Premises of Value
Relating to Machinery and Technical Specialties (MTS) Assets
Because the MTS appraiser deals with a variety of assets, most of which can be moved, it is necessary to recognize different premises of value. These can be broadly classified into three categories, distinguished mainly by the asset’s anticipated use; i.e.: (1) Sale for removal for a similar or alternate use; (2) Continued (or installed) use of the asset for the purpose for which it was designed and acquired; and (3) Liquidation.
Fair Market Value (FMV): The estimated amount, expressed in terms of money, that may be reasonably expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.
Appraiser’s Note: Under this definition, Fair Market Value is usually determined by reference to the amount that the property could be sold for in the market in which the property is most commonly sold to the public. Thus, Fair Market Value of a used automobile is the price for which a used automobile of the same description, make, model, age, odometer indication, condition, etc. could be purchased by a member of the general public (in the retail market) from a used car dealer. FMV is similar to the Accounting Standards Board term of “Fair Value”, and an insurance term of “Replacement Value”.
Fair Market Value in Continued Use: The estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and willing seller, with equity to both, neither under compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date and assuming that the business earnings support the value reported. This amount includes all normal direct and indirect costs, such as installation and other assemblage cost to make the property fully operational.
Orderly Liquidation Value: The estimated gross amount, expressed in terms of money, that could be typically 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, as of a specific date.
Auction/Forced Liquidation Value: The estimated gross amount, expressed in terms of money, that could be typically realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date.
Appraiser’s Note: Under Orderly and Auction/Forced Liquidation Values definitions, the assumption is made that the seller is compelled to sell the assets and removal is the responsibility of the buyer. It is assumed that forced liquidations have shorter market exposure time than orderly liquidations.
Liquidation Value in Place: The estimated gross amount, expressed in terms of money, that could typically be realized from a failed facility, assuming that the entire facility would be sold intact with a limited time to complete the sale, as of a specific date.
Replacement Cost-New: The cost of replacing an existing property with one of equal utility, although the same materials or the same design may not be used, reflecting changes in technology, design, building techniques and costs.
Replacement Cost (Depreciated Replacement Cost-New): The estimated amount a property is worth by deducting the physical depreciation from Replacement Cost-New.
Physical Depreciation: The wearing-out of an asset through a combination of use, the effects of weathering, structural defects and the like.
Functional Obsolescence: The impairment of functional capacity or efficiency due to causes internal to the asset.
Economic Obsolescence: the resultant effect of economic forces external to the asset.
Reproduction Cost: The expense necessary to construct an exact duplicate of a subject property, considering current prices for identical components, criteria, design, arrangement, and quality.
Salvage Value: The estimated amount expressed in terms of money that may be expected for the whole property or a component of the whole property that is retired from service for use elsewhere.
Scrap Value: The estimated amount expressed in terms of money that could be realized for the property if it were sold for its material content, not for a productive use.
Insurance Replacement Cost: The replacement cost new as defined in the insurance policy less the replacement cost new of the item specifically excluded in the policy, if any.
Insurance Value Depreciated: The insurance replacement cost new less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements.
Appraiser’s Note: These definitions are commonly used, but are not the only acceptable ones. These definitions are provided by the publication entitled “VALUING MACHINERY AND EQUIPMENT,” written by the MTS Committee of the American Society of Appraisers, Washington, D.C., Copyright 2000, pages 2-5. Certain appraisals require the use of definitions mandated by law. Definitions may be expanded or redefined by the appraiser as the purpose and function of the appraisal dictate, so long as the fundamental and underlying concept is not altered without a compelling reason (such as being required by law or requested by a lender).