Cost Appraisals vs Value Appraisals: What Are The Main Differences?

Imagine you decide to get into the picnic table business as a hobby. You figure you can make a basic picnic table in your garage in about an hour. Using white pine and some tinted exterior sealer would make it look nice. You figure the lumber and material costs from the store are about $50. And with your labor included your total cost is about $75 per table. So then you take your creation to the farmers market to sell. It is springtime, so lots of people are fixing up their yards and you have no problem selling your whole inventory of tables for $150 each. Nice! A couple of months go by and you decide to do it again to make some extra money. However, this time it is late fall and the farmer’s market is quiet. You are only able to sell a couple of tables for only $25 each. What happened? Well, in a way you just learned some of the differences between cost and value. Please read on to better understand what we mean..

Price is what you pay. Value is what you get.– Warren Buffet

In our example the cost of the picnic table was constant regardless of the season. However – it’s value fluctuated, mainly due to seasonal changes in demand levels. That is why there are both cost appraisals and there are also value appraisals. They are different. There are also different types of costs and different types of values too.

 

Cost Value Appraisal

What kind of appraisal do I need?

To answer that question we need to know what you are using the appraisal for.

Cost Estimate Appraisals

Say you own a commercial building and you want to make sure you have enough building insurance coverage in place. If that building was destroyed somehow, you would hope that the insurance coverage was based on its cost and therefore you need a cost estimate appraisal. A cost estimate appraisal is one of the services that Suncorp specializes in. We do cost estimate appraisals for all building types including multi-family, commercial and industrial structures.

Market Value Appraisals

Say you decide to sell that commercial building, or maybe you are thinking of taking out a mortgage on it. Well in that case you need a value appraisal, specifically a market value appraisal. This is an estimate of what the property will sell for given current market conditions and you want to be sure that you sell it for at least it’s market value. For mortgage purposes, the bank will want to know market value to ensure that the loan-to-value ratio is appropriate. Suncorp has a team of highly qualified appraisers who specialize in this type of work. We do value appraisals for all building types, as well as machinery and equipment too.

commercial-building

Different Types of Cost

There are a variety of different types of cost. Here are 2 common examples;

– Reproduction Cost New (CRN)

An estimate of the cost to construct an exact duplicate of an existing building.

– Replacement Cost New (RCN)

An estimate of the cost to reconstruct a building using modern materials and standards.

Different Types of Value

There are a variety of different types of values too.

– Market Value

As mentioned, market value is an estimate of what a property/asset may sell for.

– Market Rent

An estimate of what a property may rent for.

– Forced Sale Value or Liquidation Value

An estimate of what a property may sell for under distressed conditions such as during a foreclosure or bankruptcy.

commercial-building-liquidation

There are many factors that affect value that appraisers must consider including competing supply, effective demand levels or trends, exposure and marketing periods, etc. There are many other types of cost and value in addition to these examples. If you are unsure of the type of appraisal service you need, your first call must be to Suncorp Valuations. We have decades of experience with these matters and we are anxious to help you today.

Cost vs. Value Chart

While there may be particular situations where the cost of a particular asset may be equal to its value, this is a rare occurrence. Generally speaking, costs increase steadily over time because of inflation and it is a function of basic material and labor costs. However, although value also tends to increase over time, it is much more volatile and subject to peaks and valleys. This is because value is a function of supply and demand, as well as economic cycles.

cost-vs-value-what-is-the-difference

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multi-lingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

CONTACT US

Reducing Risk and Liability in Shops and Science Labs

Shops and science labs can be very dangerous places. There are many different dangers such as high heat, dust, machines, flammable liquids/chemicals, excess noise, and more. A high-risk lab could result in an injury or fatality very easily if safety precautions are not taken. The key to reduce risk and liability in such spaces is to be proactive, and a Suncorp Shop & Science Lab Safety Survey is your starting point.

wood-shop-safety

Suncorp Shop & Science Lab Safety Survey Details

A Suncorp Shop and Science Lab Safety Survey touches on many different important points, including the following:

  • Analysis of the layout of each Shop and Science Lab to ensure there are adequate clearances around your equipment (delineation lines), and separation of processes involved in these areas.
  • An inventory of your major equipment and an analysis of the safety controls in place within each of these facilities.
  • A detailed listing and condition assessment of your equipment located in the Shop and Science Labs.
  • An inventory with condition notes of all power tools general condition, and notes on any safety concerns/infractions observed.
  • An analysis of the general condition of all welders, cutting torches and equipment, grinders, etc.
  • An inventory with condition notes of all safety equipment including safety glasses, shields, hearing protection, guards, eye wash stations, etc.

