Hard facts about diverse properties

By Vern McClelland

April 6, 2017 12:00 AM

MIX IT UP Properties with diverse uses present their own special problems when it comes to appraising them.

Just when you think you have a handle on basic appraisal principles, along comes a mixed-use property.
Meaning it’s currently used for more than one purpose.
An example would be a quarter of land that hosts the headquarters of a grain farm, but also includes the owner’s house, a secondary residence for the hired man, and a welding shop.
Or the only liquor vendor in the community housed in conjunction with an insurance brokerage.
An acreage with a bed and breakfast.
A two-storey building, with a restaurant on the main floor and several apartments above.
How does one assign an accurate value on these?
One of the first things you are taught in appraisal practice is the concept of “highest and best use.”
Imagine a detached single family home surrounded by commercial buildings.
If you were to go to the market today what do you think would be worth more, the land or the seventy year old house on it?
Is the future potential of this property to continue as a private residence or to be converted to some type of business structure?
And although every possible future use cannot be predicted by the person doing the valuation, understanding a parcel’s potential application is critical to pricing it correctly.
So, one must consider location, probable income that could be generated, the availability of other competing properties, financing restrictions, current economic and demographic data, even drive times.
We just spent the weekend in Edmonton taking in an Oilers’ game and stayed at the Coast Hotel several blocks away.
If you want to see an example of how one development can affect a whole district, take a short tour north of Jasper Avenue between 97 and 109 Street.
It’s one square mile of real estate that’s undergoing massive change, simply as a result of the construction of just one venue, Roger’s Place.
There is a whole slate of new construction underway; condominiums, hotels, restaurants, and the transit system to serve it.
Before Grant McEwen College was put there, the area was mainly warehouses, like Macdonald’s Consolidated.
Here in the midwest, change is often slower but just as dramatic.
Bud Miller Park was established in the 1980s alongside the campus of Lakeland College.
Today it’s surrounded by upscale housing on all sides as city residents want to be within walking distance of the recreation opportunities offered within the park.
But back to the multiple use property.
It’s one of the most difficult type of real estate to put a value on, especially in rural areas.
The key question is what is the foremost purpose of the parcel and its improvements?
With the grain farm example, the welding shop could be converted to general agricultural use or rented to a third party.
However, there is a higher risk to finding a renter for a property designed for light industry in a rural location, and most appraisers would be skeptical about the sustainability of such an enterprise.
So, they would probably look at the building using the cost or reproduction analysis, depreciated to effective age, just like any other shop on the farm to determine what it contributes to the primary value of the property.
You may love operating a bed and breakfast or dude ranch kind of guest housing, but the next owner may want it only for their family, so the income stream from the secondary use may or may not be taken into consideration as contributing to the value.
Just like any other small business, even though a property presents a certain way today does not mean it is sustainable in the market place with a different owner.
Any emotion in the equation must be taken out of it by the valuator and the result can be a hard pill for the current owners to swallow!
Vern McClelland is an associate broker with RE/MAX of Lloydminster. He can be reached at (780) 808-2700, through www.vernmcclelland.

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