Essays in Honor of William N. Kinnard, Jr. Research Issues in Real Estate Volume 9

Citation

French, N. (2005), "Essays in Honor of William N. Kinnard, Jr. Research Issues in Real Estate Volume 9", Journal of Property Investment & Finance, Vol. 23 No. 3. https://doi.org/10.1108/jpif.2005.11223cae.002

Essays in Honor of William N. Kinnard, Jr. Research Issues in Real Estate Volume 9

Essays in Honor of William N. Kinnard, JrResearch Issues in Real Estate Volume 9

Editors: C.F Sirmans and Elaine WorzalaSponsored by the RICS FoundationKluwerDecember 2003ISBN 1-4020-7516-2Review DOI 10.1108/14635780510599494

Introduction

Many of you from outside the USA will not have heard of William N. Kinnard Jr, yet his contribution to the discipline of valuation worldwide was immense. Bill (as he preferred to be called) was a quiet unassuming man blessed with an extremely sharp and analytical mind. He published extensively both in the academic and professional journals and his work always centred on pragmatic applications of academic techniques and concepts. To him, a theory without an application was only half an argument. He was a pragmatist who believed that every problem had a solution and that the route of that solution would be found in the fundamentals of academic theory. It was this belief that set him apart from many consultants and made him highly sought after as an expert witness. He had an uncanny gift for thinking laterally and identifying the “wood” of a problem when others could only see the “trees”.

Sadly, Bill died in April 2001 but he left us a rich legacy of articles and influences. The “best” of his articles have now been collected together in one volume supplemented by a number of new papers by friends and colleagues who have all benefited from his influence. This new collection, co-sponsored by the RICS Foundation, was published in 2003 as part of the ARES Research Issues series. It is, without doubt, a valuable and important tome and a fitting tribute to the memory of Bill Kinnard.

The Kinnard philosophy

What is particularly interesting about Kinnard’s philosophy with regards to valuation is that he understood the holistic nature of the discipline. Valuation is the end result. It is the quantification of an understanding of the market; the legal impact; the physical constraints; the planning regime; the availability of finance; the demand for product and the general economy all influence the value of property. This mirrors the UK/Commonwealth experience that, through the RICS, has always proffered an all-encompassing approach. Yet, appraisal practice in America had historically been driven by the single discipline of finance. Real estate appraisal was seen as a sub-set of finance and treated accordingly, with definitive and rigid mathematical models being applied. Kinnard[1] was one of the first commentators[1] who began to advocate that the role of Appraisal was much more interdisciplinary and that a new holistic approach should be adopted. This became known as the “New school of appraisal thought” and was instrumental in moving the American profession away from an exclusive financial perspective of value.

It was against this background that Kinnard published his seminal work, Income Property Valuation (1971). This became a classic text for real estate appraisal in America and similarly sits proudly in my own bookcase alongside the best texts from the UK and the commonwealth. Indeed, I had a feeling of both surprise and affirmation when I first read this particular book. My own views and understandings of valuation had come from reading the UK and Australian literature. I had digested and distilled the principal points to form, what I believed, was a new interpretation of the role and function of valuation particularly with regards to the definition of value. I was therefore surprised and encouraged that Kinnard had come to the same conclusions some 30 years earlier on the other side of the Atlantic

Principal concept of value

Kinnard (1971) stated:

Value is a price. It is a price that would tend to prevail under specified market conditions as a result of the interaction of the forces of supply and demand. This price reflects the capacity of an economic good to command other goods in exchange. This is the basis for Value in Exchange. Value is also the present worth of future benefits anticipated or forecast to be receivable from the ownership of an asset. This is the basis for Value in Use. Rights in real estate represent ownership of an asset. Their Value in Use is measured in appraisal analysis by Investment Value. In the perfect market of economic theory, informed and rational buyers would pay no more, and informed and rational sellers would accept no less, than the present worth of the anticipated future benefits from ownership of an asset (discounted at market-determined rates). Thus, all transactions would take place at prices that reflected Value in Use, and represented Value in Exchange. Value in Use would equal Value in Exchange, and Price would be synonymous with Value.

This equates exactly with the understanding of value, price and worth as proposed by the RICS in the late 1990s (RICS, 1997a, b):

In the language of economics used by Kinnard, worth (V_s) can be considered as value in use, whereas price (V_t) or market value (V_p) can be considered as value in exchange.

As Kinnard (1971) stated:

… market value can be regarded as the price that a willing buyer would pay, and a willing seller would accept, with each acting rationally on the basis of available market information, under no undue pressure or constraint, with no fraud or collusion present. It represents value in exchange for interests in Real Estate.

