Appraising Primer

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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 theft
 Partitioning
 Condemnations and other takings
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Perspectives on Value
Market
Value
Value-in-use
Social 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 transactions
 Comparing 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 asset
 Generally 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 factors
 Political and social factors
 Interpretation 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 Cost
 Estimate the cost to re-establish the tree or
stand.
 Requires that the cash flow for the reestablishment 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
Costs of milling and
distribution
Delivered log price at mill
Cost of Logging and hauling
Residual for Stumpage
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$300/MBF
- $160
$140
- $ 60
$ 80/MBF
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Appraisal Quality

Training and certification
 Relevant experience
 Selection of methodology
 Data 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 justified
 Facts justified
 Analysis 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 adopted
 Norm 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) 3354100, 888-570-4545
Uniform Standards of Professional Appraisal Practice. 2002. The
Appraisal Foundation. P.O. Box 96734, Washington, D.C. 200906734. 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. McGrawHill: New York.
Forest Resources Economics and Finance. 1996. Klemperer, W. D.
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McGraw-Hill: New York.
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Resources
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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!..
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