Appraisal Procedures (ref. ASA):

Value Definitions (ref. ASA):

In appraisal practice and procedures, there are three traditional and generally accepted approaches to value: Cost Approach, Sales Comparison Approach, and Income Capitalization Approach.

Cost Approach

The appraiser starts with the replacement cost new (or in some circumstances the reproduction cost new) of the property being appraised, and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.The logic behind the cost approach is the principle of substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility.

Physical Depreciation

Loss in value or usefulness of a property due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.

Functional Obsolescence

A form of depreciation in which the loss in value or usefulness of a property is caused by the inefficiency or inadequacies of the property itself when compared to a more efficient or less costly replacement property that new technology might now allow.

Economic Obsolescence

A form of depreciation where the loss in value or usefulness of a property is caused by factors external to the property.These may include such things as the economics of the industry; availability of financing; loss of material and/or labor sources; new legislation or ordinances; increased cost of raw materials, labor, or utilities without a compensatory increase in product price; reduced demand; increased competition; inflation or high interest rates; or similar factors.

Sales Comparison (Market) Approach

The sales comparison approach is a technique which value is estimated based on market prices during actual transactions along with advertised selling prices for similar assets available as of the date of valuation. The process is essentially that of comparison and correlation between the subject asset and similar assets that have been sold.

Income Approach

The income approach is applicable to machinery or equipment capable of producing a net income stream on a standalone basis. By using this approach to value, the appraiser measures the present value of the future benefits of property ownership. In general, income streams and the value of the asset upon resale (reversion) are capitalized or converted into a present day, lump sum value. This value, based on the future cash flow that an asset will produce over its useful life, can either be discounted to net present value or capitalized by examining stabilized net operating income. These are the two most generally accepted methods in applying the income approach.

First, a projection is made of the cash flow an asset is expected to generate. This involves the analysis of present financial information along with discussing projected future income and related expense with management and operations personnel. The second step is to convert the cash flow to a present value equivalent through discounting or capitalization rate analysis. The processes use a rate of return that accounts for the time value of money or the rate of return expected by investors and owners.

The market value of an asset is the sum of the discounted cash flow, plus the present residual value or the capitalized one year net earnings. In either method, an analysis of the discount (yield) rate or capitalization rate must be determined through data available in the marketplace.

The strengths and weaknesses of each approach used are weighed in the final and reconciliation analysis. The approach or approaches offering the greatest quantity and quality of supporting data are typically given most consideration and the final estimate of value is correlated.