This is equates to the international definition of market value (RICS, 2003). Given that I have been involved in at least 20 years of debate about the use of definitions in valuations, it is perplexing that there was any such argument when we have such a clear exposition from Kinnard, which not only stands the test of time, but also applies internationally.

The history of classical value theory

Value theory is a central tenet of all economics literature. Value is a driver in production, investment, and the measurement of utility. In the book, Austin Jaffe and Ken Lusht have traced the history of value theory from the earliest works of the Greek through to the work of the classical economists such as Adam Smith, David Ricardo and Thomas Malthus in the eighteenth and early nineteenth centuries. Most importantly, it recognised that real estate valuation is firmly steeped in economic tradition and thought.

It was the Greek philosopher Aristotle (1257) who was the first to distinguish between “value in use” and “value in exchange”. This distinction forms one of the major cornerstones of modern value theory. However, there was little written about value theory during the Roman period, through the mediaeval and middle ages. The defining economic text relating to value was Adam Smith’s (1776) The Wealth of Nations. However, much of the discussion in his text brings together the theories and economic writings or economists from the preceding 200 years.

Few economists are as well-cited as Adam Smith. His seminal book The Wealth of Nations, sets out an elaborate value theory drawing on the labour theory of the preceding years he develops the historical differences between “exchangeable value” and what he termed “natural value”. The notion of natural value based on the labour cost became a cornerstone of Adam Smith’s theory of value. For Smith, the natural price was “the central price, to which the prices of all commodities” continued to move towards:

… the actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.

Thus, to Smith, the market price was determined by the particular supply and demand conditions at any given time and place. In the long run, this price would “gravitate” towards the “natural” level. This gives rise to the modern idea of a long-run equilibrium value. It was left for David Ricardo and Thomas Malthus to develop further this classical economics approach.

In Ricardo’s (1817) book The Principles of Economy and Taxation, he develops the theme concerning the difference between value in use and value in exchange.

Ricardo’s theory of value differs from Adam Smith’s by fitting together a theory of rent with the labour theory to get a theory of profits. This is s related through the story of the production of corn. If the price of corn is high then the price of agricultural land will correspondingly be high.

The third of the principal classical economist to be credited with developing value theory was Thomas Malthus (1836). He developed the ideas of Smith and stated in his book Principles of Political Economy the distinction, and relationship, between price and worth:

The price which fulfills these conditions (cost of labor, capital, rent on land) is precisely what Adam Smith calls the natural price; and when a commodity is sold at this price, he says it is sold for precisely what it is worth.

The very concepts that are being proffered today as price (value in exchange) and worth (value in use). This theme is central to the papers presented in the Kinnard monograph.

A review of Kinnard’s work

Apart from being a wonderful tribute to Kinnard’s life, the new text Essays in Honor of William N. Kinnard is an excellent book in its own right. Anyone wanting to understand valuation is strongly urged to read this text. The original essays by Jaffe/Lusht (discussed in full above), French and Colwell/Beron all contribute to the academic literature. The papers by Clapp/Giaccotto, Jackson and Aycock discuss practical application. It is an first-rate mix of papers that reflect the philosophy and thinking of Kinnard. The editors are commended for their insightful choice of papers.

In particular, the paper by Jaffe and Lusht traces the history of economic definitions of value and provides the reader with clear and detailed exposition of valuation theory. This should be recommended reading for all valuers. Modesty forbids me from recommending the second paper by French, but the paper does flow well from the previous essay and develops and clarifies the definitions of value in the context of the current market. Similarly, the paper by Colwell and Beron (written with Kinnard before his death), perfectly illustrates Kinnard’s philosophy of academic theory underpinning practical application. A theme that is developed in the more practical contributions of the other authors in this section.

The second section of the book is the work of Kinnard himself. Here there is a wealth of knowledge born from a lifetime of experience. The papers range from a consideration of uncertainty in valuations (ironically, a subject which is still being debated today) to the practical problems of acting as an expert witness. I was privileged to have known Bill personally, but I must be honest that it only since his death, and particularly through this book, that I have been able read his work in depth. In life we are all offered the opportunity to learn something new each day. It is clear that Kinnard had such inquisition and through these essays we are all able to share in the knowledge that this thirst for answers has provided to us. I recommend this book to anyone who is involved in valuation.

Abbreviations: Price (V_t); is the actual observable exchange point in the open market;; Market value (V_p); is an estimation of the price that would be achieved if the property were to be sold in the market; and; Worth (V_s); is a specific investor’s (or occupier’s) perception of the capital sum that he/she would be prepared to pay (or accept) for the stream of benefits that he/ she expects to be produced by the property.

Nick FrenchThe University of Reading Business School, ReadingUK