Appraisal Principles and Procedures, Henry A. Babcock, FASA is the core course publication used by the American Society of Appraisers (ASA) as a textbook for becoming a credentialed member of their organization. Information and procedures outlined within the text can be applied to what we call “deconstruction appraisals.” Some suggest alternate titles such as “Architectural Salvage Appraiser,” or, “Reuse Appraiser,” The title does not matter; the valuation methodology does. There is no defined category for appraisals of these type within ASA at this time, however we expect the demand for these appraisals to continue to increase as deconstruction ordinances are passed and circular economy goals become more widely embraced. Individuals and businesses will discover tax deductions for the value of these materials as an attractive tax savings. Throughout this textbook, Babcock provides critical analysis that must be considered when valuing materials and property for income tax deduction purposes, and by extension, by deconstruction, architectural salvage or reuse appraisers. We will stick to “deconstruction appraiser” for the remainder of this writing for simplicity.
Comparable Property
The author introduces us to the definition of Comparable Property. This is defined as, “A whole property of the same kind as the subject property and capable of being compared with it. In some cases, a comparable property may be equivalent to the subject property; or, in other cases, identical with it; but to be comparable a property does not necessarily have to be either equivalent or identical.” 332 p. 51 Deconstruction appraisers claiming they cannot use the correct methodology, the Sales Analysis Method of Valuation (ASA term) or the Sales Comparison Method (International Society of Appraisers—ISA) requires an impossible stretch of credulity: comparable sales data for these materials exists and has existed for at least the past decade.
Classifying properties into defined categories is necessary to analyze which valuation method should be used. From the text, “classification permits the establishment of general and unifying concepts of the character of property value and hence has a place, perhaps in the general field of theoretical economics.”
Three Categories of Property:
Marketable Noninvestment Property: This is the type of property we value as deconstruction appraisers. This is to the exclusion of the other two types of property—investment property and service property. Let us dive right into the definitions of these types of property as provided in the text:
Investment Property: “one which is expected to be useful to its owner through the production of a net monetary yield; it is marketable because the expectancy of a monetary yield is always salable at some price; and it is expected to be self liquidating through the recovery of the capital investment out of the net monetary returns…The value is measured by calculating the present worth of the earning expectancy.” xxv
Marketable Noninvestment Property: “one which is expected to be useful to its owner through providing amenities, satisfactions, or other benefits of a nonmonetary character; it is also marketable; but it is not expected to be self liquidating. The type of value it has is called market value. This value is measured by relating the prices paid for comparable properties to the value elements of those properties and then applying this relationship to the value elements of the subject property. Preferably, this relationship is expressed in mathematical form.” xxv
Methods of Valuation for the Three Categories of Property:
Investment Property= Investment Analysis Method of Valuation
Marketable Noninvestment Property= Sales Analysis Method of Valuation
Service Property=Cost Summation Method of Valuation
Comparable Sales Data and Market Value
Analyzing comparable sales data should take mathematical and statistical form. The Green Mission Inc. had already incorporated statistical analyses into evaluating the comparable sales data derived from research. Specifically, this has included the basic statistical values of range, median, mode and mean. After thorough review of the analysis within this book, we have added a yield curve when plotting multiple data points and looking for trends as well as calculating correlation coefficients and ensuring data included is within +/- 2 standard deviations. These concepts have offered additional incredibly useful criteria as we move to ensure these valuations are derived from solid objective data and undergo thorough analysis.
Marketable noninvestment property is to be valued using market value. From the text, “The central idea in the concept of market value, whether applied to an investment property or a marketable noninvestment property, is the idea of the most probable buy-sell price. The determination of market value is based on the assumption that, if other properties (identical, equivalent, or otherwise comparable to the subject property, as the case may be) have sold at a certain price, or within a certain price range, then the subject property will also command the same price—this is the price a seller will probably get, or the price a buyer will probably have to pay. The validity of this assumption depends upon the continuation of the “market” from which the sales data were obtained, or, more precisely, upon the continuation of the trends demonstrated in that market.” 664 p. 117
The author presents a description of what he believes best summarizes the concept of fair market value. 733 p. 139
- 1The highest price in terms of money which the property will bring
- 2If exposed for sale in the open market, with
- 3A reasonable time allowed to find a purchaser
- 4Buying with a knowledge of all the uses and purposes to which it is adapted and for which it is capable of being used,
- 5The seller being willing but not compelled to sell and the buyer being willing but not compelled to buy.
