Principle of Substitution
No prudent buyer will pay more for a properly than it would cost to acquire an equivalent substitute property of equal utility. (The Cost and Sales Comparison Approaches rely on the Principle of Substitution.)
Principle of Anticipation
The value of property is affected by the potential future benefits of its ownership. (The Income Approach relies on the Principle of Anticipation.)
Principle of Conformity
The value of a property is enhanced when the uses of surrounding properties conform to the use of the subject property.
Principle of progression/Regression
Progression is the increase in value of a property that is attributable to its location among more desirable properties. Regression is the decline in value suffered by a properly that is located in an area of less desirable properties.
Principle f Consistent Use
The principle of consistent use requires both the land and the improvement to be valued for the same use, even if they are being valued separately.
Principle of Highest and Best Use
Market value is determined by the most profitable use of the property consistent with the following criteria:
(1) Physically possible
(2) Legally permissible
(3) Financially feasible
(4) Maximally productive
Principle of Competition
Competition occurs when supply and demand are out of balance.
Principle of Change
Supply and demand fluctuate in response to changes in social, economic, and other conditions that influence value. (This is the fundamental reason for the requirement that appraisers estimate value as of a specific date.)
Principle of Balance
Value and production are maximized when opposing or interacting factors are in equilibrium. An imbalance will result in an over improvement or under improvement and consequentially a loss in value.
Principle of Contribution (Contributory Value)
The value of a component, regardless of its cost, is equal to the amount of value it adds to the property as a whole as perceived by the market. (This principle is particularly useful to the Sales Comparison Approach.)
Principle of Surplus Productivity
This principle recognizes the Four (4) Agents of Production:
- Land
- Labor
- Capital
- Entrepreneurship
In any enterprise, labor must be paid first. With capital paid after that under the surplus productivity concept. Entrepreneurship is then paid.
This principle forms the basics of residual techniques for estimating land value.
Principle of Increasing and Decreasing Returns
Larger amounts of the Four Agents of Production will produce greater net income up to a certain point at which the maximal value will be developed. Any excess expenditures will not produce a return commensurate with the original investments.
Principle of Supply and Demand
The value of a commodity in a competitive market is determined by the relative levels of supply and demand. The demand for a commodity is created by scarcity. Prices decrease when supply exceeds demand of a commodity and increase when demand is greater than supply.
RENT TYPES
- CONTRACT RENT – rent specified in lease
- MARKET RENT – rent property would command if it were available for lease in current market
- DEFICIT RENT – contract rent is lower than current market rent
- EXCESS RENT – contract rent is higher than current market rent
LEASE TYPES
FLAT – fixed rent over entire term
GRADUATED LEASE (STEP-UP/STEP-DOWN LEASE) – rent adjustments at specific times in specified amts.
INDEX LEASE – rent adjustments are tied to market conditions, such as the CPI
GROSS LEASE – lessee pays only rent and no expenses
MODIFIED GROSS LEASE (also called a ‘NET LEASE’) – lessee pays some expenses
NNN LEASE – lessee pays all expenses
GROUND LEASE – a lease in which the tenant leases only the land from the landlord, but the tenant actually owns the building. The tenant, as building owner, is free to sell the building at will and have the buyer assume the existing land lease subject to any and all lease provisions such as creditworthiness standards required for lease assignment, administrative property management fees required for lease assignment, etc.. Term of ground lease is generally the life expectancy of the building.
LEASE TERMS
PERIODIC LEASE – Month-to month lease
TERM LEASE – for a fixed period of time, either short or long term
RENEWAL OPTIONS – allow tenant to renew lease on specified terms after conclusion of the original lease term
If renewal terms favorable to tenant, they am taken into account by appraiser because that is considered ATYPICAL
If renewal terms favorable to landlord, they an ignored by appraiser because that is considered TYPICAL.