Marriage value: the land or the minerals?

There are many instances where lands containing minerals or extractive materials are located either close to or adjoining an existing quarry operation, but are separately owned and may become available for sale or purchase. Both landowners and quarry operators frequently ask the following questions:
? I wish to sell (or buy) the land. What is the market value?
? Is it based on its existing use, zoning and site improvements or the mineral value to a quarry operator?

The answer is ?generally somewhere in between? but to determine this figure, then the valuer has to carry out a ?marriage value?.


Most people understand the meaning of ?market value? but where there are circumstances where the benefits to an adjacent owner may create additional or special value to them, then they are known as ?special purchasers? and often they either pay, or can afford to pay a premium over and above the market value to acquire a site. The marriage value identifies the vendor?s interest, and the purchaser?s interest, and the marriage value is generally a value adopted somewhere in between, which is often agreed via negotiation.

Marriage value – Physical
Marriage value is where land or property (physical) or interests in land or property (legal) are merged to create a value higher than the sum of the parts. The term is also used in companies where mergers occur and create mutual benefits to both companies.

There would be many examples of marriage value in the market place. In the diagram below, we identify a block of land for sale. The adjacent existing property owner benefits from a large block of land but perhaps not quite large enough to create a subdivision. Therefore, if the adjoining existing property owner purchases the land for sale and merges it with the existing property land, then they could create two lots for subdivision, as in Figure 1. However, only the owner of the existing property has these benefits, and the owner could afford to pay more than any other purchaser, as they have ?special purchaser? status. Therefore the special purchaser who can create a marriage value can afford to pay a higher price above the perceived market value, compared to a prospective buyer without those benefits.

So for quarry operators, a purchaser of additional lands and reserves would benefit by extending the life of the quarry which, in turn, may bring unit costs down, allow capital invested in plant and machinery to be offset over a longer period, and reduce fixed costs. The landowner or vendor benefits by obtaining an acquisition price in excess of the perceived market value, otherwise known as a ?premium?, which encourages them to sell.

Divorce value – Physical
Divorce value is the opposite of marriage value as the sum of the parts is greater than the whole. This is where a landowner has a large block of land that is subsequently subdivided into numerous smaller blocks, creating additional value through changes to the units of comparison or diseconomies of scale. This is common for large residential developments and also the basis on which a quarry business operates.

Marriage value of interests in land – Legal
Marriage value can also be achieved in interests in land. For instance, both a landlord and a tenant can benefit from a marriage value within a lease.

If a tenant gains a profit rent, especially over a long period, then this can be a great asset to the tenant as the lease could be sold or sub-let to another tenant who would be prepared to pay a premium. The landlord may also be interested in buying out the tenant so that he can benefit from the full rental value of the property at an earlier point than would otherwise have been done under the terms of the lease or even sell the property.

It very much depends upon the motives and priorities of the landlord and whether the main requirement is for income growth or capital growth. If the landlord is primarily concerned with capital growth then there may be tax advantages for deferment of income earned as any capital gains will only be realised if the property is sold.

An example would be where a landlord?s interest is currently less than the freehold value due to a lease. If the landlord wished to sell the freehold with vacant possession then he would have to negotiate with the tenant and try to persuade the tenant to vacate. However, the tenant may not want to go and even if they did would expect at least the value of their profit rent. In such circumstances, the landlord could offer the tenant a sum in excess of the profit rent to vacate. The tenant may agree to this. At the same time, the landlord would be better off if he sells the property. This is an example of a marriage value where the whole (the freehold) is worth more than the parts (landlord?s and tenant?s interests).

Divorce value of interests in land – Legal
This is very common in the market place and otherwise known as a ?lease?. Both the landlord and the tenant agree on the terms of the lease, but neither party has full control. The landlord has waived his freehold rights in favour of receiving a rent from the lease. The tenant benefits as they may not have the capital to acquire the property in the first place and hope to gain a profit rent.

It needs to be pointed out that lands involved for potential acquisition close to quarries often do not benefit from development approval/planning consents, but also are often too small in area to be able to operate as a quarry business in their own right. Therefore, any valuation of the land (from the quarry owner?s perspective) is not a ?quarry valuation? in the formal sense of the definition, but a valuation of ?mineral bearing land? which is somewhat different.

To distinguish the two, it is our understanding that a quarry valuation would involve an enterprise or business or the potential of operating a viable business on lands of sufficient size to benefit from economies of scale, whereas quite often mineral bearing land, while it can be assessed for a future quarry business if of a sufficient size, often involves smaller parcels of land which are adjoining existing quarry operations and have a special value to the operator of that business, and which could not be operated or worked by itself as a separate business entity.

Therefore, the existing land owner would benefit by obtaining a value or premium over and above the existing value of the land, and, in effect, share some of the profits that an acquiring quarry operator may obtain, but subject to the quarry operator taking the risk of achieving a development approval.