auto-shop-safety

  • Analysis of the controls in place within all science labs in the handling and use of chemicals.
  • An analysis of chemicals stored and sued within the various Science Labs and controls thereof.
  • A review of ventilation, fume hoods and dust control equipment within the various Technology Shops and Science Labs in the schools.
  • A review of the safety meetings and instruction to students in place within the School Division or District.
  • A general review of the electrical supply and equipment including emergency stop switches, magnetic switches, power cords and outlets (overloading), extension cord use, etc.
  • Recommendations regarding how to improve compliance with current codes, provincial standards, CSA standards, NFPA standards, and other relevant regulations.

lab-shop-safety

The Bottom Line on Shops and Science Lab Safety

Shops and science labs are known to be full of danger. It’s important to ensure these areas are as safe as possible. Your Suncorp Shop & Science Lab Safety Survey will provide you with reliable data and recommendations regarding the safety of your operation from our qualified and trained experts. With these tools you can ensure that your shop & science labs will run more efficiently, and will be safer for students and teachers as well. Call Suncorp today to learn more about our Shop & Science Lab Safety survey.

 

CONTACT US

Joseph (Joe) J. Martins, Senior Valuation Consultant

We recently added Joseph (Joe) J. Martins to our team so we thought we’d introduce him.

Joe brings forty-two (42) years of valuation experience to Suncorp.

We are excited about the amount of knowledge that he adds to our Industrial Valuation team, which our clients and perspective clients can benefit from.

Joe Martins.

Joe has particular experience in the valuation of forest products, pulp & paper, oil & gas, hydroelectric, deep sea shipping, grain handling, food processing, petro-chemical and mining related assets.

Joe is recognized by the court as an expert witness for property tax valuations in the provinces of British Columbia, Alberta and Manitoba, Canada, while has completed valuations for assessment appeal, insurance placement, fair market value, capital gains and depreciation related purposes.

Joe is fluent in both English and Portuguese.

For more information on Joe Martins, please see the following link:

https://suncorpvaluations.com/insight/team/joe-martins/

Join Suncorp as we Celebrate 35 Years at RIMS Canada – Sept 23-26, 2018

Suncorp would like to extend an invitation to all in attendance to visit us at our booth as we celebrate our 35th year participating in the RIMS Canada conference. Find us at booth #145 along the South wall. See the complete exhibitor list here: http://events.rims.org/canada/2018/map_francais.cfm.

Suncorp RIMS Exhibitor Booth

The RIMS Canada Conference, St. John’s Newfoundland & Labrador – September 23rd – 26th, 2018.

Since its inception in 1950, and covering several transformations, branding and business evolution, RIMS has maintained steadfast to their commitment to keep pace with the evolving nature of risk management in business.

Throughout the 1970s, RIMS was instrumental in developing and defining risk management as a discipline, and the success of this undertaking, as well as the corresponding branding, was evident in the discipline’s growing numbers. The 1980s saw RIMS break new ground by asserting itself as the voice of the commercial risk manager and expanding its international influence by co-sponsoring the first International Risk Management Conference in Monte Carlo.

-https://www.rims.org/aboutRIMS/Pages/RIMSBrand.aspx

Many decades later, Suncorp is setting up for our 35th year in attendance and look forward to visiting with as many of you as possible.

2018 has been a fantastic year for Suncorp, with expansion and growth across North America, new strategic partnerships and a new online vision that has seen us reach increasing numbers of visitors to our website.

We look forward to seeing you in stunning St. John’s Newfoundland & Labrador!

St. John's Newfoundland - RIMS Conference 2018

How can we help you?

Appraisal Services

  • Insurance Placement
  • Financial Reporting
  • Financing
  • Mergers/Acquisitions
  • Dispute Resolution
  • Corporate Planning
  • Litigation
  • Post Loss Damage Qualification

Advisory Services

  • Loss Control Surveys
  • Implementation and Administration of Property Record Systems
  • Reserve Fund Studies

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

The Role of Tangible Asset Appraisals in the Valuation of a Business

In the past we’ve discussed the role that tangible asset appraisals can play in facilitating the placement of property insurance.  In addition to facilitating property insurance coverage, tangible asset (land, buildings, machinery and equipment) appraisals can be instrumental in supporting conclusions reached in the valuation of a business.

Tangible Assets for Valuation

Business valuation is the process of  estimating the fair market value (or some other premise of value) of a business interest, at a given point in time, in the absence of open market negotiations.  Business valuations are often required for various legal and business purposes such estate planning, financial reporting, establishing a purchase price, settling a dispute or allocating the purchase price of a business across its various assets.

