Calculating Section Eighteen Diminution in Industrial Property Reversionary Valuations
Section 18 caps industrial dilapidations at actual reversionary value loss, stopping landlords from recovering repair costs that exceed open market impact.
Open Market Value
Meaning
Real estate and asset appraisals estimate the price at which an asset would change hands between a willing buyer and a willing seller in an arm’s-length transaction. Calculating the open market value requires assuming that the asset is exposed to the market for a reasonable period and that neither party is under duress to transact. It represents the standard benchmark for tax assessments and secured lending.
This valuation must ignore any special interest or marriage value that a specific neighbor or strategic buyer might pay, focusing solely on what the broader pool of typical buyers would bid under normal competitive conditions.
Valuation Method
Comparative analysis of recent transactions involving similar properties remains the most reliable way to estimate pricing. To establish the open market value, appraisers adjust the sale prices of benchmark properties to account for differences in size, age, and condition. This process removes subjective biases from the appraisal.
Forced Sale
Distressed disposals often occur when a company must liquidate assets quickly to cover outstanding liabilities. Under such conditions, the price achieved is typically much lower than the open market value because the marketing period is insufficient. This discount reflects the cost of urgency.
Investment Yield
Capital growth and rental income expectations are the primary drivers of investor demand for industrial properties. The open market value is sensitive to shifts in interest rates and regional vacancy levels, which dictate the yield that buyers expect. When vacancy rates are low, property values rise.