APPRAISAL

What can I expect when I request an appraisal of my Equipment?

Before answering that question, let’s define some terminology accepted by the appraisal profession.

 

DEFINITION OF TERMS
•   Client - The person, establishment, or company to which the appraisal will be addressed. NOTE: Typically, the client is identified as the party who pays for the appraisal. 
•   Company - The facility where the equipment is located. There can be multiple locations, divisions, subsidiaries, and so forth.
•   Intended Use (Purpose) - Why is the appraisal being conducted?
•   Intended User - Client, company, third party? These need to be identified.
•   Value Concepts - When the purpose and use are established, the appraiser and client discuss the value concepts that will be used to provide the estimate of worth.
•  Equipment - Also identified as machinery and equipment, personal property, or assets, this is what will be inspected and valued.
•   Timing - How soon does the work need to be done? What is the client’s or company’s expectation for delivery of the completed appraisal report?
•    Appraisal - The process by which the opinion of a property's value is determined.
•  Appraiser - One who is expected to perform valuation services competently and in an independent, impartial, and objective manner.

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SCOPE OF WORK
According to the Uniform Standards of Professional Appraisal Practice (USPAP—see below), the scope of work is the extent and type of research and analysis an appraiser will perform to complete an appraisal assignment. It is an agreement between the appraiser and the client that outlines the appraisal requirements. The appraiser is responsible for developing and reporting the scope of work. 

The scope of work can vary depending on the complexity of the appraisal and the intended use. For example, an appraisal for litigation may require more research and detail than an appraisal for a seller. The appraiser should disclose all research and analysis performed and any research and analysis that was not performed. The report should explain why specific approaches were used or not and why. Finally, the report should disclose and explain the use of any extraordinary assumptions or hypothetical conditions.

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THE FIRST STAR PERSPECTIVE

The client (financial institution, accountant, attorney, etc.) expresses their need for an appraisal. First Star obtains the client’s contact information, the company's name, and the nature of the property to be appraised. NOTE: The company's identity does not to be disclosed during this phase of the process. However, sufficient information will be required to establish the scope of work, our fee, etc.

 

Normally, the client provides an equipment list in Excel format, a fixed asset schedule, or a previous appraisal. This information determines the nature of the equipment, its industry, the number of assets, complexity, and other factors.

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The client is typically the intended user. They request the appraisal for their unique purpose and will own it, controlling its use as necessary. They are also responsible for the fees and expenses associated with the engagement.

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The purpose of the appraisal needs to be established. Appraisals are performed for many reasons, each with different requirements. A complete understanding of the purpose is mandatory. Some reasons appraisals are performed include asset-based lending and financing, end-of-lease negotiations, ad valorem tax, purchase price allocation, insurance claims, asset management, and the sale or purchase of equipment. 

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Value concepts are then discussed based on the purpose of the engagement. First Star uses the definitions of value established by the American Society of Appraisers as the basis for our appraisal assignments. Sometimes, the client will have additional value concepts pertinent to the valuation. First Star will discuss and assist in selecting value concepts that will best address the client’s needs.

LINK TO ASA DEFINITIONS 
 

Common value concepts include Fair Market Value, FMV In-Place and In-Use, Orderly and Forced Liquidation, and Replacement Cost New.

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After the scope of work is identified and agreed upon, First Star will submit a letter of engagement summarizing the discussions regarding the assignment. Our terms and conditions will explain the engagement and address all necessary parameters, such as fee, timing, limitations, etc.

With a signed engagement letter, First Star will contact the company and arrange to inspect the equipment. During the inspection, our appraisers work with the company contact, collecting financial data and invoices for newer equipment (as available). Each asset is identified with the manufacturer’s name, serial number, and age (when possible); essential specifications and unique characteristics are recorded for analysis. Representative photographs are taken to verify the existence and illustrate the condition, which assists with valuation research and our internal review.

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After the inspection process, our certified appraisers establish value based on the required value concepts, always under peer review. Our analysis considers current market trends, unique value characteristics, and the equipment's desirability in the secondary market. The condition of the equipment is considered as it pertains to the item's serviceability.

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The underlying principle for equipment appraisal is the principle of substitution. The principle states that the upper limit of value tends to be set by the cost of acquiring an equally desirable substitute of like/kind utility, assuming no untimely delays. A prudent investor would pay no more for an income-producing property than it would cost to build or purchase a similar property.

Next, the narrative report is prepared. It will identify the purpose, intended user(s), definitions of values requested, statement of assumptions and limiting conditions, appraiser certification, and description of the performance requirements. It will then be internally reviewed and submitted to the client under the terms of the engagement letter. 

The appraisal report is the client's sole property; information obtained from private sources is kept confidential and will not be disclosed to unauthorized parties.

 

USPAP
The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States.  USPAP was adopted by Congress in 1989 and contains standards for all types of appraisal services, including real estate, personal property, business, and mass appraisal.  Compliance is required for state-licensed and state-certified appraisers involved in federally-related real estate transactions.

  
The Appraisal Foundation - Click here.

Link to USPAP Information - Click here.