1 Appraising Primer Review of principles and practical suggestions for appraisal ISAF 8702 WLM amp 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 ID: 165935
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Appraising Primer
Review of principles and practical suggestions for appraisalSlide2
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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.Slide3
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Purposes of Appraisals
Market transactions
Buyer’s perspective
Seller’s perspective
Lender’s perspective
ExchangesSlide4
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Purposes of Appraisals, cont.
Tax transactions
Basis establishment
Casualties
Estate settlement
Gifts
Property tax assessmentSlide5
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Purposes of Appraisals, cont.
Trespass and criminal theft
Partitioning
Condemnations and other takingsSlide6
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Perspectives on Value
Market Value
Value-in-use
Social ValueSlide7
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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.Slide8
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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)Slide9
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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 policySlide10
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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” situationsSlide11
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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 preferredSlide12
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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 otherwiseSlide13
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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 notSlide14
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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 separatelySlide15
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Volume Estimates
Inventory
Cruise
Combination based on dbhSlide16
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Market Evidence
Records of actual transactions
Comparing transactions to asset being appraised in terms
Date of sales
Productivity
Location
Species composition/qualitySlide17
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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.Slide18
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Derived Residual Value
Value is the net of
Sell price – all costs of production.Slide19
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Market Quantification
Estimation of supply and demand curves for industry wide appraisals
Uses large data sets and econometric proceduresSlide20
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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 Slide21
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Expert Judgment
Value of non-market factors
Political and social factors
Interpretation of values generated by above methods to determine an “appraised value”Slide22
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Appraisal of Trees and StandsSlide23
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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.Slide24
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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.Slide25
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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/MBFSlide26
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Appraisal Quality
Training and certification
Relevant experience
Selection of methodology
Data base of comparablesSlide27
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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 appraisalsSlide28
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Appraisal Quality – Court Cases
Appraiser is “qualified” by presenting counsel
Appraiser’s qualifications questioned by opposing counsel
Procedure justified
Facts justified
Analysis and results presentedSlide29
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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 adopted
Norm is to average acceptable appraisalsSlide30
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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” valueSlide31
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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
, 4
th
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/
) Slide33
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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!..