Definitions of Appraisal Terms

DEFINITIONS OF VALUE RELATING TO MACHINERY AND TECHNICAL SPECIALTIES ASSETS

The underlying theme and elements of the definitions presented here are based in standard appraisal theory. Many terms are used to describe various thoughts or premises of value. These definitions are offered to provide the fundamental value concepts; they are not the only acceptable definitions, since contracts or jurisdictions may dictate somewhat different philosophies. Therefore, these definitions may be expanded or refined as the purpose and function of an appraisal dictate, as long as the fundamental concepts are not altered. In other cases, the laws of a country, state region, or regulatory agency may require other terms, which therefore would take precedence over the definitions shown here.

Because the machinery and technical specialties (MTS) appraiser deals with a variety of assets, most of which can be moved, it is necessary to recognize different definitions of value. These can be broadly classified into three categories, distinguished mainly by an asset’s anticipated use:

  1. Sale for removal for a similar or alternate use,
  2. Continued (or as installed) use of the asset for the purpose for which it was designed and acquired,
  3. Liquidation

Hence, use of the term value or fair market value is modified or refined to create special definitions to fit the needs of a particular appraisal. These modifiers provide a specific definition of value to guide the work of the appraiser. The following list of the various definitions of value that the appraiser will encounter is not intended to be complete. The list begins with a basic definition of fair market value and then presents the various refinements of the term that are used to fit the needs of the appraiser.

SALE for REMOVAL or ALTERNATE USE

FAIR MARKET VALUE is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts, as of a specific date.

FAIR MARKET VALUE – REMOVED is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts, considering removal of the property to another location, as of a specific date.

CONTINUED USE (or CAPACITY for USE)

FAIR MARKET VALUE in CONTINUED USE with ASSUMED EARNINGS is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts, as of a specific date, and assuming that the business earnings support the value reported, without verification.

FAIR MARKET VALUE in CONTINUED USE with an EARNINGS ANALYSIS is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts, as of a specific date and supported by the earnings of the business.

FAIR MARKET VALUE INSTALLED is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

These concepts are all similar with some minor nuances. In each of these instances the property is capable of being used at its present location. Therefore, the amount includes the depreciated value associated with all normal direct and indirect costs, such as installation and other costs, to make the property fully operational. The continued use concepts consider the property as part of a business enterprise, whereas the installed concept considers the property is or is not being used. Since the two continued use concepts consider the use of the property, economic justification is required for the determined value. Under assumed earnings concept, the appraiser assumes there exists economic justification for the reported value, and under the earnings analysis concept, an analysis of the business earnings needs to be undertaken to provide justification for the reported value.

LIQUIDATION

LIQUIDATION VALUE IN PLACE is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact.

ORDERLY LIQUIDATION VALUE is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is where-is basis, as of a specific date.

FORCED LIQUIDATION VALUE is an opinion of the gross amount, expressed in terms of money, that typically could be 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.

All the liquidation concepts require a seller being compelled to sell, whereas the fair market value concepts include a willing seller with no compulsion. The primary difference between orderly and forced liquidation is the assumed time period for selling the property. Orderly liquidation value provides for a reasonable period of time, and forced liquidation value provides for a sense of immediacy. Orderly liquidation value and forced liquidation value assumes the property would be sold piecemeal and liquidation value in place assumes the entire facility is sold intact.

All the definitions listed in this text may be expanded or redefined by the appraiser as the purpose and function of the appraisal dictate, so long as the fundamental and underlying concept is not altered without a compelling reason, such as being required by law.

OTHERS

SALVAGE VALUE is an opinion of the amount, expressed in terms of money, that may be expected for the whole property, or a component of the whole property, that is retired from service for possible use elsewhere, as of a specific date.

SCRAP VALUE is an opinion of the amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.

INSURANCE COST NEW is the replacement or reproduction cost new as defined in the insurance policy, less the cost new of the items specifically excluded in the policy, as of a specific date.

INSURABLE VALUE DEPRECIATED is the insurance replacement or reproduction cost new, less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements, as of a specific date.

Definitions for values and value premises other than those presented above may be acceptable. The appraiser may expand or refine a definition as the purpose and function of the appraisal dictate, as long as the fundamental and underlying concept is not altered without a compelling reason (such as required by law).

PRICE AND COST DISTINGUISHED

The appraiser often receives financial information about the property to be appraised in which the terms price, cost and value are used interchangeably by accountants and the general public. Appraisers carefully distinguish between these terms.

Price is defined as the amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transaction. A price, once finalized, refered to a sale or transaction price and implies an exchange. In other words, price is a fact. The price paid for a particular asset may be higher or lower than, or equal to, the asset’s value.

The term cost is used by appraisers in relation to production, not exchange. Cost may be either an accomplished fact or a current estimate. It is defined as the total dollar expenditure for any asset. The cost of a particular asset may be higher then, lower than, or equal to the asset’s value.

The terms price, cost and value may have different interpretations by various appraisers. One example might be to say that price is what is marked, cost is what is paid, and value is what one may obtain after the purchase.

Source: Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets, Third Edition 2011, American Society of Appraisers