Damage to Market Value and Locational Premiums

  • December 20, 2004
  • • Written by: Peter D. Bowes, MAI, CRE Douglas C. Brown, MAI, CRE Albert R. Wilson, CRE

Winter 2004-2005, Vol 29, No 4

Abstract: In the real estate literature of the past decade or so confusion has arisen between the concepts of a damage to the market value of a property and a locational premium. Many articles discuss the influence of some alleged negative condition (disamenity) such as powerlines, landfills, railroad tracks, superfund sites, or industrial facilities on the value of nearby properties by comparing their value to the values of similar properties not nearby as if this differential were a damage. This differential, assuming it exists, is properly a locational premium, i.e. the difference a market participant is willing to pay to be further from the alleged disamenity (or alternatively, closer to an amenity). Damage to market value is specific to the ownership of the property and can occur only when a condition negatively influences the market value after purchase. This paper will clarify these concepts and provide concrete definitions for them. It also seeks to explain how damage to market value resulting from a condition such as an alleged disamenity may be identified and measured.