This textbook provides yet another volume of appraiser science that clearly states the type of property we, as deconstruction appraisers, are valuing and the valuation method to be used: Marketable Noninvestment Property using the Sales Analysis Method of Valuation. The fallacy that has been advanced by many within the current pool of deconstruction appraisers claims that the materials and property salvaged from deconstruction projects only has “Owners Value” as defined above under “Service Property.”
Some deconstruction appraisers use the Cost Approach to Value (ISA term) or the Cost Summation Approach to Value (ASA term) in deconstruction appraisals. A hypothetical deconstruction appraiser might claim that there is insufficient comparable sales data from which valuations can be derived. This is false. Comparable sales data for building materials and other household property have existed in abundance for at least the past decade if not longer. Additionally, hypothetical appraisers using construction cost estimating software like RS Means or Marshall & Swift for full-house deconstructions. They load material quantities into the software with a plug of arbitrarily assigning deprecation produce valuations not in line with IRS codifications, underlying GAAP and the literature presented by both ISA and ASA and other personal property appraisal experts. Tying this back to the IRS definition of fair market value and the values that must be used for income tax deduction purposes, GAAP and the IRC would place weight upon market sales data and not support the claim that a market does not exist and, hence, an original cost less an arbitrary amount of depreciation is the correct method of valuation. This is especially relevant when valuations using the incorrect methodology and/or this software produce inflated valuations. Even if the valuations are not inflated, the methodology is absolutely incorrect. Materials and property without a comparable sales valuation necessitating the Cost approach are rare and the Cost method usage should be proportionately rare.
Section 520 on p. 88 provides a list of what falls under Marketable Noninvestment Properties as well as Service Properties.
Here is a list of included chattels in Marketable Noninvestment Properties:
- Machine tools
- Machinery & equipment
- Furniture & furnishings
- Homemade table
- Office equipment
- Typewriter
- Fine arts & antiques
- Gems & jewelry
- Diamond ring
- Furs
- Stamp collection
- Art collection
- Private automobile
- Personal clothing
- Food purchased at retail
- Portable or removable building
And now the list of Service Properties:
- Church
- Public school
- College
- City hall
- Jail
- Hospital
- Club
- Institution
- Freakish single-family residence
Can any deconstruction appraiser claim, with any credulity, that deconstructed materials and property more accurately fit under Service Properties than under Marketable Noninvestment Properties? If hypothetical deconstruction appraisers cannot ram deconstructed materials under a false classification of Service Properties then it follows that they cannot use the wrong valuation method, the Cost Summation Approach Valuation. This is, yet again, clear and concise instruction on how we, as deconstruction appraisers, must value property for income tax valuation purposes.
Service Property and Using the Cost Summation Valuation
Let us examine the text for clarification on what constitutes Service Property and when the Cost Summation Valuation approach should be used especially in light of actual and alleged use of this method by some within the current pool of deconstruction appraisers.
Service property characteristics provided within the text:
- 1A service property does not have an earning expectancy
- 2It is not marketable (515.2, p. 80)
Service property is considered to have use to the owner but a market for sale of the property does not exist. Additionally, replacement properties cannot be purchased but must be produced, hence the application of replacement cost, new/ replacement cost, used/ replacement cost, new, depreciated. From the text, “It is desirable to emphasize again that the replacement cost, new, depreciated does not measure the value of a whole investment property or of a whole marketable noninvestment property. Its only applicability to whole properties appears in the case of owner value of tangible service properties and even here it is not on very firm ground.” 753, p. 148 Further, “One of the principal uses of replacement cost, new, depreciated occurs in insurance appraisals where, in most cases replacement of that which is destroyed or lost is the concern rather than compensation for loss in value. Another principal use is in the appraisal of business enterprises.” 761 p. 149, emphasis mine.
The Cost Summation Valuation is applicable to valuations for insurance purposes and not for marketable noninvestment property, of which definition deconstructed materials and property clearly fit. Further examples utilizing the Cost method include, “Real estate, business enterprises, gems, fine arts, and antiques are examples of properties for which market quotations for standardized units do not exist.” 121.2 p. 5 Further examples of application include:
- 1Determining assessed value for property tax purposes
- 2Determining the amount of the award in a condemnation action.