There are methods of valuation involved for assessing quarries. Most quarries are acquired based on the ?going concern? value of the business, which involves capitalisation of the potential profits or future maintainable earnings over the life of the operation. However, this method also includes a range of other business assets that support the business in addition to goodwill.

For finance and accounting purposes then, the basis of value involves the ?asset value? or ?real estate? value, which accounts for the potential or hypothetical rental value of the quarry that an operator would pay, and then capitalised over the life of the operation. The rental value is equated by multiplying the potential future market output by the market royalty over the life of the resources. However, it needs to be recognised that the asset or real estate value of a quarry does not include other business assets such as plant, machinery and equipment or goodwill and is often less than the going concern value (assuming normal profits).

If a quarry business is not profitable then a purchaser would generally not pay more than the asset value to acquire the property. If the business were also making sizeable losses, then a hypothetical purchaser may only be prepared to pay for a reduced asset value that is sufficient to support the business.

Consequently, mineral bearing land acquisitions would be based on the asset value or real estate value, as they are not part of a going concern. Additionally, if the lands are not of sufficient size to be operated as a separate business, then allowances would also need to be made to reflect the lack of any development approval or planning consents and licensing. There are also arguments to suggest that any property located close to a quarry may suffer from noise, dust and traffic issues, and this may reduce the market value of the existing use or, in effect, be discounted.

The vendor?s or owner?s interest in a marriage value involves the value of the existing use of the land, which may be limited. This is especially so for mineral bearing land, as the owner would not be able to benefit from the profits involved from a quarry business because the land is not of sufficient size to either warrant a development approval application or the capital costs involved in setting up a quarry business.

However, the purchaser?s or quarry operator?s interest would involve the profits that they could achieve by adding to their existing resources and other economies of scale that they may gain from acquiring the mineral bearing land and they could afford to pay a premium for the land well in excess of the vendor?s or owner?s interest. The marriage value is then the merger of the two interests, in that the vendor would wish to receive a ?premium? to be encouraged to sell the land, and the purchaser would be prepared to pay a premium below their interest?s value in order to obtain the benefits of the land.

Consequently, the valuer performs two valuations in order to determine a likely marriage value for the mineral bearing land, firstly the vendor?s or owner?s interest, and secondly the purchaser?s or quarry operator?s interest.

The owner?s interest is relatively straightforward in that it is currently based on the value of land, site improvements and other factors, and sales evidence of similar properties within the same locality and date of valuation would be used to determine a value. This is based on the sales comparison approach to valuation. If we believed that similar sites were rented, then we may also try to determine the rental value for the site and capitalise it over an appropriate period to determine a market value. This is based on the income approach to valuation.

When assessing the purchaser?s or quarry operator?s interest, then we have to assess the current market value of the mineral and equate to a royalty. This is achieved by researching available market royalty evidence, where available, and equating this analysis to a market royalty for the subject site. It needs to be appreciated at this point that the royalty value for a quarry sold as a going concern is very different to a royalty determined from mineral bearing land, as the latter does not benefit from development approval and so is often much lower. A net income is derived by multiplying the projected annual output by the market royalty. The income is then capitalised for the estimated life of the mineral bearing land using an appropriate capitalisation rate. The life of the mineral bearing land is determined by dividing the total reserves by the projected annual output. The reserves need to be split into proved, probable and possible so that they are valued separately, reflecting the differing risk rates involved.

Any delays and risks involved in obtaining development approvals and licensing and geological or physical events are also reflected in the capitalisation rate, eg there may be a serious loss to production as workings approach a fault zone, or an operator may have to remove significant overburden in several years? time to expose future extraction areas. Also time is a factor in order to reflect risk to the capitalisation rate.

The capitalisation rate applied needs toreflect the risk involved within such an operation. There are numerous ways of determining the capitalisation rate, and it very much depends on the market evidence available. In the absence of good quality, comparable sales transactions of mineral bearing land, the valuer often has to revert to alternative methods to determine the capitalisation rate. Generally, consideration is given to the capital asset pricing model (CAPM theory), and weighted average cost of capital (WACC), price to earnings ratios, EBITDA multiples, derived comparable capitalisation rates, capitalisation rates of other property assets and valuer judgement, as mostly there are never two mineral properties that share the same characteristics.  

Once the landowner and quarry operator interests are valued, then the two parties can commence negotiations citing their relative strengths and weaknesses to bargain for a settlement which would be somewhere between the two values, and hence the marriage value. Quite often the balance of power in the negotiations lies with the party who knows both values and understands the other parties weaknesses better.

Performing marriage values for quarry operatorsand owners of mineral bearing land are ahighly challenging task, as even when thevaluations figures are produced for bothinterests, then often the skill is in the negotiationsof the price, for both parties, but the marriage value assists in determining the relative ranges of the negotiating parameters.

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