Two Approaches to Business Valuation

Generally speaking there are two approaches used in the valuation of a business:  A liquidation approach or a going concern approach.  The approach that is selected is the one that will yield the highest return to the owners of the business at the valuation date.

Tangible Asset Appraisals - featured

Businesses that do not generate an adequate return to its stakeholders are valued under a liquidation approach (orderly or forced).  In valuing these businesses, appraisals are often required to restate asset values from reported values to liquidation values, which estimate the gross proceeds expected from their sale in  the open market inclusive of taxes and commissions.  Under a liquidation methodology it is assumed that assets are sold on a piecemeal basis and their value is based on exchange value rather than value in use.

Businesses that generate an adequate return to investors are generally valued by estimating the present value of the prospective cash flows that are expected to accrue to their owners.  These estimates are developed by utilizing capitalization and discounted cash flow methodologies that are supplemented by alternative “test” methodologies, that include multiples of revenue, multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) or industry rules of thumb.

While the value determined under a going concern approach is primarily a function of prospective cash flows rather than asset values, asset valuations are often relied upon to help business valuators establish the tangible asset backing of the business.  In the business valuation process, balance sheet assets (and liabilities) are often restated to their respective market values so that the valuator can allocate the value of the business to its tangible (working capital, capital assets) and intangible (goodwill and other intangible assets) components.  This allows the valuator to evaluate the reasonableness of the fair market value conclusion.  It also helps the valuator assess the going concern risk as he or she can quantify the portion of the enterprise value that is backed by tangible assets.

In addition, appraised values are often relied upon by secured lenders so they can help a valuator estimate a  capital structure (mix of debt to equity) that is appropriate to finance the business.   Appraisals can also assist a business valuator in estimating levels of capital re-investment required by a business to sustain its property, plant and equipment.

Under the assumption that a business is a going concern assets are typically appraised on basis of their value in use (vs. value in exchange) inclusive of the installation and assemblage costs required to make the property operational.

How can we help you?

Appraisal Services

  • Insurance Placement
  • Financial Reporting
  • Financing
  • Mergers/Acquisitions
  • Dispute Resolution
  • Corporate Planning
  • Litigation
  • Post Loss Damage Qualification

Advisory Services

  • Loss Control Surveys
  • Implementation and Administration of Property Record Systems
  • Reserve Fund Studies

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

Appraiser Field Stories – How Your Valuation Experts Can Help You!

Appraiser_Valuation_Expert_Story

Appraiser Valuation Expert Story #1: Significant Tax Savings

We were engaged by a US based pharmaceutical company to develop a “floor to book” inventory and reconciliation of their major assets for IFRS accounting implementation, which is a straight forward assignment. As the assignment progressed, we determined that many of the assets in the ledger were ghost assets. You saw the asset but they did not really exist. The pharmaceutical company purchased a turnkey production line 20 years prior for approximately 15 million dollars. Over the subsequent years, they slowly upgraded or changed just about every component of the production line to the point that none of the original components remained.

Our analysis showed the auditors that the even though the production line was still in existence, it’s components were not from the original production line from 20 years ago. It was actually made up of numerous entries for components and upgrades in the fixed asset ledger. Since our client was paying capital taxes on the original cost, the retirement of the original production line coupled with all other unrecorded retirements resulted in significant tax savings for that fiscal year as well as all of the following year. Our fee for this assignment was a small fraction of the savings from year 1 alone.

Appraiser Valuation Expert Story #2: Avoiding Legal Issues

We were engaged by a mid-sized oil well services firm to do a Market Value appraisal of a small light industrial property they wanted to purchase. This was to be a private all cash deal. Our client wanted the appraisal for internal purposes only to confirm to the company’s investors and auditors that the acquisition price was fair. The property was a newer light industrial building on 10 acres of land in a rural setting approximately 5 Kilometers outside a small city with a population about 15,000. The building included three bays plus a wash bay, an office block, and living quarters above the office block. We found the building and grounds to be reasonably well kept and cared for.

During our research we noted that the zoning designation was Agricultural and not Industrial, which we thought was odd. Perhaps the municipality made a mistake and did not record the re-zoning to allow the industrial use? As per a professional appraisers usual routine we decided to check by calling the Municipal Planner to inquire. The response was “That’s odd you should ask about that property. We just found out last week they put up an industrial building without a permit or a re-zoning application. The county’s lawyers are currently preparing the 90-day demolition order and will be issuing it this week.”

We advised our client that the current use of the property is non-conforming and requested instructions on if they would like us to complete the appraisal based on the property being 10 acres of undeveloped land. The client requested that work on the appraisal cease and for us to bill them for time spent. Needless to say, the client was quite pleased to have avoided proceeding with the purchase which would have inevitably lead to an expensive legal tussle.