- 2Mortgage financing (church, museum, etc.) 813.331, p. 181
Back to the Sales Analysis Valuation Method
Market value of marketable noninvestment property as an appraisal objective, clearly lays out that the Sales Analysis Valuation Method is to be used “as fair market value, for income tax, gift tax, and inheritance tax purposes.” 813.332, p. 181 Our prior research has tied the concept of fair market value back to the underlying accounting standards for asset valuation found in FAS 157 Fair Value Measurements. Were the question of which valuation method should be used for deconstructed material put to debate, it might prove to be a quick and easy win for Team 1:
Team 1: We claim the Sales method must be used when valuing deconstructed materials and property.
Team 2: From where do you claim this mandate?
Team 1: IRS definition of fair market value and the underlying accounting principles found in GAAP
Team 2: Is that it?
Team 1: International Society of Appraisers also make this claim clearly in their Core Course, which is the beginning course for any personal property appraiser.
Team 2: So, only one appraisal organization?
Team 1: No, actually the same concept is taught in the American Society of Appraiser’s Core Course, again for beginners.
Team 2: But, I have been doing these appraisals for decades! In fact, I have produced thousands of appraisals and never had a single audit! You must defer to my experience and longevity in this industry!
Team 1:
- aConsistency of wrong practices for a long duration does not prove correct application of methodology
- bA taxpayer gets audited, not an appraiser. You have no idea how many clients might have been audited and lost their deductions. Furthermore, do you understand that an entire return comes under audit, not just a single form, in this case form 8283? A taxpayer may have had other tax inaccuracies and never fought back on the 8283 valuation disallowance.
Team 1: Of necessity, our follow up questions to Team 2: Are you technically a “Qualified Appraiser” by IRS standards? If you answer in the affirmative, how would you answer the following questions:
- aDo you have an undergraduate and/or master’s degree and what discipline did you study? Was that field complementary to understanding objective measurement valuation methodology?
- bAre you an accredited member of an appraisal organization? If you have been practicing for years, have you always been an accredited member of the organization?
- cDo you follow the Sales valuation approach? If not, defend your answer and cite sources for support.
The “Experience” Conjecture
Within the deconstruction appraisal industry, too often it is said that an appraiser must be trusted and engaged because of their many years of experience. It should be considered that many years of producing appraisals using the wrong valuation methods and principles does not a competent appraiser make. Claims that subjective assignment of values based on experience or having the knowledge in one’s head does not suffice when such clear and objective valuation-criteria are set forth in numerous scholarly and authoritative publications. Many have fallen back on the term “opinion of value” to mean that the opinion can be subjective and not attached to empirical data.
A priori as defined, is relating to or denoting reasoning or knowledge which proceeds from theoretical deduction rather than from observation or experience and cannot be the appraiser’s norm for developing valuation opinions. A posteriori, or in a way based on reasoning from known facts or past events rather than by making assumptions or predictions, must underly all analysis in deconstruction appraisal valuations. Valuations of deconstructed materials and property lend themselves well to empirical analysis, data trend evaluation and statistical measures. Utilization of empirical evidence demonstrates that the data captured and analyzed supports the appraiser’s valuations. “The effective value elements in any set of comparable sales can only be discovered by detailed research and statistical analysis of numerical data.” 829.24, p. 219. Appraisers must try out different equations to determine the best fit for proper analysis of the data captured until they find the correlation, analyze statistics and throw out potential outliers and provide objective support for each value assigned.
Reviewing this portion of the text was thrilling as a CPA with a Masters in Accounting degree and equally thrilling for our COO, with a Masters in Construction Management. We both look to objective, empirical methods in analyzing data sets. While we may both be abysmal creative writers, we thrive on the objective, provable data sets and related analyses to prove or disprove our valuation opinions. As stated before, deconstruction appraisers have the ability to rely almost entirely on objective data. Subjective judgment must be employed in determining condition of materials when compared to comparable sales but even the subjectivity is constrained by objective and verifiable underlying market values. We are not fine art appraisers or those hired to prove provenance of an original manuscript nor to appraise a raw cut gem. We are valuing tangible assets with comparable valuations that are plentiful in multiple sources. There are very few instances in which an appraiser can claim that comparable sales data, of either duplicate or similar characteristics, do not exist. Our produced appraisals bear this out.
Appraisals for deconstructed materials and property aligns closely with the related academic fields of economics, finance, accounting, statistics, construction management, engineering and architecture. Ideally, an appraiser should have an undergraduate, masters or other advanced degree in one of these fields to ensure they possess a clear understanding of the objective, empirical valuation measures that must be employed to arrive at accurate valuations.
The Green Mission Inc. will continue our research to promote best-practices among deconstruction appraisers and to encourage procurement and training of a new pool of sharp talent to meet the demand for increases in deconstruction projects and required appraisals.
