Collaborative Valuation: When Equipment and Real Estate Intersect

By Johnson, Park R. | Real Estate Issues, Fall 2014 | Go to article overview

Collaborative Valuation: When Equipment and Real Estate Intersect


Johnson, Park R., Real Estate Issues


APPRAISERS SHARE VALUES

It might be said within the valuation community what has long been remarked about the English and the Americans: two peoples can be separated by a common language. Indeed all the appraisal disciplines, whether real or personal property or business and intangible asset valuation, share the same pedagogy; yet so often the shared concepts differ in their applications. For example, prevailing accounting rules may apply to certain equipment or business valuations, whereas the real estate appraiser looks to standards of practice. Rules are objective, regardless of outcome, whereas application of standards may vary with the individual, however rigorously applied.

Appraisers share professional values and a work ethic. In the United States, valuers subscribe to the Uniform Standards of Professional Appraisal Practice (USPAP).1 The purpose of USPAP is to promote and maintain public trust that professional appraisers remain independent, impartial and objective in their respective valuation practices.2

It should also be noted that appraisers, regardless of the asset, deal in "value" as an economic concept, or as USPAP defines it: "the monetary relationship between properties and those who buy, sell or use those properties."3 The "property" can be real, personal or intangible.

Preparing an appraisal involves research, analysis of all pertinent information and the proper experience, knowledge and judgment to make a reasonable and supportable opinion of value, regardless of asset type.

THE EMERGENCE OF THE EQUIPMENT VALUATION PROFESSION

Machinery and equipment (sometimes referred to as M&E) is a subset of personal property, but is most often associated with industrial or purpose-built real estate. In this article, the author will adopt the more encompassing term "equipment" to denote this type of asset valuation. Equipment appraisal has its roots in the valuation of entire industrial plants for rate setting and property taxation. The valuation of individual pieces of equipment has a deeper legacy related to security for collateral lending and insurance purposes. Beginning in the 19th century, regulated utilities needed uniform replacement cost information to set rates of return when setting pricing.

The educational and business experience of appraisers varies with the asset type. While there is overlap, equipment appraisers specializing in whole plant valuations tend to come from an engineering background. Those who specialize in valuing for asset lending have bought and sold equipment, perhaps as auctioneers. Contrast this with real estate appraisers, traditionally schooled in finance, perhaps having worked in banking. Business valuers will be grounded in accounting.

Most of the equipment appraisal literature seems to have originated with the practitioners who have an engineering background. The Machinery and Technical Specialties discipline of the American Society of Appraisers (ASA), with nearly 1,200 members, is the best-recognized professional group of equipment appraisers.

The U.S.-based ASA is the largest multiple discipline professional valuation organization. The Royal Institution of Chartered Surveyors (RICS), a London- based international organization, has come to embrace professionals working in all aspects of the real estate industry as well as valuers, regardless of asset type. The MAI-designating Appraisal Institute, in contrast, limits itself to real estate valuers.

Many valuers have worked where asset types intersect. Look no further than financial reporting and property tax appeals. Both require real estate and equipment appraisers, if not business appraisers, to work together on behalf of a common client. Yet while all asset experts nominally use the cost, market and income approaches in valuation, the distinctions are significant, even as they are subtle.

COMPARE AND CONTRAST: PERSPECTIVES ON THE APPROACHES TO VALUE

Whereas real estate appraisers typically apply two, if not all three approaches to value, equipment appraisers may consider all three, but more often rely on only one: the cost approach. …

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