of market value developed by the International Valuation Standards Council (IVSC) and used in International Valuation Standards. In these standards, market value is defined as:

The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

In stark contrast to market value, use value (often referred to as value in use) is the value a specific property has for a specific use. In estimating use value, an appraiser focuses on the value the real estate contributes to the enterprise of which it is a part or the use to which it is devoted, without regard to the highest and best use of the property or the monetary amount that might be realized from its sale.

As previously illustrated, use value does not fit the definition of market value.

In some situations the market value in exchange might be very similar to the use value of a property. An example of this might include a multi-tenant shopping center. Here, the highest and best use of the property might be the same as the specific use for which it is being used. In this circumstance, the market value in exchange may be equivalent to the use value of the property, assuming leases in place are consistent with market rent and standard terms.

However, there are numerous situations where use value may be very different than market value in exchange. The most common example of this situation is a special-purpose property, defined by the Dictionary of Real Estate Appraisal, 5th Edition, as:

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.

The Appraisal of Real Estate, 14th Edition2 cites several examples, including: houses of worship, theaters, greenhouses, schools, rail and transportation facilities, sports arenas, and other specially designed and constructed buildings.

The most common element is a build-to-suit for a specific owner/user, with no real alternative use, and a limited number of potential buyers (if any) with a need for the specific design. Use value (driven by cost) for these properties is often much higher than value in exchange (driven by actual market participants).

An industrial building designed and constructed around specific unique manufacturing processes will often have functional elements that may not be suitable for any other use. The construction cost of such a building will often be much higher than a standard industrial warehouse type building. As part of a viable business enterprise, that building may have significant use value to the owner/operator. However, if the owner decided to sell that property on the open market, there may be few, if any, potential buyers who could utilize the building as it is designed. In this example, the market value in exchange to any willing buyer is likely much lower than the use value to the particular owner.

Another example is an acute-care hospital, which is designed specifically to provide in-patient and out-patient healthcare services. As part of a viable hospital enterprise, the use value for the hospital buildings may be significant. However, if the hospital enterprise is no longer financially viable, the market value in exchange may be significantly lower. This reflects the fact that a hospital is a special purpose property, and is often impossible to convert to an alternative use.

Other considerations include the following:

  • Sale and lease data derived from sale/leaseback transactions are typically not reflective of value-in-exchange, due in part because they reflect a captive market, a transaction between related parties, and they are really a form of off-balance-sheet financing
  • Sales of properties like hospitals, hotels, and nursing homes typically reflect the going-concern (real estate, personal property, and intangibles)
  • Buildings designed with a “brand identity” typically have little value to another user (i.e., A McDonald’s restaurant has specific design characteristics that are not suited to anyone else)

Do the Courts Get It?

The following section cites and summarizes court decisions where the concepts of value in exchange and/or value in use were factors in the case.

Cases in Brief

F & M Schaeffer Brewery v. Lehigh City – Supreme Court of Pennsylvania, May 8, 1992

The Supreme Court of Pennsylvania said that value in use is not a reflection of Fair Market Value and is not relevant in tax assessment cases because only the Fair Market Value is relevant.

The property in this case was a 791,382-square-foot brewery building. The facility included a manufacturing office, a warehouse plant, grain silos, and an office building. The county assessor considered the facility’s highest and best use as a special purpose brewery and applied a cost-approach valuation. The assessor concluded to a value of $34 million, whereas the expert for the property owner concluded to a value of $9.5 million. The board of assessors and trial court upheld the $34 million valuation.

On appeal, it was argued that the value in use premise was used in this case, which involves the value to a specific user. The Supreme Court agreed and said the value in use may result in a higher value than the value in the marketplace. The court ruled that the valuation of $34 million could not stand.

Here, the lower court obviously did not “get it,” but the Supreme Court ultimately did “get it.”

Marquette Bank Nat. v. County of Hennepin – Supreme Court of Minnesota, March 4, 1999

Marquette Bank National Association, challenged the 1994-1996 property tax assessments of one of its branch-bank locations, known as Marquette Bank-Brookdale.

