ISAF, 8/7/02, WLM & WLH1 Appraising Primer Review of principles and practical suggestions for appraisal

ISAF, 8/7/02, WLM & WLH2 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.

ISAF, 8/7/02, WLM & WLH3 Purposes of Appraisals Market transactions – Buyer’s perspective – Seller’s perspective – Lender’s perspective – Exchanges

ISAF, 8/7/02, WLM & WLH4 Purposes of Appraisals, cont. Tax transactions – Basis establishment – Casualties – Estate settlement – Gifts – Property tax assessment

ISAF, 8/7/02, WLM & WLH5 Purposes of Appraisals, cont. Trespass and criminal theft Partitioning Condemnations and other takings

ISAF, 8/7/02, WLM & WLH6 Perspectives on Value Market Value Value-in-use Social Value

ISAF, 8/7/02, WLM & WLH7 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.

ISAF, 8/7/02, WLM & WLH8 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)

ISAF, 8/7/02, WLM & WLH9 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

ISAF, 8/7/02, WLM & WLH10 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

ISAF, 8/7/02, WLM & WLH11 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

ISAF, 8/7/02, WLM & WLH12 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

ISAF, 8/7/02, WLM & WLH13 Timber vs. Vegetative Value? Appraise timber separately if timber sales will be “allowed” Appraise as real estate with tree cover if not

ISAF, 8/7/02, WLM & WLH14 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

ISAF, 8/7/02, WLM & WLH15 Volume Estimates Inventory Cruise Combination based on dbh

ISAF, 8/7/02, WLM & WLH16 Market Evidence Records of actual transactions Comparing transactions to asset being appraised in terms – Date of sales – Productivity – Location – Species composition/quality

ISAF, 8/7/02, WLM & WLH17 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.

ISAF, 8/7/02, WLM & WLH18 Derived Residual Value Value is the net of – Sell price – all costs of production.

ISAF, 8/7/02, WLM & WLH19 Market Quantification Estimation of supply and demand curves for industry wide appraisals Uses large data sets and econometric procedures

ISAF, 8/7/02, WLM & WLH20 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

ISAF, 8/7/02, WLM & WLH21 Expert Judgment Value of non-market factors Political and social factors Interpretation of values generated by above methods to determine an “appraised value”

ISAF, 8/7/02, WLM & WLH22 Appraisal of Trees and Stands

ISAF, 8/7/02, WLM & WLH23 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.

ISAF, 8/7/02, WLM & WLH24 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.

ISAF, 8/7/02, WLM & WLH25 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

ISAF, 8/7/02, WLM & WLH26 Appraisal Quality Training and certification Relevant experience Selection of methodology Data base of comparables

ISAF, 8/7/02, WLM & WLH27 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

ISAF, 8/7/02, WLM & WLH28 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

ISAF, 8/7/02, WLM & WLH29 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

ISAF, 8/7/02, WLM & WLH30 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

ISAF, 8/7/02, WLM & WLH31 References IRS Valuation Guide for Income, Estate and Gift Taxes Commerce Clearing House, Inc West Peterson Avenue, Chicago, IL The Appraisal of Real Estate, 12th Edition. The Appraisal Institute, 550 W. Van Buren St., suite 1000, Chicago, IL 60697, (312) , Uniform Standards of Professional Appraisal Practice The Appraisal Foundation. P.O. Box 96734, Washington, D.C The Appraisal Journal. monthly. Am. Institute of Real Estate Appraisers of the National Association of Real Estate Boards. Forest Mangement, 4 th Edition Davis, L.S., et. al. McGraw- Hill: New York. Forest Resources Economics and Finance Klemperer, W. D. McGraw-Hill: New York.

ISAF, 8/7/02, WLM & WLH32 Resources American Society of Appraisers ( American Society of Farm Managers and Rural Appraisers ( Appraisal Foundation ( Appraisal Institute ( Appraisal Subcommittee of Federal Financial Institutions Examination Council (

ISAF, 8/7/02, WLM & WLH33 Resources Indiana Professional Licensing Agency, Real Estate Appraiser Licensure and Certification Board ( U.S. Department of Justice ( U.S. Forest Service: Landownership 5400 Appraisal Handbook bin/Directives/get_dirs/fsh? !.. bin/Directives/get_dirs/fsh? !..