MethodsForValuingPersonalProperty
Thethreeprimaryapproachestovaluationarecost,incomeandthesalescomparison approach.Theseapproachesareusedforvaluingrealestate,businessesandpersonalproperty Theunderlyingtheorydoesnotchange.Thetypesofdataandanalysesaredifferent
Themostreliableapproachtovaluedependsonthevaluationengagement.Thequantityand qualityofdataavailableforeachapproacharethekeydeterminantsofwhichapproachtovalue willbemostreliable.Thecostapproachistypicallybasedonreplacementcostless depreciationforphysical,functionalandexternal.Theincomeapproachisgenerallyrelatedtoa multipleofannualgrossornetincometoprovideanindicationofvalue.Thesalescomparisonapproachisbestunderstoodbecauseof itsubiquityinunderstandingthevalueofyourhouseandotherhousesintheneighborhood.
CostApproachasaValuationMethod
Actualcost(orcostadjustedforreplacementcost),lessALLtypesofdepreciation,isan appropriatevaluationmethod.Regrettably,whathasoccurredisageneralpracticeofusing somewhatarbitraryphysical-lifedepreciationschedulesbasedontheestimatedphysicallifeof thepropertythereforeachairandrailroadtracksbothhaveaseven-yearlife.TheIRS depreciationschedulesarestatutoryforpropertythatcannotbeexpensed.However,thereisno basisinfactorlogictosuggestthattheIRSdepreciationschedulesareareasonablebasisfor calculatingvalue
WhatShouldNotbeIncludedinCost
Appraisaldistrictinstructionsforrenderingpersonalpropertydirectthepropertyownertoinclude:1)costfreighttodeliver,2)costof installationand3)anyspecialpurposebuildingtohousetheequipment.Thisadviceisnotonlybad;itisdeadwrong. TheseinstructionsmaybeappropriateforIRSpurposes.However,theyareentirelyinappropriatefordeterminingthemarketvalueof tangiblepersonalproperty.First,youcan’tmove,feelortouchdeliveryorthecostofinstallation.Second,andreallytothepoint,these itemsareirrelevanttomarketvalue.Marketvaluedoesnotassumethebuyeristhecurrentowner.Thatisvalue-in-use,andnostate determinestaxesbasedonvalue-in-usefortangiblepersonalproperty.Marketvalueassumesthepropertyisexposedtothemarket andissoldforitsvalue.Thecostoffreightandinstallationwouldhavenobenefittoapurchaser,unlessweassumetheonlypurchaser isonewhowillleavetheiteminplace.
TypesofDepreciation
Typesofdepreciationincludephysical,functionalandexternal.Physicalincludeswearandtear fromuse.Functionaldepreciationaddresseschangesintechnologyandwhatisacceptableto purchasers.Externalobsolescenceisbasedonchangesoutsidethepropertyforrealestateand notdirectlyrelatedtotheconsiderationorfunctionalworthofthepropertyforpersonal property.Functionalobsolescencecanreducethevalueofequipmentby50or100%depending onthetypeofchange.Changesinmarketconditionscanimpactthevalueofinventoryor equipmentheldbyindustriesindecline.Forexample,imagineadesertedarmybaseinthe middleofadesert100milesfromthenearesttownandwithpoorqualityroadsbetweenthe armybaseandthetown.Evenifthebuildingsareingoodconditionanddonothavefunctionorphysicaldepreciation,external obsolescencecouldbe100percentiftherearenousersordemand.
ExternalObsolescence(akaEconomicObsolescence)
Externalobsolescencenegativelyimpactsthevalueofdrillingrigsandoilfieldequipmentduringdownturnsintheoilindustry.The priceofoilfellfromover$100inmid-2014toabout$50inearly2017.TheU.S.rigcountfellfromaround1,600inSeptember2014toa lowof325andhasnowreboundedto688rigs,orforty-threepercentofthelevelfromthreeyearsago.Thisisnotthetimeforadetailed discussionofthevaluationofa$1.2billiondrillingrigforoffshoredrilling.However,wewillsoonseehowanoffshoredrillingcompany isvaluedat25%ofbookvaluebasedonitsstockprice.Theonlydifferencebeingthevaluationapproach.Wedoknowthereislimited
appetiteforsuchoffshoreexplorationuntilthelargestmultinationalsareconfidentthepriceofoilwillstabilizeatalevelthatisabout 50% urther,thecosttodry-dockandprotectthevalueofsucharignotinserviceoffshoreismaterial.
