APPRAISING MACHINERY & EQUIPMENT By RONALD J. SAVILL, ASA, MRICS

INTERNATIONAL APPRAISALS, INC.

www.internationalappraisals.com

The Machinery & Equipment Appraiser Tested, Certified, and Designated by the American Society of

Appraisers

American Society of Appraisers

Requirements for Professional Designations in ASA

1. Education A degree from a recognized institution of learning or such other education, knowledge or experience as may be deemed to be equivalent of such professional education by the International Board of Examiners of the American Society of Appraisers.2. Experience Member status requires a minimum of two years full time appraisal experience. Senior Member (ASA) status

requires a minimum of five years full time appraisal experience.

American Society of Appraisers3. Examinations In addition to other mandatory requirements, individuals must pass comprehensive examinations covering areas of: General Value Theory, Technical Expertise, Professional Ethics.

4. Appraisal Reports As part of the professional designation process, candidates must submit several appraisal reports for evaluation and grading.

5. Personal Investigation Each individual seeking a designation must furnish numerous professional and personal references and be subject to local credit and background investigations. 6. Continuing Education

To ensure that competent, relevant, and current valuation counsel is available to the public, ASA requires Accredited Senior Appraisers to reaccredit.

Reaccreditation Certificate

Royal Institution of Chartered Surveyors

• RICS credentials are only awarded to individuals who meet the most rigorous education, experience and ethical requirements.

• MRICS - Member of The Royal Institution of Chartered SurveyorsThe letters MRICS represent professionalism and quality and are awarded to individuals who meet the following criteria:

• Education - the individual must hold a relevant Bachelor's level qualification and/or an RICS recognized professional designation.

• Experience - most individuals have at least ten years relevant experience. Those with a Master's degree may only need five years.

• Ethics - the individual agrees to be accountable to a strict code of conduct.

• Evaluation - most individuals complete written submissions and a final assessment interview to communicate professional and technical competence.

“appraisal” Definition

USPAP defines “appraisal” as:

the act or process of developing an opinion of value; an opinion of value.

Dimensions Of Value

FLV

OLV

FMV

FMV-ICU

REPL

0 1 2 3 4 5 6Once you have determined that you need an appraisal, we can help you

decide what type of appraisal is appropriate for your situation. The following concept definitions are recognized as standard by the

American Society of Appraisers.

Types of Appraisals

• Replacement Cost New Is the current cost of a similar new property having the nearest equivalent utility as the property being appraised, as of a specific date.

• Reproduction Cost New Is the cost of producing a new replica of a property on the basis of current prices with the same or closely similar materials, as of a specific date.

• Insurance Replacement Cost Is the replacement cost new as defined in the insurance policy. It is the cost new of the items specifically excluded in the policy, if any.

• Insurance Value Depreciated Is the insurance replacement cost less accrued depreciation considered for insurance purposes.

Types of Appraisals

• Forced Liquidation Value

Is the estimated gross amount expressed in terms of money which could be typically realized from a properly advertised and conducted public auction with the seller being compelled to sell with a sense of immediacy on an as is-where is basis, as of a specific date.

• Orderly Liquidation Value

Is the estimated gross amount expressed in terms of money which could be typically realized from a liquidation sale given a reasonable period of time to find a purchaser, the seller being compelled to sell on an as is-where is basis, as of a specific date.

Types of Appraisals

• Liquidation Value In Place

Is the estimated gross amount expressed in terms of money which is projected to be obtainable from a failed facility assuming that the facility would be sold intact within a limited time to complete the sale, as of a specific date.

• Fair Market Value

Is the estimated amount expressed in terms of money that may reasonably be expected for a property in exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.

Types of Appraisals

• Fair Value

Is the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement date.

• Fair Market Value In Continued Use Is the estimated amount in terms of money that may

reasonably be expected for a property in exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell and both fully aware of all facts, including installation and assuming the earnings support the value reported.

Types of Appraisals

• Fair Market Value-Installed Is the estimated amount of an installed property expressed in

terms of money that may reasonably be expected in exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell and both fully aware of all the relevant facts, as of a specific date.

• Fair Market Value-Removal Is the estimated amount expressed in terms of money that may

reasonably be expected for an item of property between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, considering the removal of the property to another location, as of a specific date.

Three Approaches to Value

For every appraisal assignment, an appraiser mustconsider all three of the approaches to value:

Cost Approach, Market Approach, Income Approach

1. The Cost Approach is that approach which measures value by determining the current cost of an asset and deducting for the various elements of depreciation, physical deterioration and functional and economic obsolescence.

The logic behind the cost approach is the principle of substitution: a prudent buyer will not pay more for an item than the cost of acquiring a substitute new item with the same utility as the subject asset.

Three Approaches to Value2. The Market Approach is that approach to value where

recent sales and offering prices of similar property are analyzed to arrive at an indication of the most probable selling price of the property being appraised. The logic behind the market approach is that a prudent purchaser would pay no more for an item than the cost of acquiring an existing replacement in the used market.

The market approach is the truest indicator of what an asset would bring on the open market. The type of sale-auction or negotiated, conditions of the sale, and condition of the equipment at the time of the sale need to be considered.

