Appraisal Institute publications address the topic:
The Dictionary of Real Estate Appraisal, Sixth Edition presents three definitions applicable to unique properties:
page 114 A limited-market property is “a property (or property right) that has relatively few potential buyers.” A special-purpose property is “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; also called a special-design property.”
page 217 A special-purpose property is “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, also called a special-design property”
page 241 defines use value as “The value of a property assuming a specific use, which may or may not be the property’s highest and best use on the effective date of the appraisal. Use value may or may not be equal to market value but is different conceptually.”
The Appraisal of Real Estate 14th Edition, Page 62 defines use value as
“In real estate appraisal, the value a specific property has for a specific use; may be the highest and best use of the property or some other use specified as a condition of the appraisal.”
“Use value is not the same as market value and it does not fit the definition of market value.”
“In sharp contrast to market value …, use value 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. Real property has both a use value and a market value, which may be the same or different depending on the property and the market.”
The Appraisal of Real Estate” 14th edition page 566 says
“In any market, the value of a building can be related to its cost. The cost approach is particularly Important when a lack of market activity limits the usefulness of the sales comparison approach and when the property to be appraised—e.g., a one-unit residence—is not amenable to valuation by the income capitalization approach. Because cost and market value are usually more closely related when properties are new, the cost approach is important in estimating the market value of new or relatively new construction. The approach is especially persuasive when land value is well supported and the improvements are new or suffer only minor depreciation and, therefore, approximate the ideal improvement that is the highest and best use of the land as though vacant. The cost approach can also be applied to older properties given adequate data to measure depreciation.
The cost approach may be used to develop an opinion of market value (or some other type of value the appraisal assignment may require such as use value or fair value) of proposed construction, special-purpose or specialty properties, and other properties that are not frequently exchanged in the market. Buyers of these properties often measure the price they will pay for an existing building against the cost to build less depreciation or against the cost to purchase an existing structure and make any necessary modifications. If comparable sales or comparable rentals are not available, current market indications of depreciated cost, or the costs to acquire and refurbish an existing building, would be the best reflections of market thinking and, thus, of market value.
When the physical characteristics of comparable properties differ significantly, the relative values of these characteristics can sometimes be identified more precisely with the cost approach than with the sales comparison approach. Because the cost approach starts with the cost to construct a replica or a substitute property with optimal physical and functional utility, it can help an appraiser determine accurate adjustments for physical differences in comparable sale properties. If, for example, an appraiser must make an adjustment for inadequate elevators in a comparable property, the cost to cure the deficiency can be used as a basis for this adjustment. Thus, the cost approach provides the appraiser with data to use both in estimating depreciation and in deriving an adjustment to apply in the sales comparison approach.
The cost approach is especially useful when building additions or renovations are being considered, which is a key issue in highest and best use analysis. The approach can be used to estimate whether the cost of an improvement, including an entrepreneurial incentive, will be recovered through an increased income stream or in the anticipated sale price. The analysis of feasibility rent can help identify and prevent the construction of over-improvements.”