IncomeApproachforValuingLeasedProperty
Theincomeapproachisusedtovalueleasedproperty.Thevaluationmayreallybemoreofa leasedfeevaluation,subjecttothevalueofthecreditofthelessee.Theincomeapproach simplyconsidersthequantityandqualityoftheincomestreamthatanassetisexpectedto deliver.Forexample,ifthedrillingrigwasleasedtoacompanythatthenhadaAAorAAArating fromthelargeratingcompanies,suchas,Moody’s,S&PorFitch,itwouldbepossibletovalue theleasedfee(includingthelease)bycomparingittosimilartermcorporatebondswitha similarrating,manyofwhichmaynothavespecificcollateral.Inaddition,forafeesimplevalue therelevantrentalrateistherateforusedequipmentandnotforbrandnewequipment featuringthelatesttechnology
Example–ValueofDrillingRigswhenOilPricesareLow
Toillustrate,imagineaninvestmentbankraiseddebtfromthisAAorbetterratedcompanytopurchase5drillingrigswithatotalcost of$5billion.Thesearerigssuitableforoffshoredevelopmentinmostpartsoftheworld.Therigswerepurchasedandfinancedin September2014whenthepriceofoilwas$110perbarrel.NowfastforwardtoJanuary1,2016andthepriceofoilisabout$30per barrelandJanuary1,2017andthepriceofoilisabout$55perbarrel.Considerthefollowingquestions:
Whatisthevalueoftherigsifthelessee(adrillingcompany)isstillpayingontheleasesbuthasbeendowngradedtojunkby theratingagenciesandhasmothballedtherigssincetheyarenotabletoleasethem?
Whatisthevalueifthetenantfilesbankruptcyandstopsmakingpayments?
Howdoyouestimatemarketrentandutilizationrateswhendemandislowornon-existent?Itisdifficulttodeterminemarket rentwhentherearefewtransactions.
Shouldthelessee’screditbeconsideredinvaluingtheproperty?Theleaseisacontractandisclearlyintangiblepersonal property
Excludingtheintangiblevalueofcredit-enhancedleasesandofintangiblepropertyontherigisessentialtodeterminingthe valueofthetangiblepersonalproperty
SalesComparisonApproachforRealEstateValuations
Thesalescomparisonapproachforrealestateisbaseduponthehypothesisthatitispossibletogenerateacredibleopinionofvalue baseduponreviewingthesalespriceofsimilarpropertiesandmakingadjustmentsforthedifferencesfromthesubjectproperty
RealEstateAppraisal
Single-familyappraiserscanselectsimilarpropertiesinhomogeneousneighborhoodsrequiringminimaladjustmentsandquickly developacredibleopinionofvalue.ThehypothesisworkswellforhousessincetheMultipleListingService(MLS)hasseventy-fiveto 200fieldsofdataforeachsale,aswellasinformationimmediatelyavailableonhousesundercontractandforsale.Thisdatabrings transparencytovaluinghousesinhomogeneoussubdivisionsThesalescomparisonapproachworkswellforcommercialrealestate suchasapartments,office,retailandwarehouse.However,thequalityofavailabledataismodest.
PersonalPropertySalesData
Salesdataisdifficulttoobtainforpersonalpropertyandsalesdataissimilarlydifficultytofind forcommercialrealestate.Salesdataisreadilyavailableforsometypesofpersonalproperty includingvehicles,boatsandaircraft.Therearesiteswithinformationonpersonalproperty availableforsale.However,theaskingpricecanbemuchhigherthanthesalespriceormarket value.Further,itisimportanttoreviewtheleveloftrade(retailorwholesale).Thesales comparisonapproachforpersonalpropertyischallengingduetotheprivatenatureofpersonal propertysales(theytypicallyarenotpubliclyavailable)andthecontentofsalesofgroupsof propertyarenothomogeneous.Hence,itisdifficulttocomparethesaleofonegroupofassets tothesaleofanothergroupofassets.Individualassetsalescanbetabulatedatauctionsbasedondetailswithassetage,typeand condition.Thisprocesscanbeexpectedtogenerateanannualdepreciationschedulethatincludesphysical,functionaland external obsolescenceforatypeofassetinageographicarea.Salespricesforindividualassetsareindicationsofthemarketvalueattheretail leveloftradeandneedtobeadjustedtothewholesaleleveloftrade.Buttheretailvaluesdoindicateaceilingforvalue.Thediscount forthewholesaleleveloftradecouldbetoolargetomaketheretailsalesdatameaningful
Itmaybepossibletofindrecentcomparablesalesofverysimilarproperty.However,asasubstitute,giventhepaucityofdataavailable regardingpersonalpropertysalesandthepoorqualityofthedatawithregardtocondition,levelofusageandwhetherornot recommendedmaintenancewasperformed,developingascheduleofvaluesrelativetoacquisitioncostisareasonableandcost efficientmethodofestimatingthevalueofpersonalproperty.Thereneedstobetwoadditionaltablesdependingonthepurposeofthe appraisal:1)toseparatetangibleandintangiblepropertyand2)toextractanyfreight,setupcostsandspecializedbuildingsbuiltto
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