When should financial advisers, such as Wealth Managers, Bankers and Trust Officers, Tax Advisers or Attorneys call in a Personal Property Appraiser to work with their clients? Why do clients need appraisals when they want to have financial advice? To answer these questions, one only has to ask: “How can I help my clients to effectively plan their financial future, if they don’t know what all they own and how much it’s worth?”
As financial professionals know, clients have wide-ranging needs relating to personal property ownership, and the services that appraisers provide can establish a solid foundation and basis of value so that one can advise and help a client manage their assets.There are many situations when working with a qualified professional appraiser is a necessity, such as when deciding about scheduling for Insurance, Estate Planning, Wills and Trusts, Equitable Distribution of Property, Estate Taxes, Gift Tax, Charitable Contributions, Damage Claims and Litigation for any reason.
Unlike major art collectors, the majority of clients inherit or collect bits and pieces for years, but are often unaware of what they own, or the current value. Contacting an appraiser to do an inventory and detailed
appraisal is the first step. An appraisal report is a legal document and one as important as a will. Frequently having an appraisal done will be the first time that a client’s property will have been accurately identified, described and valued for any purpose, and has proven particularly important for the recovery of items in the case of theft. Often a client’s personal property will be of greater value than their residence, and by having an appraisal to review, advisers are able to help clients make informed decisions and plan ahead. Once an
adviser has the necessary value information about the client’s property, they can make sure that there are no surprises and help them avoid potential problems with heirs or make choices that might keep them from reaching their financial goals.
Although laws may differ according to country, it is particularly important for financial advisers to work with a professional, accredited appraiser who has no vested interest in the property to be appraised.
Whether it involves fine art, a particular collection or the accumulated valuables in their residences, an appraisal report, if properly prepared by a qualified professional appraiser, will provide a defensible value at
a particular given time. A proper appraisal report should be prepared by an independent, accredited professional appraiser, who belongs to one of the major recognized appraisal organizations and is compliant with USPAP (Uniform Standards of Professional Appraisal Practice) which are the quality control standards for all appraisals performed in the United States and its territories. The report should be presented in a cohesive,
logical, readable manner and should provide a client with evaluations and analyses of their tangible assets. In this respect, appraisals are particularly applicable and necessary for wealth managers, trust & estate practices, the insurance industry, and to collectors.
Although laws may differ according to country, it is particularly important for financial advisers to work with a professional, accredited appraiser who has no vested interest in the property to be appraised. This will ensure that the value conclusion is independent, accurate and will clarify questions of value under any circumstances. Not only do national taxation services, but also museums, institutions, businesses, insurance companies
and collectors all require appraisal reports that are objective, true and independent of auction houses, dealers and other collectors.
Recent hurricanes, fire disasters, earthquakes and tsunami around the world spotlight how financial advisers and insurance companies working together with appraisers/valuers can help their clients to be prepared for and begin to recover from such natural disasters.
Therefore it would be prudent for those working in a financial advisory capacity to always consider working with a qualified professional appraiser, to ensure that they have all the facts needed to advise their clients on how best to prepare for the future.
About Jean O'Brien:
Jean O’Brien, Principal of JA O’Brien Associates, is an Accredited Senior Member of the American Society of Appraisers with over 30 years of experience appraising a broad range of Fine Art, Decorative Arts and Antiques. Her background includes degrees in Studio Art and Art History, ASA professional appraisal training, and over two years at Christie’s International Auction House Education Division in London, where she earned two diplomas from the Royal Society of Art.
Contact details:
Jean A. OBrien, ASA
Principal, J.A. OBrien Associates, LLC
4817 West 69th Street
Prairie Village, Kansas 66208, USA
Telephone: 913 722 2460
913 787 1926
To hear about valuations and middle market M&A, Finance Monthly reached out to the experts at IBG Business.
IBG Business exists to bring merger and acquisitions skills, resources and knowledge to middle market business owners selling (or buying) businesses. “The firm is defined by its expertise, character and commitment to delivering exceptional results”, says IBG Oklahoma Managing Partner and Principal John Johnson. “Our team brings extensive background, robust training and deep resources to each deal. Time and again, the precise execution of our refined professional process has yielded maximum value under optimal terms and timing for our clients.”