3. The Income Approach is that approach where the net income that the property can produce is capitalized. The logic is that a prudent purchaser would likely base his buying decision upon potential future income generated by ownership of the assets.

Market Approach Resource Materials

1. Internet2. Published Cost Guides3. Auction Monitoring Services4. Trade Journals5. Machinery Dealers6. Other Appraisers & Auctioneers7. Attending & Monitoring Auction Sales

Uniform Standards of Professional Appraisal Practice (USPAP)

The intent of USPAP is to promote and maintain a high level of public trust in professional appraisal practice by establishing requirements for appraisers. It is essential that appraisers develop and communicate their analyses, opinions, and conclusions to intended users of their services in a manner that is meaningful and not misleading.

USAP establishes requirements for impartiality, independence, objectivity, and competent performance. Because of these standards, appraisers who comply with USPAP are viewed as unbiased professionals whose work is worthy of public trust.

To document recognition and acceptance of his or her USPAP-related responsibilities in communicating an

appraisal completed under USPAP, an appraiser is required to certify compliance with USPAP.

USPAP

USPAP Reflects the Current Standards of the Appraisal Profession

USPAP

USPAP

An appraiser must not disclose confidential information or assignment results prepared for a client to anyone other than the client and persons

specifically authorized by the client.

Appraisal Report Contents Proper appraisal practice requires the following

elements be included in any appraisal report.

1. Letter of Transmittal

2. Identification of Appraisal Property

3. Certification and Limiting Conditions

4. Appraisal Methodology Narrative

Letter of Transmittal

All appraisals should begin with a letter of transmittal. This letter should state the identity of the client and any intended users; state the intended use of the appraisal; state the type and definition of the value; state the property interest being appraised; state the value conclusion; state the effective date of the appraisal and the date of the report. This letter should be signed by the appraiser responsible for the value conclusion contained in the report.

Identification of Property All items being appraised should be sufficiently

identified so as to avoid any misunderstanding or confusion over what specifically is included. This identification could include, when available, the following:

a) Manufacturer b) Model Number c) Serial Number d) Size and Capacity e) Year of Manufacture f) Attachments & Auxiliary Equipment g) Special Features h) Photographs

Certification and Limiting Conditions Each written machinery appraisal report must

contain a signed certification that is similar in content to the following form:

a) The statements of facts contained in this report are true and correct.

b) The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal , impartial, and unbiased professional analyses, opinions, and conclusions.

c) I have (or have not) made a personal inspection of the property that is the subject of this report

d) The appraiser has no financial interest in the items appraised,

and no personal interest with respect to the parties involved.

Certification And Limiting Conditions

e) The fee was not contingent on the value reported

f) Statements, information, or data supplied by others, on which the conclusions were based, should be summarized.

g) My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

A signed certification is an integral part of the appraisal report. An appraiser who signs any part of the appraisal report, including a letter of transmittal, must also sign this certification.

Methodology Narrative Because intended users’ reliance on an appraisal may

be affected by the scope of work, the report must enable them to be properly informed and not misled. Sufficient information includes disclosure of research and analyses performed and might also include disclosure of research and analyses not performed.

Furthermore, the appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions, including reconciliation of the data and approaches.

When an opinion of highest and best use is developed by an appraiser, there should be a description of the support and rationale for that opinion.

Causes & Effects

When the time comes to actually liquidate assets, there are certain circumstances which tend to have a positive or negative influence on the actual outcome of the sale. These factors effecting value are often the least understood by both the appraiser and the client. A client can readily understand why the condition of the particular machine will have a direct relationship on the liquidation value of the machine. However, it is often much more difficult to understand why the condition of the building in which that machine is located can have a similar effect on its value. Causes and effects can be divided into four categories.

Causes & Effects1. Total Draw of M&E There is a direct relationship

between the selling price of machinery and equipment and the “appeal” of the overall sale. If there are insufficient quantities, too many of the same item, or if the majority of the equipment is somewhat obsolete, it will be difficult to draw enough buyers to create a favorable selling situation. It is for this reason that sellers should consider carefully the decision to “sell off” assets prior to a total liquidation.

2. Physical Appearance The appearance of the machinery and equipment can be of more importance than actual condition. The appraiser must consider the appearance as well as condition when arriving at a liquidation value.

Causes & Effects

3. Location and Industry Economics The appraiser has to consider the health of the industry that would likely produce the buyers for the subject machinery and equipment as well as the practical aspects for transporting the machinery and equipment.

4. Psychological Effects It is a fact that the assets sold after an enterprise has failed will usually sell for less than if sold prior to failure. This is an effect of psychological factors, rather than the machinery and equipment itself.

How An Appraisal Is Conducted

1. Before We Begin

1. Determine the purpose, client(s), intended user(s)

2. Request asset/depreciation schedule

3. Estimate cost and time

4. Preliminary Inspection

How An Appraisal Is Conducted

On Site Procedure

a. Physical inventory: description, model and serial numbers, attachments, etc.

b. Photograph

c. Note age and condition

d. Interview maintenance personnel

How An Appraisal Is Conducted

3. In Office Procedure

a) Research Data Base

b) Interview Industry Experts

c) Arrive At Final Value Conclusion

d) Assemble and Deliver Final Report