Expanding Valuation Theory By Incorporating Synergy Principles

The objective of this paper is to propose a systems theory model of real estate valuation of developments illustrating network connectivity between a specific site-based project and the external environment. In recent years the appraisal literature has added consideration of valuation of ìgoing concernî value incorporating tangible and intangible elements that contribute to the land and improvements. For example, there was a discernable expansion of coverage and detail on this topic between the 11th Edition (1996) of the Appraisal Instituteís primary textbook and its 12th Edition (2001). This paper proposes to take another step by incorporating synergy principles to valuation theory. Buckminster Fuller defined synergy as ìbehavior of whole systems unpredicted by the behavior of their parts taken separately.î (Synergetics, 1975). A recent Google search using the word set ìreal estate synergyî resulted in 1,780,000 hits. Downloading a sample of these sites indicates that ìsynergyî is used primarily as a marketing phrase and is only vaguely related to Fullerís system-based definition. An examination of standard real estate valuation textbooks demonstrates a lack of coverage on the concept and its applications. Synergy, however, is commonly used by such industry groups as property developers (Urban Land Institute) and shopping center operators (International Conference of Shopping Centers). Even with these groups, synergy is used only in prosaic applications. The original contribution of this paper is to describe a systematic taxonomy of positive and negative synergy principles. The taxonomy is the authorís original work. The paper illustrates application of these principles to evaluation and counseling assignments. A taxonomy of synergy principles was developed from cases studies and interviews of real estate professionals. These principles are placed in the context of a qualitative model showing an application to revenues, costs, financing, risks and options in a life-cycle analysis of real estate development. A conventional capitalization model is modified to include option pricing to evaluate the potential value of synergy applications. Evaluation of real estate developments in the context of synergy principles provides a better approach to uncertainty/risk assessment than more conventional quantitative techniques. The proposed taxonomy and model are appropriate for a certain category of counseling or evaluation assignments. Because of USPAP rules, the proposed model has limited application to more traditional appraisals.