Owners should seek professional help prior to selling a business or planning an eventual exit. IBG Denver Managing Partner and Principal, John Zayac, explains the complexities sellers face: “Price is often a starting point in the discussion, a common marker for value. However, it is only the tip of the iceberg. Price is predicated on a complex foundation of components including shifting responsibilities for risk, tax treatment and intangible values, all of which may move dramatically as a sale is negotiated”. Regarding the question “What is my business really worth?” Gary Papay, IBG Pennsylvania Managing Partner, also asks “And why? Knowing the reasons underlying the value of a business can reveal value-enhancing improvements or set up better initial positioning of deal terms.”
Casual opinions of what a business is worth are as abundant as sparrows. Those opining rarely have knowledge of the particulars of the business, the deal terms, an understanding of the sector or any transaction expertise. All are imperative to formulating a competent view on value. Sellers often reach out to valuation specialists for a fair market value opinion, but these regimented, theoretical valuations - while an improvement on sparrows - are better suited to litigation, divorce, or estate planning.
The most useful guidance for prospective sellers will combine sophisticated appraisal techniques with recent ‘boots on the ground’ experience on actual transactions. A market-informed opinion of the value of a business will gauge how potential buyers might respond to its sale. The opinion should provide a range of values, articulate what factors underlie the opinion, and comment on possible impacts of different deal structures. Strategies to minimise obstacles and enhance value may be offered.
Seasoned mergers & acquisitions advisers can also expertly evaluate and manage the nuances and practicalities that arise in the ‘real world’. In any transaction, the buyer and seller have opposing goals: each seeks to best serve their own interests but must ultimately acquiesce in some part to the other while retaining sufficient benefit for themselves. The odds of success in this process dramatically improve when it is proactively managed by a seasoned professional who can keep polarising realities within a cooperative framework. The parties will also be more likely to work well together post-close.
Pre-sale valuation work and pro-active management of transactions are key, but subtle dynamics and market factors unique to a deal can also be vital determinants of value. IBG Arizona’s Principal and Managing Partner Jim Afinowich and Managing Director Bruce Black recently worked on a deal that perfectly illustrates such market dynamics. The client’s firm, a niche food manufacturer, initially might have had a competent fair market value of around $20M. IBG perceived growing demand in the industry vertical, and thought an opportunity existed with the evolving market dynamics. They advised the client to decline early offers and to continue to build value in the business. Improve it did, but IBG’s “read” on the market and recommendation on timing made a tremendous impact for the client: a buyer seeking market control and expansion in the vertical ultimately out-bid several competitors to buy the company for the cash price of $120M. While such extreme opportunities are uncommon, the “savvy” of a seasoned dealmaker can radically impact what is already one of the biggest financial events in the lifetime of a business owner.
Business owners must understand optimal timing and valuation complexities prior to any sale. Today, demand remains robust for quality middle market businesses and valuations are still excellent, but a cooling in the market is anticipated. Active mergers and acquisition broker and advisory firms prepared to assess opportunities with a ‘real-time’ read on transaction market remain the most vital resource for owners seeking to sell for top value.
Contact details:
Email: jim@ibgfoxfin.com
Web: www.ibgbusiness.com; www.ibgfoxfin.com
Direct: 480 327-6610
Main: 480 421-9789
Fax: 602-792-3811
To hear about valuation services in the US, Finance Monthly speaks to Gregg Dight, ASA, Senior Appraiser for Ohio-based Equipment Appraisal Services (EAS). Working from a satellite office in Redding, Connecticut, Gregg has been with EAS for 3½ years and in addition to his work in the US, he’s also completed appraisal assignments through the UK, Western Europe, Mexico, Puerto Rico and the Dominican Republic. Below, he discusses the appraisals that his company works on and offers his insights into the world of valuations.
What are the types of appraisal that you offer?
We provide machinery and equipment appraisals across all industries and markets for banks, leasing and finance companies, insurance, end-user business or asset acquisitions (purchase and sale), accounting purposes, and litigation support within all these markets, involving collateral review, business disputes, bankruptcy, casualties, liability issues, divorce, donations, property tax, and investment risk management.
