Purposes of the Appraisal

Premises of Value

Appraisal Process

Why Hire an Appraiser?

 

Reproduction Cost New is the current cost new at the date of the appraisal of duplicating an identical item or reproducing an exact replica, embodying all of the subject's deficiencies, superadequacies and obsolescence.

Replacement Cost New is the current cost at the date of the appraisal of a similar new item having the nearest equivalent utility as the property being appraised.

Reproduction Cost New versus Replacement Cost New (RCN).  Either value is an important ingredient in appraisals for insurance purposes, and they are an initial point of reference in appraisals for other purposes. The differential in dollars widens with age, and one can be higher or lower than the other. One should use the lower of the two to avoid having to reduce the higher starting point for obvious deficiencies, superadequacies or incurable obsolescence that are the usual differences between the two values. The Replacement Cost New of machinery and equipment may be higher or lower than its Reproduction Cost New. When the Replacement Cost New relates to a current model of older marketable machines, there is a vast difference between the two values. The new machine will usually outperform the older machine and has innovations included that the old machine does not possess. Otherwise, to reproduce the old machine by trending the Historical Cost to today's price levels would indicate a lesser cost than to replace that machine with a modern counterpart. This fact is sometimes reversed in the case of nonmarketable special purpose items, and their Reproduction Cost is usually a higher cost than their Replacement Cost. We should also clarify here that Historical Cost is the initial (new) capitalized cost of an item at the time it was first placed in service. Original Cost is the capitalized cost of the item in the hands of the present owner. This may be a new or used cost, or it might be the portion of a lump sum purchase price attributed to an asset in an allocation. Trending an Original Cost can be a meaningless exercise.

Insurable Reproduction Cost New (IRCN) of equipment is equal to the RCN less the portion excluded from insurance coverage. The typical exclusions are: excavation and fill, machine foundations, underground piping or wiring, wastewater treatment ponds, etc. Policies can be written for either Reproduction Cost New or Replacement Cost New.

Actual Cash Value (ACV) or Sound Value are the terms used in insurance appraisals for the depreciated Reproduction or Replacement Cost New. The depreciation taken is usually limited because of insurance industry guidelines and is far less than the depreciation reflected in the marketplace.

Fair Market Value (FMV), also known as Market Value, is hereby defined and qualified by the Appraisal Foundation as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(1) buyer and seller are typically motivated;

(2) both parties are well informed or well advised, and acting in what they consider their best interests;

(3) a reasonable time is allowed for exposure in the open market;

(4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and

(5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Fair Market Value in Continued Use (VIU) is the value of a property based on a specific use. This may differ from typical market values when the use is specialized and there is a limited market for the property based on that use. It is further clarified as the value of assets installed and in use as an integrated part of an operating enterprise with consideration given to the age, condition and utility, and the used market insofar as applicable. Consideration is also given as to whether the earnings of the business justify an investment in the assets at this amount.

The Fair Market Value in Place (VIP) of an equipment item includes installation and the contribution of the item to the operating facility. This value presupposes the continued utilization of the item in connection with all other installed items. It is also the value of a turnkey facility that is enhanced in value via its instant ability to produce a product or perform a service. Machinery and equipment is made up of marketable and nonmarketable special purpose items, and the terms are self-descriptive. For marketable equipment, it is equal to the Used Market Value plus layout, delivery and installation costs. The ability of the facility to make or lose money is not an issue in the common use of this value relative to marketable items. The productive utility is an important consideration in nonmarketable special purpose equipment when estimating the Fair Market Value, and this equipment must meet a residual earnings test. When it does not pass the test, the Fair Market Value may be reduced down to a point no less than the Forced Liquidation or Auction Value.

Orderly Liquidation Value In Place (LVIP) is the amount expressed in terms of gross proceeds which is projected to be obtainable considering the present marketplace, assuming that an entire facility would be sold intact along with all related equipment necessary to make it viable. It further considers that Fair Market Value, as normally defined, could not be obtained due to restrictions of time and probable condition of the business under forced sale conditions. A reasonable period of time is expected to find a purchaser, the seller being compelled to sell and the buyer being willing but not compelled to buy. The value considers a complete sale of the entire property, with the sale made free and clear of all liens and encumbrances.

Orderly Liquidation Value (OLV) is the amount expressed in terms of gross proceeds which could be expected from the sale of the machinery and equipment under forced orderly sale conditions, given a reasonable period of time to find a purchaser, the seller being compelled to sell and the buyer being willing but not compelled to buy. The value considers a sale of the machinery and equipment sold "as is, where is", separate and severed from the real estate. All sales are made free and clear of all liens and encumbrances.

Forced Liquidation Value (FLV) is the estimated gross amount expressed in terms of money which could be typically realized at a properly advertised and conducted public auction held under forced sale conditions and under present day economic trends, the seller being compelled to sell and the buyer being willing but not compelled to buy. The value considers a sale of the machinery and equipment sold "as is, where is", separate and severed from the real estate. All sales are made free and clear of all liens and encumbrances. The time frame for a sale is a one-day auction after a sixty- to ninety-day advertising period for the auction. The gross amount is not reduced for disposal costs or sales commissions that may exceed ten percent.

Salvage Value is the amount realizable upon the sale or other disposition of an asset after it is no longer useful to the owner and is to be retired from service. This could be equal to its Forced Liquidation Value or its Scrap Value, whichever is higher.

Scrap Value is the amount realized for property if it were sold for its material content on an "as is, where is" basis to a dealer.