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Appraising Primer

Review of principles and practical suggestions for appraisal

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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.

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Purposes of Appraisals

Market transactions– Buyer’s perspective– Seller’s perspective– Lender’s perspective– Exchanges

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Purposes of Appraisals, cont.

Tax transactions– Basis establishment– Casualties– Estate settlement– Gifts– Property tax assessment

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Purposes of Appraisals, cont.

Trespass and criminal theftPartitioningCondemnations and other takings

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Perspectives on Value

Market ValueValue-in-useSocial Value

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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.

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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)

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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

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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

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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

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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

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Timber vs. Vegetative Value?

• Appraise timber separately if timber sales will be “allowed”

• Appraise as real estate with tree cover if not

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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

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Volume Estimates

• Inventory• Cruise• Combination based on dbh

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Market Evidence

Records of actual transactionsComparing transactions to asset being

appraised in terms – Date of sales– Productivity– Location– Species composition/quality

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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.

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Derived Residual Value

Value is the net of – Sell price – all costs of production.

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Market Quantification

Estimation of supply and demand curves for industry wide appraisals

Uses large data sets and econometric procedures

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Replacement Costs

The costs required to replace an assetGenerally the cost must be for an equivalent

asset (same type, age quality).Uses market prices

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Expert Judgment

Value of non-market factorsPolitical and social factorsInterpretation of values generated by above

methods to determine an “appraised value”

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Appraisal of Trees and Stands

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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.

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Noncommercial tree and stands

Replacement CostEstimate 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.

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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

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Appraisal Quality

Training and certificationRelevant experienceSelection of methodologyData base of comparables

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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

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Appraisal Quality – Court Cases

Appraiser is “qualified” by presenting counsel

Appraiser’s qualifications questioned by opposing counsel

Procedure justifiedFacts justifiedAnalysis and results presented

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Appraisal Quality – Court Cases

“Bad” appraisals “thrown out” in deliberations

Weight assigned to each acceptable appraisal

A single appraisal may be adoptedNorm is to average acceptable appraisals

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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

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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.

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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/)

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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!..