Industrial & Commercial Property Appraisal Services

Approaches to Value

The three traditional approaches to valuation consist of the Cost, Sales Comparison and Income Capitalization Approaches, defined as follows:

Cost Approach

The Cost Approach estimates value based upon the cost of reproducing or replacing assets, less depreciation from all forms of obsolescence; physical, functional and external. This approach is based on the assumption the value of any asset cannot exceed the cost required to construct or replace it with another of comparable utility.

  • Physical deterioration can be defined as a loss in value caused by disintegration, wear and tear, and exposure to the elements.
  • Functional obsolescence is defined as a loss in value caused by conditions within the property such as changes in design, material, or process, resulting in inadequacy, excess construction, lack of utility, or excess operating costs.
  • External obsolescence is defined as a loss in value caused by unfavorable conditions usually considered external to the property, such as local economic factors, economics of the industry, encroachment of objectionable enterprises, loss of material and/or labor sources, lack of sufficient transportation, shifting of business center, passage of new legislation, changes in ordinances, etc.

Sales Comparison Approach

The Sales Comparison Approach compares similar items that have sold, or are currently offered for sale, in the marketplace with the subject assets. This approach presumes that a market exists for the type of property being appraised, and that data on recent arm’s-length sales of similar assets in the same market are an appropriate guide to estimating the market value of the subject property.

Income Capitalization Approach

The Income Capitalization Approach measures the present worth of anticipated future benefits (net income). The net income or net cash flow is estimated over an appropriate period of time and then capitalized at an appropriate rate. The capitalization rate reflects the time value of money, inflation, and risk inherent in ownership of the property.

Insurance Appraisal Services

Much has happened within the industrial fire protection insurance industry over the past few years. Major fire protection insurance providers had expressed more interest in selling business interruption insurance packages than keeping abreast of insured’s actual real and personal property replacement costs. An over-reliance in underwriting “umbrella” policies that address all overlapping variables should catastrophe strike is common. Major insurance carriers have disbanded their industrial appraisal services departments.

What basis is used in formulating your current fire protection coverage? Do you feel your present coverage is adequate? When was the last time your insurance provider sent appraisers to visit your manufacturing operations and check on changes that may have occurred? Do you suspect your carrier’s Underwriting Department of simply inflating “trended” numbers (reproduction cost new) and increasing insurance premiums accordingly? Insurable value estimates become unreliable by simply inflating numbers year after year.

Replacement Cost New

Replacement cost new is defined as the current cost of a similar new property having the nearest equivalent utility as the property being appraised, as of a specific date. Page 585, Valuing Machinery and Equipment, American Society of Appraisers, Washington, D.C., 2005.

Reproduction Cost New

Reproduction cost new is defined as the current cost of producing a new replica of a property with the same, or closely similar materials, as of a specific date. Page 585, Valuing Machinery and Equipment, American Society of Appraisers, Washington, D.C., 2005.

Much of today’s state-of-art machine tools are not only more efficient and productive, they are less expensive to operate and acquire. As a result of technological advancement, today’s replacement costs can be considerably cheaper when compared to trended historical costs, i.e. reproduction cost new. Is it time to check the accuracy and associated costs of your present policy coverage?

Mergers, Acquisitions & Purchases of Property, and Ad Valorem Tax

Alliance Appraisal & Consulting Services, Inc. (“Alliance”) combines property records enhancement solutions while conducting appraisal analysis establishing fair value estimates for Federal tax and financial reporting purposes.

Fair value is defined as 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. Statement of Financial Accounting Standard No. 157.

Alliance will conduct a thorough physical review of the assets acquired and reconcile with existing property records to help promote and ensure adequate asset stewardship. Asset effective age, remaining economic useful life, and residual value estimates can also be formulated at this time.

Asset Based Financing

Attendance at industrial property auction sales provides Alliance Appraisal & Consulting with insights on market desirability for used machinery and process equipment. Orderly liquidation value or forced liquidation value appraisals can be provided where asset-based financing is sought.

Orderly liquidation value can be defined as the estimated gross amount, expressed in terms of money, that could be typically 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. Page 4, Valuing Machinery and Equipment, American Society of Appraisers, Washington, D.C., 2005.

Forced liquidation value can be defined as the estimated gross amount, expressed in terms of money, that could typically 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. Page 4, Valuing Machinery and Equipment, American Society of Appraisers, Washington, D.C., 2005.

Uniform Standards of Professional Appraisal Practice

Alliance appraisals are conducted in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP) of The Appraisal Foundation.