contributory Value: A Flawed Hotel Appraisal

Introduction

Many hotel appraisals overestimate personal property value. This seems to occur mainly in appraisals prepared for property tax appeals. Perhaps not coincidentally, hotel owners in certain taxing jurisdictions benefit when more of their overall hotel value is classified as personal property (e.g. furniture) instead of real property (e.g. the land and building). The concept of “contributory value” can sometimes be the culprit in these flawed hotel appraisals. By understanding the difference between consumer surplus and market value, appraisers can avoid this type of appraisal error.

Consumer surplus is a valuable concept that can help appraisers understand what is and is not property value in hotels. Readers can think of consumer surplus as the difference between what a buyer is willing to pay for an item and that item’s market price. If you are willing to pay $5.00 for a gallon of milk, but the local supermarket price is only $3.49, then you can enjoy a consumer surplus of $1.51 by purchasing the gallon of milk.

In this example, the market price, or market value, of a gallon of milk is $3.49, even though at least one buyer would be willing to pay more. The market value of an item can be higher or lower than the price various individuals are willing to pay.

The Appraisal Institute[1] provides the following definition of market value:

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, knowledgeably, and for self-interest, and assuming that neither is under undue duress.

There are many definitions of market value. In general, these definitions focus on determining the price at which something would trade in a competitive marketplace.

Graphic Representation of Consumer Surplus

Graphically, consumer surplus represents the area between a demand curve and the market price of whatever is being traded. The following figure shows the consumer surplus in the shaded area, below the demand curve, above the market price P1.

[1] The Appraisal Institute, The Appraisal of Real Estate, 13th Edition (Chicago: The Appraisal Institute, 2008), 22-23.