Module 4.1 Flashcards
It is the act of calculating the value an “investor” places on “property”.
Valuation
4 Measures of Value
- NPV
- WPL (SEV) of buyer
- Reservation price of seller
- Instinctive value
2 Uses of Valuation
- Offering price
2. Asking price
Process of estimating “market value”
Appraisal
Appraisal value is the ____ for similar property
Average expected selling price
What is the goal of appraisal?
To obtain the fair market value
Price at which a willing seller and a willing buyer will trade, neither being under compulsion to trade, and both having access to all knowledge relevant to the transaction
Fair market value
3 Uses of Appraisal
- Taxes
- Amount of loan collateral
- Estimate damages for insurance or law suites
What are the 2 uses of taxes?
- Assessment for property tax levy
2. Basis of property
3 possible buyers of standing timber
- Logger
- Saw or veneer mill timber buyer
- Broker of logs or standing timber
The one who buys for resale, accumulate specific products for buyers, and knows his/her customers.
Broker
What is stumpage in a buyer’s perspective?
Conversion return or Residual
What is lessened to the value of veneer or lumber in stumpage valuation
- Milling cost
2. Overhead for procurement or working capital
What is lessened to the value of delivered log price in stumpage valuation?
- Cost of logging and hauling
2. Overhead for procurement or working capital
What is stumpage value from a buyer’s perspective
Willingness to pay for stumpage, WPS
What are the 5 valuation factors?
- Price of lumber, veneer, or pulp
- Efficiency of processing plant
- Proximity of stand to mills or broker’s yards
- Price expectations of buyers
- Season of the year
What is stumpage value from a seller’s perspective?
Reservation price
Why aren’t conversion return and reservation price always the same?
- Unrealistic perception of timber values
2. Non-consumptive value given to timber in-situ
The investor’s maximum willingness to pay for an income-producing asset.
WPL
WPL is ____ the market value
not necessarily
What are the 4 types of WPL (bare land)?
- Even-aged management
- Uneven-aged management
- Holding value of immature even-aged value
- NPV of uneven-aged forest
What are the 3 large tracts of timber valued?
- Old Growth
- Young Timber
- Impacts of Loans
Consider timber only, not land. Volume too large to harvest in one year.
Old-Growth Timber Valuation
The timber value in old-growth timber valuation is ___ than the sum of future harvest values as determined by the ______.
less than, timber valuation factor
Formula of timber valuation factor
NPV of future timber harvests/Current stumpage value of entire volume
Collection of various aged thrifty young growth stands to be cut at different times
Young timber valuation
In young timber valuation, timber’s NPV will likely ____ stumpage value. However, this is not true if real interest rates are ___ and buyers are ____ about future stumpage prices.
exceed, high, pessimistic
Use of existing equity to borrow funds to purchase additional business assets.
Leverage
Loans are denominated in _____
Current dollars
Loan payments are not adjusted for ____. Instead, the ____ is adjusted by the lender for expected ____ and ____.
Inflation, loan rate, inflation and risks
For the impact of loans in NPV, the principal enters as a ____ while the payments enter as ____
revenue, costs
Payments are discounted with ____ since payments are legal obligations
risk free interest rate
Formula of NPV loan
Principal - PV of payments
The ____ is reduced on an after basis because interest payments are usually _____.
Impact of loans, tax-deductible
What are the 3 appraisal methods for market value?
- Comparable sales
- Capitalized income
- Replacement cost
What is the goal of an appraisal? And what is not?
To estimate most-likely selling price not the average selling price
Use depends on the availability of sales data
Appraisal by Comparable Sales
In appraisal by comparable sales, ____ is a valuable business asset
Database
13 factors to consider in making comparisons in appraisal by comparable sales
- Species mix
- Quality
- Average diameter
- Product mix
- Terrain
- Date of sale
- Distance from mills
- Road building and logging costs
- Log scale used
- Type of harvest
- Size of sale
- Terms of sale
- Liability for severance or other harvest tax
3 considerations in terms of sale
- Cash as closing
- Pay-as-cut
- Installments
2 Ways to Adjust Sales to Make them Comparable
- Regression Analysis
2. Adjustment factors
Unit price made a function of sale characteristics. Requires sales data for a relatively short time period.
Regression Analysis
In regression analysis, this is used as the independent variable
Trend line
In regression analysis, the larger the number of factors (independent variables), the larger the _____ required
Database
The non-statistical method of adjusting sales to make them comparable.
Adjustment factors
2 basis of adjustments by experienced appraisers
- Knowledge of market
2. Published factors
Simply an NPV calculation, but based on most likely conditions, not the conditions for a specific person.
Appraisal by Capitalized Income
Other terms for appraisal by capitalized income
- Income appraisal
2. Income approach
In appraisal by capitalized income, this is used when no comparable sales are available.
Necessity
Appraisal by capitalized income is not useful if?
Non-income benefits are the major output of a property
What are the 3 assumptions of appraisal by capitalized income?
- Use regional average yields
- Project prices with trend-lines for real prices
- Proper discount rate to use is difficult to estimate
The discount rate used by the average buyer in computing the price paid for a property.
Derived capitalization rate
One of the estimates used for sample properties by assuming cash flows and finding r that results in observed sales price
IRR
Appraisal by Replacement Cost is useful if
- Trees were planted within the last “few” (less than 6) years
- Land with timber recently purchased
This does not matter in appraisal by replacement cost
Sunk costs
The assumption of appraisal by replacement value is that market price reflects the ____, but the _____ the valuation date is, the ____ it is that past costs affect market price.
initial costs, further out in time, less likely
This is more like the seller’s asking price based on her costs
Forest NPV
As a guideline for income approach, enter incomes as ____ and costs as ____ when ____
positives, negatives, discounting
As a guideline for income approach, enter incomes as ____ and costs as ____ when ____
positives, negatives, discounting
As a guideline for the replacement cost approach, enter costs as ____ and revenues as _____ when _____ historical costs.
positives, negatives, compounding
