When beginning an appraisal, it is important to establish the correct premise of value. The premise of value is the definition of that conclusion of value which is most meaningful for the proposition or decision or transaction being conducted. To allow a successful appraisal the premise of value must be agreed between the appraiser and the client before any work is done on the appraisal project. The goal is to produce a deliverable – the appraisal report – that best equips the client, the user of the appraisal report, to make the required decision.
Standard premises of value are defined by the American Society of Appraisers (“ASA”), the primary governing and licensing body for appraisal practice in the U.S. The premise of value is defined by the ASA and one of the first elements of an appraisal that is required by the Uniform Standards of Professional Appraisal Practice (“USPAP”), the body of rules and procedures that governs best practices in appraisal practice. Here are the definitions of value according to ASA
An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.
An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.
An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, considering removal of the property to another location, as of a specific date.
An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date and supported by the earnings of the business.
An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date and assuming that the business earnings support the value reported, without verification.
An opinion of the gross amount, expressed in terms of money, that typically could be 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.
An opinion of the gross amount, expressed in terms of money that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact.
An opinion of the gross amount, expressed in terms of money, that typically could be 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.
The current cost of a similar new property having the nearest equivalent utility as the property being appraised, as of a specific date.
The cost of reproducing a new replica of a property on the basis of current prices with the same or closely similar materials, as of a specific date.
An opinion of the 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 possible use elsewhere, as of a specific date.
An opinion of the 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, as of a specific date.
Part of the path to determination of the correct premise of value for an appraisal engagement is to recognize what events are likely to happen. For example, if the bankruptcy court has specified that the 100 assets in the case will be auctioned next Tuesday at noon by the administrator, then the premise of value will be Forced Liquidation Value – forced auction sale as of a certain date.
The most common premise of value in the equipment leasing and bank lending and ABL spaces is both Fair Market Value and Orderly Liquidation Value. These values best represent the likely values that will be achieved in the event of credit default; hence these appraisals are most commonly used to support loan or lease underwriting decisions.
A common premise of value for property tax or purchase price allocation is simply Fair Market Value. This premise of value is intended to support development of the correct accounting for asset value, rather than any sale, distressed or otherwise, of the assets.
In any event, when you conduct an appraisal establish the correct premise of value up front, in discussion with the appraiser, which will best support the decision or transaction at hand.
BlueChip Asset Management is an appraisal and asset management services company which serves the ABL, banking, equipment finance, legal, and turnaround industries. Members of TMA, and CFA.
Our appraisers have over 25 years of experience in machinery and equipment appraisals, spanning a wide variety of assets from basic industry: covering construction, high technology, medical, mining, processing, rail, transportation and diverse assets. Contact us for asset valuation assistance at 415.515.1110 or www.bcamasset.com.