The property included a single-tenant, owner-occupied building of 17,920 square feet after improvements were made. Those renovations cost $1 million and added 5,770 square feet to the building. The property’s market value was assessed in 1994 and 1995 at $1.5 million and $1.6 million in 1996. The Minnesota Tax Court determined that the market value of the subject property was $1,110,000 for all three years, a reduction of more than $400,000 per year. The county appealed.

On appeal, the county argued that the tax court’s reliance on the bank’s expert witness’s testimony led the court to improperly concentrate on the property’s potential “value-in-use” to that portion of the market that preferred smaller, less ornate branch bank facilities, rather than in considering the bank’s value in the overall marketplace. But the court concluded that this argument was without merit because the tax court’s adoption of the appraiser’s opinion was simply an attempt to determine the property’s value to the typical purchaser, rather than an attempt to consider the subject property’s intrinsic value to the bank. The tax court decision was affirmed.

Here, the court “gets it.”

Higbee Company v. Cuyahoga County Board of Revision – 839 N.E. 2d 385 (2006)

In accepting a valuation based on the current business use of the property, rather than a valuation based on value in exchange, the owner’s business success, or lack thereof, in the building determines value rather than the underlying value of the real estate.

The court determined that “the business factors and the real property factors must be separated when the real property is being valued for tax purposes.“ “(While) the economics of real-property transactions involving anchor stores and mall developers is different from the usual types of real estate transactions, for ad valorem tax purposes, the property still must be valued on the basis of what a willing buyer would pay a willing seller…”

Here, the court “gets it.”

STC Submarine, Inc., v. Department of Revenue (Oregon Supreme Court)

This case involved an industrial property designed to manufacture underwater fiber-optic cable. The court determined that the buildings were special purpose and could be valued based on the cost approach. The Oregon Supreme Court relied on and quoted specific statutory language as follows: “If the property has no immediate market value, its real market value is the amount of money that would justly compensate the owner for loss of the property.” This is effectively the use value to the current owner, not the value in exchange to any willing buyer.

Here, the court relied upon the statute in allowing use value.

First Federal Savings & Loan Association of Flint v. City of Flint (Michigan Court of Appeals)

This case involved a 65-year-old, seven-story office building designed as a corporate headquarters. The taxpayer argued that the value in exchange is appropriate, and is much lower than the assessed value, which reflects value to the existing corporate user. The Michigan Court of Appeals ruled that the assessment was not erroneous because the bank building was especially suited to a particular use, was not obsolete, and was being used for the particular use for which it was designed.

Here, it appears the court does not “get it.”


New Legislation – Indiana State Senate Bill 436

Indiana State Senate Bill 436 is new legislation that could have implications on the value in use vs. value in exchange conversation. This bill was signed in May 2015 and institutes a change in how special purpose property is valued. This bill states that only the cost approach should be used for appraisal purposes of special purpose properties. However, this bill broadens the definition of what is considered a special purpose property, which will add many properties into this category that have not traditionally been defined as such.

According to information released by the Institute for Professionals in Taxation (IPT), prior to the passage of the bill, they indicate the bill expands the definition of special purpose properties to be defined as follows:

“…special purpose property would be defined as buildings of 50,000 square feet or more (i.e. big box stores), fast-food restaurant chain properties, manufacturing plants, movie theaters, industrial properties, chain stores and the like that have one or more of the following characteristics:

a | Built with a unique physical design that enhances the utility to the person for whom the structure was built

b | Made using special construction materials that enhance the utility to the person for whom the structure was built

c | Designed with a layout that enhances the utility to the person for whom the structure was built”

Critics warn that this expanded definition of “special purpose” properties could result in unequal assessments. This legislation could also create new implications based on future court cases on this very topic.


There is a clear distinction between value in exchange and value in use. The definition of market value is a value in exchange concept, yet court decisions in various jurisdictions around the country indicate the courts don’t always understand the difference. In part, the decisions are based on statutes in place or recently passed — and the hands of the courts are effectively tied. However, some jurisdictions have statutes that mandate value-in-exchange — yet court rulings sometimes create exceptions by relying on value in use concepts. At the end of the day, hiring an expert who understands and can clearly articulate the difference may make the difference between helping the courts get it — or not.


1 The Appraisal of Real Estate, 14th Edition, page 58.

2 The Appraisal of Real Estate, 14th, page 269.