Valuation Factors regarding Deprivation Analyses

Article excerpt

A deprivation occurs when the owner of an asset, property or business interest is involuntarily deprived of the ownership (or other legal or economic rights) of his property. A deprivation can result from eminent domain, property damage, infringement, squeeze-out transaction, breach of contract or similar actionable events. As the result of such events, the property owner is typically eligible for compensation for the economic loss suffered from the deprivation. The measurement of the compensation for the economic loss typically requires an appraisal. These appraisals may include the valuation and economic analysis of a variety of properties, such as: business entities and securities, intangible assets and intellectual properties, real estate and real property interests, tangible personal property, etc.

When deprivations occur, accountants are immediately called upon by their employers or clients for assistance, advice and counsel. Accountants are often asked to perform an analysis of, or to assemble and interpret data for an analysis of, the deprivation. Accountants are frequently asked to participate in the selection of independent valuation and economic advisors who specialize in the deprivation appraisal process. And, accountants are always asked to work with the independent valuation and economic advisors -- and legal counsel -- to ensure the aggrieved party receives the full compensation they are entitled to.

This article will discuss the valuation aspects of deprivation appraisals, in particular, the theoretical concepts and practical applications of deprivation appraisals. These concepts and applications affect the purpose and objective of the appraisal, the definitions of value and premises of value used in the appraisal, the actual valuation approaches and methodologies used, and the presentation of the appraisal work product.

Of course, the definitions of value used, the valuation procedures performed, etc. will be directly influenced by the statutory authority, judicial precedent and administrative rulings of the legal or political authority in which the property deprivation occurred.

The valuation fundamentals will also be directly influenced by the type of deprivation that occurred--and by the type of asset, property or business interest that suffered the deprivation. Nonetheless, there are certain valuation principles or standards that are universal with regard to virtually all types of deprivation appraisals. It is these universal deprivation appraisal principles or standards we will discuss.

This article is presented from the perspective of the professional appraiser, valuation analyst or economist. It is not intended to provide legal, accounting or taxation advice.

The Nature of a Deprivation Appraisal

A deprivation appraisal is conducted when a deprivation has occurred or is threatened to occur. In a deprivation, the legal owner of a property is deprived of the ownership of, the possession of, the use of or the economic enjoyment of that property.

Typically, in a deprivation, the party subject to the deprivation loses some portion (or all) of their bundle of legal rights related to the property. The party subject to the deprivation also loses some portion (or all) of the economic value attendant to those legal rights. The party responsible for the deprivation receives some portion (or all) of the total bundle of legal rights related to the property. And, the party responsible for the deprivation receives some portion (or all) of the economic value attendant to those legal rights.

In short, the party subject to the deprivation is economically disadvantaged, and the party responsible for the deprivation is economically advantaged. Typically, the ultimate objective of the deprivation appraisal is to quantify the amount of fair and just compensation to the property owner to compensate the owner for the economic disadvantage associated with the deprivation. …