At EAS, approximately 50% of the work I do involves some level of litigation or potential for legal intervention. In many of these engagements, I am directly hired by one of the law firms involved with the case.
What does a typical valuation process involve?
The process begins with an in-depth client discussion to better understand the overall scope and purpose of the appraisal within their larger project. Gaining a ‘big picture’ perspective allows us to assist the client in defining the appropriate approach to take within the valuation scope that best fits their project needs. For example, definition/premise of value and effective date.
We then review the specific assets involved and discuss the importance or relevance of completing an on-site inspection of the facility and associated equipment as part of the scope. We typically suggest a physical inspection as part of the process, however, in certain instances this may not be feasible or critical, and we therefore, complete a desktop analysis based on the data provided to us from the client.
Once the scope is fully defined, we estimate a fee level for the client, enter an engagement agreement and complete the work within an efficient time frame, usually 10-15 business days, depending on the size of the project.
Field work involves meeting with company personnel familiar with the assets to gain an understanding of the business operation and specifics of the underlying machinery and equipment pertinent to the appraisal. The research and analysis is then completed through searches of similar assets in the used and new equipment marketplace, both recently sold or available on the market, and discussions with manufacturers and dealers in the new and secondary markets, ultimately arriving at an appraised value that best fits the subject machines valued.
Certain assets have more market information available to review than others, and we therefore determine how much reliability there is to the market data while complementing the research with variables such as the normal useful life, effective age, typical physical deterioration levels and obsolescence (usually technology related) of the equipment. These two approaches are referred to as the ‘Sales Comparison Approach’ and the ‘Cost Approach’. There is a third approach called the ‘Income Approach’ to value involving discounted cash flows and review of related internal financial data, however, this approach is used primarily in the overall business valuation of a company as opposed to the appraisal of individual assets. We can, however, complete a Fair Rental Value analysis on specific assets, which estimates current and future equipment values along with market lease rates.
The final deliverable product to our clients is a narrative report summarising the work with a detailed appendix of equipment descriptions and associated values. These values may be defined under ‘Fair Market’, ‘Liquidation’ or ‘Fair Value’ premises depending on the needs of the client. Photographs and industry data is also included in the final product.
To what level do you guarantee the accuracy of the valuations you provide?
Given there is always a degree of subjectivity to any appraisal, and reliance on external data not identical to the subject assets being appraised, there is no guarantee behind an appraiser’s values. We state in our reports that an appraisal is an estimation of value based on the data provided and researched, so there is no ability to guarantee the equipment will ultimately sell for any exact amount. The variables involved with the actual sale of an asset can be quite different from the appraisal’s assumptions at the time of the valuation.
I am an ASA (American Society of Appraisers) Senior Accredited Appraiser which carries a high degree of experience and reliability behind it. We are governed under the Uniform Standards of Professional Appraisal Practice (USPAP) and we state that the work undertaken is thorough and reasonable for the assignment. If you ask three appraisers to value the same group of assets at the same time under the same premise and scope, it is entirely possible they will arrive at three different conclusions. The hope is they will be within a reasonable range of each other (+/- 10-20%), however, this is not always the case. This is where the subjectivity level of the final conclusion comes into play and the reason why appraisers can be on opposite sides of a legal case or business transaction, while being required to explain their findings in an effort to prove the reliability of their work.
This ASA accreditation and associated experience is critical if the client needs a formal, reliable valuation that will hold up to any level of scrutiny.
How important are your valuation opinions to lenders and investors, when they are considering a transaction? Are they able to override your opinion?
The importance of any appraisal is ultimately determined by the users of the report and their overlapping case or project involved. Typically, the appraisal is one part of a larger business deal or legal case which will assist in establishing a value perspective within the framework of a larger transaction. As examples, in an equipment investment approval, the pricing, profitability and credit rating of the client’s customer will factor in as much or more than the collateral value of the assets. In legal cases, establishing and proving liability is often the most important factor in a case. Once that is decided, the damages portion of the dispute will involve a review of the appraisal.
Which sectors do you work with most? How do you overcome the problems presented by working with a number of different sectors?
Being a ‘Generalist’ in the machinery and equipment appraisal world is common as there is simply not enough work for a valuation firm within a single industry. There are appraisers who specialise in certain markets, however, they usually have a resale component to their business that supports the revenue of the company.
