Fair Market Value

Fair market value is the price a property would bring on the open market between a willing buyer and a willing seller. Neither is under compulsion, and both know the relevant facts. The IRS applies this standard in Publication 561 and Revenue Ruling 59-60 for gift, estate, and donation reporting.

Four conditions define it. Buyer and seller act voluntarily. Both understand the property’s condition and permitted use. The asset gets reasonable exposure to the market, and payment is in cash or its equivalent.

Fair market value differs from investment value, the closest neighboring concept. Investment value is what one specific buyer will pay given their tax position, cost of capital, and plans for the asset. A 1031 exchange buyer facing the 180-day closing deadline may pay a premium over fair market value. That premium is real. It does not move the market standard.

Assessed value is a third thing entirely. A county assessor sets it for property tax billing, and it resets on the cycle the state statute prescribes, not when the market moves. Fair value under ASC 820 is a fourth: an accounting measure with its own input hierarchy.

Appraisers working on federally related transactions report “market value” as defined under FIRREA Title XI and USPAP. That wording departs from the IRS standard on financing terms and exposure time. Check which definition a report cites before you rely on the conclusion.

Consult a licensed appraiser and a tax advisor before using any value conclusion for a tax filing, an estate, or litigation.

Formula

Income approach: Value = NOI ÷ Capitalization Rate

NOI is effective gross income minus operating expenses, before debt service and capital expenditures. The cap rate is extracted from comparable sales in the same submarket and asset class.

Illustrative figures: $480,000 of NOI capitalized at 6.5%, using three recent comps, indicates roughly $7.38 million. Numbers are illustrative only.

In practice

A seller anchors to the asking price, the lender to the appraisal, the assessor to the tax roll. All three can be wrong at once. Ownership records, sale history, and current-use data on Realmo let an investor test each figure against one comp set.

Comparable Sale

A comparable sale is a closed transaction used to price a subject property by measuring what buyers actually paid for similar assets. Brokers adjust each comp for differences in date, location, size, condition, and financing terms. Listings don’t count.

Cost basis is irrelevant. A broker builds a grid of three to six closed sales and converts each to a unit price. That unit can be per square foot, per unit, or per acre. Adjustments run in one direction only: toward the subject. A comp with better loading and 32-foot clear height gets adjusted down, while a comp on a weaker corridor gets adjusted up.

Screen for arm’s-length terms first. A sale between related parties, a portfolio allocation, or a lender-forced disposition prices differently than an open-market deal between unrelated principals.

A comparable sale is not a comparable listing. An asking price records what a seller wants, while a closed sale records what a buyer paid and a lender underwrote. Assessed value is something else. It comes from a lagging assessment cycle built for tax rolls.

Formula

Adjusted unit price = (comp sale price ÷ comp size) × (1 + net adjustment)

Net adjustment is the sum of percentage adjustments applied to the comp so it resembles the subject.

Illustrative example. A comp closes at $2,400,000 for 20,000 square feet, or $120 per square foot. The comp sits on an inferior access road (+6%) and closed with above-market seller financing (‑4%). Net adjustment is +2%, giving $122.40 per square foot. Applied to a 25,000 square foot subject, that indicates about $3,060,000. Reconcile at least three adjusted comps before quoting a number. One comp is an anecdote. Figures above are illustrative only.

In practice

For a 40,000 square foot flex pricing opinion, the broker pulls closed sales within two miles from the past 12 months. Each one gets verified with a party to the deal. Ownership and sale records on Realmo shorten the pull.

Valuation used for lending, tax appeal, or litigation requires a licensed appraiser.

Functional Obsolescence

Definition

Functional obsolescence is a loss in property value caused by outdated design, layout, or building systems that no longer match market standards. The defect sits inside the property line. A warehouse with 20-foot clear height competes poorly against 36-foot buildings, and rent reflects that gap.

How it works

Appraisers split accrued depreciation into three buckets in the cost approach: physical deterioration, functional obsolescence, and external obsolescence. Functional obsolescence covers what’s wrong inside the fence.

It takes two forms. Curable obsolescence pays for itself: a replacement HVAC system, added dock levelers, a chopped-up office floor opened back up. You cure it when the cost is less than the value the fix adds. Incurable obsolescence is structural. Column spacing of 40 by 40 feet can’t be widened to 50 by 54. A 24-foot clear height can’t be raised without rebuilding the shell.

A third form runs the other way. Superadequacy is a feature that cost real money and returns nothing. Think a 30% office build-out in a bulk warehouse whose competing space runs closer to 5%.

Don’t confuse this with external obsolescence, the nearest neighboring concept. That loss originates outside the property line: a rerouted highway, a closed anchor, oversupply in the submarket. Same hit to value, different cause, different treatment in the appraisal.

Formula

Functional obsolescence = the lesser of cost to cure, or capitalized rent loss.

Capitalized rent loss = (rent gap per SF × rentable SF) ÷ cap rate

Illustrative example. A 100,000 SF warehouse with low clear height leases $0.75/SF/year below competing product. Annual gap: $75,000. At an illustrative 7.0% cap rate, that’s roughly $1.07 million of value. Raising the roof would cost several times that, so the obsolescence is incurable and stays in the valuation as a deduction.

In practice

Buyers underwrite functional obsolescence as a permanent rent discount, not a one-time repair line. Realmo’s current and suggested use data helps flag buildings whose configuration no longer fits demand in their submarket.

Going Concern Value

Going concern value is the value of an operating business and the real estate it occupies, measured as one working unit. It applies to properties where income depends on an active business: hotels, self-storage, marinas, senior housing, car washes. It covers real property, furniture and equipment, and intangible assets together.

Appraisers split the total assets of an operating property into three buckets. Real property is the land and improvements. Personal property is the FF&E: beds, laundry equipment, point-of-sale systems, vehicles. Intangible value is everything else that produces income, including a franchise flag, a liquor license, an assembled workforce, and goodwill built from repeat customers.

The split matters to lenders. A mortgage secures real property, not a workforce or a brand agreement. The Interagency Appraisal and Evaluation Guidelines (federal banking regulators, 2010) direct appraisals to identify non-realty items when their value is material. USPAP Standards Rule 1-4(g) requires the same analysis. A loan sized off the full going concern number is over-secured on paper and under-secured in a default.

The closest neighboring concept is business enterprise value, which refers to the intangible slice on its own rather than the whole package. The Appraisal Institute has moved away from treating “going concern value” as a value type. It prefers the going-concern premise of value and the term total assets of the business (TAB). Buyers still use the older phrase in negotiation.

One more contrast worth holding onto. Value the same hotel as a dark box, closed and awaiting a new operator, and the number drops hard. The gap between the two figures is what the operating business is worth.

Formula

Going concern value = real property value + FF&E value + intangible business value

Illustrative example. A 100-room limited-service hotel generates stabilized business-level NOI of $1,200,000. Applied at an illustrative overall rate of 9%, the going concern indicates $13,333,000. Subtract FF&E at depreciated replacement cost, $1,500,000. Subtract intangibles (franchise affiliation, assembled workforce), $1,800,000. The real property indication is $10,033,000, and that is the figure the mortgage is sized against. Figures are illustrative only.

In practice

An investor bidding on a self-storage portfolio pays the going concern price but finances against the real property allocation. This creates a wider equity check than a comparable warehouse deal. Allocation also drives depreciation schedules at closing, so confirm the numbers with a licensed appraiser and a tax advisor before signing.