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Appraising Primer

Appraising Primer. Review of principles and practical suggestions for appraisal. What is Appraisal. Estimation of the value or worth (generally in dollars) of assets (trees, logs, stands, real estate) at a particular time. Appraisal may be for past, current or future times.

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Appraising Primer

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  1. Appraising Primer Review of principles and practical suggestions for appraisal ISAF, 8/7/02, WLM & WLH

  2. What is Appraisal • Estimation of the value or worth (generally in dollars) of assets (trees, logs, stands, real estate) at a particular time. • Appraisal may be for past, current or future times. • Value or worth of forest assets are influenced by both market and non-market factors. ISAF, 8/7/02, WLM & WLH

  3. Purposes of Appraisals • Market transactions • Buyer’s perspective • Seller’s perspective • Lender’s perspective • Exchanges ISAF, 8/7/02, WLM & WLH

  4. Purposes of Appraisals, cont. • Tax transactions • Basis establishment • Casualties • Estate settlement • Gifts • Property tax assessment ISAF, 8/7/02, WLM & WLH

  5. Purposes of Appraisals, cont. • Trespass and criminal theft • Partitioning • Condemnations and other takings ISAF, 8/7/02, WLM & WLH

  6. Perspectives on Value • Market Value • Value-in-use • Social Value ISAF, 8/7/02, WLM & WLH

  7. Market Value Assumptions • Best estimate of value is the Price of a asset in a competitive market • Assumes • Knowledgeable buyers and sellers • Equal assess to information • No ability by individuals participants to influence the price. • Frequently these assumptions do not hold in forestry situations. ISAF, 8/7/02, WLM & WLH

  8. Value-in-Use • The value that a particular buyer or seller has for an asset. • Assumes • Expected use and practice that an individual will employ • Reduces the influence of other possible uses (development values) ISAF, 8/7/02, WLM & WLH

  9. Social Value • Value of the asset in achieving social goals or conditions including • Species diversity • Conservation values • Self-sufficiency in timber • Etc. • Mainly a social and political process, but does influence values and values influence policy ISAF, 8/7/02, WLM & WLH

  10. Appraisal Methods • Market Evidence • Capitalized income (Discounted cash flow) • Derived residual value • Market quantification • Replacement Costs • Subjective/Expert judgment Each methods has a set of assumptions and fits different “real life” situations ISAF, 8/7/02, WLM & WLH

  11. Appraisal Methods Recognized by IRS • Cost • Market based costs must be used • Market (sales comparison) • Preferred methodology • Market values required • Income capitalization • Income estimates must be factual • Market rental values preferred ISAF, 8/7/02, WLM & WLH

  12. Best Method? • Market (sales comparison) for marketable timber • Cost for premerchantable timber • Income capitalization • Generally acceptable only if market rental rates are available • Too speculative otherwise ISAF, 8/7/02, WLM & WLH

  13. Timber vs. Vegetative Value? • Appraise timber separately if timber sales will be “allowed” • Appraise as real estate with tree cover if not ISAF, 8/7/02, WLM & WLH

  14. Appraise By-The-Lot or Piece? • Appraise according to how timber is sold • Almost always by the lot • Summation of volume and unit price by species, grade, and size used only as indicator of value by the lot • High value trees may be marketed separately ISAF, 8/7/02, WLM & WLH

  15. Volume Estimates • Inventory • Cruise • Combination based on dbh ISAF, 8/7/02, WLM & WLH

  16. Market Evidence • Records of actual transactions • Comparing transactions to asset being appraised in terms • Date of sales • Productivity • Location • Species composition/quality ISAF, 8/7/02, WLM & WLH

  17. Capitalized Income • Estimates the revenues and expenses generated by the asset • Uses discounting to estimate a present net worth of these cash flows. • Does not generate a “market value” because the cash flows used in the analysis are for only one way to use the asset. ISAF, 8/7/02, WLM & WLH

  18. Derived Residual Value • Value is the net of • Sell price – all costs of production. ISAF, 8/7/02, WLM & WLH

  19. Market Quantification • Estimation of supply and demand curves for industry wide appraisals • Uses large data sets and econometric procedures ISAF, 8/7/02, WLM & WLH