Appraiser Valuation Expert Story #3: Property Tax Decrease

We were engaged by a bank to do a routine Market Value appraisal on a residential property. The current owner had resided in the house for many years and was refinancing their mortgage. The house was an average quality 1990’s bungalow. As is our usual routine, we obtained and reviewed numerous documents in advance of the inspection such as a title search, assessment records, subdivision plans, etc. During the inspection of the property, we measured the house, which, again, is part of our usual routine. We immediately spotted a significant error on the assessment sheets. The property was being taxed on the basis that the house measured 36ft x 48ft (1,728sf) when in fact it actually measured 32ft x 42ft (1,344sf).

Although an assessment audit was outside the scope of the assignment, we gave the property owner a copy of the assessment records and pointed out the error. We advised her to speak to her municipality and ask them to correct the error which should result in a lower property tax bill. A few weeks later the property owner phoned call our appraiser. She advised that the municipality corrected the error which resulted in her property tax bill dropping by about $600/year. Furthermore, the municipality chose to refund her the previous four years of over-assessment. She had just that day received a cheque in the mail for about $2,400 and wanted to call to thank us for the extra effort.

Appraiser Valuation Expert Story #4: Double The Rental Income

We were engaged by a landlord to assist with a land lease renewal. The land was being used by the tenant as a site for a commercial greenhouse operation. The lease was for the land only, and was a long-term lease with periodic rent adjustments. Our job was to estimate the current Market Rent of the land to assist the parties with the lease renewal negotiations.

Our first step for these types of engagements is to read the lease. We noted that the lease did not state the exact area or boundaries of the land parcel. This was odd because leases typically, and ideally, include a very exact description of what is being leased. Instead, this lease had a general reference to “…..approximately 3 acres at the north east corner of the larger parcel…” During the site inspection, we noted that the tenant had fenced the area they were using. Based on our ground observations and using Google Earth measuring tools we suspected the tenant may be using a lot more than three acres. We spoke to the client and advised her that before we continue with our work she should engage a surveyor. As it turned out, the tenant was using five acres.

We completed the Market Rent estimate based on five acres of land. We also established that the current rental rate was significantly below market levels. Our report recommended a significant increase in the rental rate, and that the new rate be applied to the entire five acre parcel that the tenant was occupying. Our client then entered lease renewal negotiations armed with the report and the survey. After a rather short negotiation, the tenant completely accepted the recommended increase, which effectively almost doubled the amount of rent payable to our client.

Appraiser Valuation Expert Story #5: Hyperinflation Accounting

We were engaged to estimate the replacement costs of the municipal assets of mid-size City for insurance coverage purposes. One of the locations was a large apartment complex, which was a basic four story, wood frame/vinyl clad building. When we first ran the numbers for the building, it became very apparent that the costs being generated were nowhere near what our independent research was showing for local construction costs. As per a professional appraisers regular routine we surveyed local developers and contractors to determine actual local construction costs. Based on the research we established that costs in this City where approximately double that of the closest metropolitan City. We therefore incorporated the market data into our analysis to establish an accurate replacement cost.

Following completion of the report, we knew that this mid-size City was experiencing “hyperinflation” and as an added service to our clients, we updated the costs on all their properties on a quarterly basis. This proved to be an incredibly valuable exercise as approximately three years later this particular building was destroyed by fire. Our original estimated cost of the building came in around the $10 million mark. However, with our quarterly updates over the few short years the building was currently insured for over $27 million. When the claim was settled the total loss came in around the $26 million figure saving our client significant co-insurance penalties.

About Suncorp Valuations

Suncorp Valuations is a leading provider of independent valuation, appraisal, and advisory services. Suncorp’s valuations and appraisals have been relied upon by leading insurance companies, public and private companies, property owners and managers, tax authorities, accounting bodies, courts, municipalities and financial institutions from all over the world.

Our valuation and appraisal staff consist of professionals that are highly accredited in the fields of engineering, real estate and equipment appraisal, business valuation, risk management and loss control. Our multi-disciplinary, multi-regional and multilingual staff take an interactive team approach and have been involved in some of the most complex valuation assignments across the globe.

For questions or comments, please Contact Us.

How can we help you?

Appraisal Services

  • Insurance Placement
  • Financial Reporting
  • Financing
  • Mergers/Acquisitions
  • Dispute Resolution
  • Corporate Planning
  • Litigation
  • Post Loss Damage Qualification

Advisory Services

  • Loss Control Surveys
  • Implementation and Administration of Property Record Systems
  • Reserve Fund Studies