A typical year of valuation work in my present capacity will cross into construction/contracting equipment, transportation, including truck/tractor, rail, and marine, manufacturing equipment of all kinds including machine tool production and packaging, mining operations, material handling, infrastructure of various kinds, high tech, including IT and semiconductor, medical equipment, and general personal property (office and warehouse furniture fixtures and equipment (FF&E). I do my best to become more versed in these markets during the course of the engagement by getting current in the industry and the equipment available. In today’s climate, data is more accessible to be able to learn what you need to quickly and efficiently. After 34 years of working across multiple industries, I have retained enough of the key factors involved in most of these markets to minimise the time it takes to bring myself up to speed.
Phone: (203)-644-0006
Email: gregg@equipmentappraisal.com
Website: http://www.equipmentappraisal.com
Turning our attention to real estate appraisal, we interviewed Robert Nord – an expert in appraisal and mortgage loan origination of income-producing properties in Northern and Southern California, the Western United States, and in Canada and Latin America.
Prior to working for his own firm, California True Values, Robert was employed as principal with Arthur & Young in San Francisco Office and Regional Chief Appraiser for First Interstate Mortgage Company, California Federal Savings and New York life in the San Francisco Offices.
As a professional with 30 years’ experience in appraisal - looking at the work of your peers, and in your past experience, how would you say the role of a real estate appraiser has changed over the past decade?
Since 1989, the Appraisal Standards Board adopted the Uniform Standards of Professional
Appraisal Practice (USPAP). Thus, the role of the appraiser has been to standardize in the reporting of their results. But the ultimate results have been the same, to provide the client with answers in a clear and concise reconcilable manner.
Over the past 30 years, what would you say have been the three most impacting turning points for the US’ real estate market?
I think that the most significant turning points happen approximately every ten years or so. These are the supply and demand issues that are coincidental with the capital markets. That is when supply of new space grows and the demand for the space grows as well. Remember when short-term shot up to 13 percent and long-term increased to about 10 percent about 35 years ago, well, the inverse is going to happen shortly. As excess supply, has work itself off the market, interest rates will increase. Long-term government bond yields have trended downward to about 2.5 to 3 percent from over 8.5 percent the last 35 years. And overall capitalization rate will go up from 4.5 to 6.0 percent to 7.5 percent to 9.0 percent over the next 10 years. After all, I can’t imagine a negative return on bond yields, and what it would mean for real estate appraisals? Can you? So, I see rents going higher and capitalization rates both increasing with Donald J. Trump as President over the next four years or so. When were overall capitalization rates at 5 percent? 60-years ago? So, you can see how the cycles have influenced our work from the recessionary 1979-82, 1989-94 and the 2007-10 periods. During the 1980s, 95 percent of my work was for lenders. But it changed to 95 percent non-lenders in the 1990s. So, you can see that cases involving values can grow beyond lending.
Over the years, which would you say have been your most successful and rewarding projects, and why?
In the 1980s, my work included the 30-story 583-unit high rise luxury residential condominium project in Emeryville, California. In the 1990s, it was the Chevron World Headquarters in San Ramon for ad valorem taxation and the 300-acre Lockheed Skunk Works, a EPA super fund site of contaminated soil located in Burbank, California. A bit further north in Saugus was the Rye Canyon facility which had an earthquake fault running through the middle of the site. In 2000, another site included a Class 1 landfill site in Covina. Another site appraised, a gold mine, on the behalf of EPA located in Plumas County with values going back thirty years to 1980. Where do you find land sales? Fortunately, a local assessor in Auburn had a personal printout for 1980. A fortunate occurrence for sure!
More recently, I was involved with a marijuana cultivation facility where I appraised a proposed 170,000-square-foot campus on a 10-acre site in Desert Hot Springs. And to date, no construction has occurred on any such facilities. But there is a plenitude of proposed projects in the open vast desert, which will mushroom from the valley floor. The cannabis will be pampered by air-conditioning and watered in its cultivation area with 13-foot clearance, while the native vegetation sweat to survive in 115-degree plus, summertime heat. This cannabis, which will be grown for human medicinal purposes will contain five times the THC. And since there are no facilities built to date, where are the comparable sale faculties?