  20. Replacement Costs • The costs required to replace an asset • Generally the cost must be for an equivalent asset (same type, age quality). • Uses market prices ISAF, 8/7/02, WLM & WLH

  21. Expert Judgment • Value of non-market factors • Political and social factors • Interpretation of values generated by above methods to determine an “appraised value” ISAF, 8/7/02, WLM & WLH

  22. Appraisal of Trees and Stands ISAF, 8/7/02, WLM & WLH

  23. Commercial trees and stands • Basic Market Value approach with expert judgment • Determine volume by species, product and grade • Obtain prices by species, product and grade • Compute the draft appraised value by multiplying the price times volume • Adjust this value for location, property conditions, management restrictions, etc. ISAF, 8/7/02, WLM & WLH

  24. Noncommercial tree and stands • Replacement Cost • Estimate the cost to re-establish the tree or stand. • Requires that the cash flow for the re-establishment be generated and capitalized to the age and condition of the original tree or stand • Generally used in damage or loss situations. ISAF, 8/7/02, WLM & WLH

  25. Derived Residual value Log and Stumpage values Lumber Value $300/MBF Costs of milling and distribution - $160 Delivered log price at mill $140 Cost of Logging and hauling - $ 60 Residual for Stumpage $ 80/MBF ISAF, 8/7/02, WLM & WLH

  26. Appraisal Quality • Training and certification • Relevant experience • Selection of methodology • Data base of comparables ISAF, 8/7/02, WLM & WLH

  27. Qualifications • License required for real estate appraisal • Appraisal of timber not included • No license required for timber appraisal • Experience primary criteria • Some states require specified training for certain appraisals ISAF, 8/7/02, WLM & WLH

  28. Appraisal Quality – Court Cases • Appraiser is “qualified” by presenting counsel • Appraiser’s qualifications questioned by opposing counsel • Procedure justified • Facts justified • Analysis and results presented ISAF, 8/7/02, WLM & WLH

  29. Appraisal Quality – Court Cases • “Bad” appraisals “thrown out” in deliberations • Weight assigned to each acceptable appraisal • A single appraisal may be adopted • Norm is to average acceptable appraisals ISAF, 8/7/02, WLM & WLH

  30. Current Issues • Impact of environmental restrictions • Restrictions on harvesting in designated areas • Value of timber on small tracts • Value of forestland when it’s a small component of larger property • Separate access frequently an issue • Contribution of tree cover to development value • How much can be removed and still have “development” value ISAF, 8/7/02, WLM & WLH

  31. References • IRS Valuation Guide for Income, Estate and Gift Taxes. 1994. Commerce Clearing House, Inc. 4025 West Peterson Avenue, Chicago, IL 60646 • The Appraisal of Real Estate, 12th Edition. The Appraisal Institute, 550 W. Van Buren St., suite 1000, Chicago, IL 60697, (312) 335-4100, 888-570-4545 • Uniform Standards of Professional Appraisal Practice. 2002. The Appraisal Foundation. P.O. Box 96734, Washington, D.C. 20090-6734. 800-805-7857. • The Appraisal Journal. monthly. Am. Institute of Real Estate Appraisers of the National Association of Real Estate Boards. • Forest Mangement, 4th Edition. 2001. Davis, L.S., et. al. McGraw-Hill: New York. • Forest Resources Economics and Finance. 1996. Klemperer, W. D. McGraw-Hill: New York. ISAF, 8/7/02, WLM & WLH

  32. Resources • American Society of Appraisers (http://www.appraisers.org/) • American Society of Farm Managers and Rural Appraisers (http://www.asfmra.org/) • Appraisal Foundation (http://www.appraisalfoundation.org/) • Appraisal Institute (http://www.appraisalinstitute.org/) • Appraisal Subcommittee of Federal Financial Institutions Examination Council (http://www.asc.gov/) ISAF, 8/7/02, WLM & WLH

  33. Resources • Indiana Professional Licensing Agency, Real Estate Appraiser Licensure and Certification Board (http://www.in.gov/pla/bandc/appraiser/) • U.S. Department of Justice (http://www.usdoj.gov/enrd/land-ack/) • U.S. Forest Service: Landownership 5400 Appraisal Handbook http://www.fs.fed.us/cgi-bin/Directives/get_dirs/fsh?5409.12!.. ISAF, 8/7/02, WLM & WLH

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