Glossary of Terms and Definitions

Copyright © Larry Perdue. All rights reserved.

Appraisal - An appraisal is an unbiased opinion of value of an identified property based upon the investigation and analysis of pertinent data and the application of appropriate analytical techniques.

Appraisal Process- A physical inspection is made by the appraiser who gathers data and information from the client to complete and support an appraisal making every effort to ensure the information provided and collected is accurate, current, and correct.  

Appraisal Report – A report, either written or oral, conveying the findings of an appraisal assignment.  The report must communicate each analysis, opinion, and conclusion in a manner that is not misleading and contain sufficient information to enable the intended users of the appraisal to understand the report properly, and clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.

Appraisal Approaches to Value - the three recognized approaches used in appraisal analysis include:
          Market Approach - This approach involves the collection of market sales data pertaining to the subject assets being appraised.  The primary intent of this approach is to determine the desirability of the assets through recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being appraised.  The appraiser adjusts the prices that have been paid for assets comparable to the asset being appraised, equating the comparables to the subject.
          Cost Approach - The appraiser starts with the current replacement 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 this 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.
          Income Approach - This approach uses the capitalization of current net income or projected net cash flow and discounts those at a calculated rate to estimate current value.  This is the least employed approach to value in single asset appraisals of equipment.

Appraisal Value Conclusion - The appraiser adjusts and correlates the gathered information in order to arrive at the value conclusion.  Opinions are based upon the available facts and the experience, training, and education of the appraiser.

Concepts of Value - The underlying theme and elements of the definitions presented here are based in standard appraisal theory.  Many terms are used to described 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. The appraiser will analyze the appraisal assignment thoroughly to ascertain the approach value concept that best suits the purpose of the appraisal assignment.  The most common value concepts include:

          Reproduction Cost New is the cost or reproducing a new replica of a property on the basis of current prices with the same or closely similar materials, as of a specific date.  (This definition is typically used for Insurance Purposes.)

          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.  (Also typically used for Insurance Purposes.)

           Fair Market Value In Continued Use is the estimated amount expressed in terms of money (U.S. Dollars), as of a specific date, that may reasonably be expected for a property in exchange between a willing buyer and a willing seller with equity to both, neither being under any compulsion to buy or sell, and both being fully aware of all relevant facts, including all direct and indirect cost(s) attributed to installation.  It also considers that each individual item appraised contributes to an added value, relative to the operational facility and assumes that the earnings will support the indicated value reported.  In the event the earnings can not support the indicated value, then the difference between the value of what the earnings can support and the indicated value is Economic Obsolescence and the indicated value must be reduced to reflect the Economic Obsolescence penalty.

          The Fair Market Value In Continued Use concept, as particularly applied to equipment, is the value of a piece of equipment installed or in-place for continued operations, and utilized at the time of inspection.
          This value concept is applicable for marketing property on a "going concern" basis and/or for allocation of the purchase price after acquisition.  It is also used as a value applicable to any representation made for value of the personal property portion of assets as its portion of contribution to the business.

          Fair Market Value Installed / In Place is the estimated amount of an installed property expressed in terms of money (U.S. Dollars), as of a specific date, that may reasonably be expected in exchange between a willing buyer and a willing seller with equity to both, neither being under any compulsion to buy or sell and both being fully aware of all relevant facts. 
          This concept considers the Fair Market Value of an item plus all direct and indirect cost(s) attributable to installation and, as particularly applied to equipment, is the value of a piece of equipment installed and may, or may not, be for continued use.  An "In Place" asset is located at the facility, but not installed.

          Fair Market Value - Exchange is an opinion expressed in terms of money (U.S. Dollars), at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.
          In the valuation of personal property, this definition must be further defined based on the function and purpose of the appraisal.  The definition "fair market value" (considered synonymous with "market value") is based on the Internal Revenue Service definition in IRS Revenue Ruling 59-60 and the following U.S. Regulations:  26CFR 1.170A-1 - Charitable Donations, 26 CFR 20.2031-1(b) - Estate Tax, and 26 CFR 25.2512-1 - Gift Tax.

          Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date.  This statement also explains that a fair value measurement of an asset assumes its highest and best use by market participants.  Such use would maximize the value of the asset or group of assets within which the asset would be used, regardless of the intended use of the asset by the reporting entity.


         Orderly Liquidation Value Installed / In Place is the estimated amount in terms of money (U.S. Dollars) or equivalent, which could be realized from a sale conducted in an orderly manner by an experienced liquidator using appropriate marketing efforts as directed by the compelled sale, estimated to be 12 to 18 months, held under economic conditions equivalent to those in place as of the effective date for the subject assets installed/in place.

          Liquidation Value In Place is an opinion of the gross amount, expressed in terms of money (U.S. Dollars), as of a specific date, that typically could be realized from a properly advertised orderly liquidation sale, with the seller being compelled to sell for a failed, non-operating facility, assuming that the entire facility is sold intact.  (Typically used for lending on heavily installed properties.)

          Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money (U.S. Dollars), as of a specific date, 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, and considers removal of the property to another location.
          This premise of value reflects the sale of an asset (or assets) by a motivated seller after an adequate marketing period to sell the property.  Typically, the buyer is responsible for all costs associated with de-installing and removing the asset.

          Forced Liquidation Value is the estimated gross amount expressed in terms of money (U.S. Dollars), as of a specific date, which could be typically realized from a properly advertised and conducted absolute ("unreserved") public sale ("auction"), with the seller being compelled to sell, with a sense of immediacy, on an "as is, where is" basis with no warranty implied or expressed, and the buyer being responsible for the cost of removal.
          This concept takes into consideration inflationary or depreciable conditions and current economic trends which may affect the sales outcome, such as physical location, difficulty of removal, adaptability or specialization, marketability, physical condition, overall appearance, total psychological appeal, and the ability to draw interested and qualified buyers.  Any deletions or additions to the items listed could change the psychological and/or monetary appeal that may be necessary to gain the indicated prices.  No consideration is given to any additional values that might be obtained due to the sale of a product line, equipment in place, ongoing operation, or other elements of value that may be produced at a public sale ("auction") that could not have been assumed or foreseen by the appraisers.

          Salvage Value is an opinion of the amount, expressed in terms of money (U.S. Dollars) 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 mount, expressed in terms of money (U.S. Dollars) that could be realized from the property if it were sold for its material content, not for a productive use, as of a specific date.

Highest and Best Use - Highest and Best Use is defined as the purpose for which an item was designed.  It is the reasonably probable and legal use of the asset that is physically possible, appropriately supported and financially feasible, and results in the highest value in the appropriate marketplace.  The subject personal property was being used for the purpose as designed unless otherwise indicated and, therefore, its Highest and Best Use.

Marketing Period- Under any value concept, the time (Marketing Period) plays an important role in arriving at a final conclusion of value.  Naturally, the Fair Market Value, with its undefined length of time for sale, can yield the highest appraised value.  Fair Market Value does not consider a "distressed sale," but rather a willing buyer and a willing seller.