Heads up to those of you with diesel powered fleets — EPA’s National Clean Diesel Funding Assistance Program’s latest grant application process will close out on June 14. This funding opportunity is only available to specified applicants, but if your organization operates any of the qualified items and falls into one of the eligible entity categories, get yourself over to the EPA website  for more information and an application.

Qualified Diesel Fleet Types

• Medium or heavy trucks
• Non-load engines or vehicles used in construction, cargo handling, agriculture, mining, or energy production, including stationary generators and pumps
• Buses
• Marine engines
• Locomotives

Eligible Entities

• Regional, state, local or tribal agencies/consortia or port authorities with jurisdiction over transportation or air quality
• Nonprofit organizations or institutions that
  • represent or provide pollution reduction or educational services to people or organizations that own or operate diesel fleets; or
  • have, as their principal purpose, the promotion of transportation or air quality

The EPA site allows that “School districts, municipalities, metropolitan planning organizations (MPOs), cities and counties are all eligible entities under this assistance agreement program to the extent that they fall within the definition above.”

Other limiting conditions include how the grant funds may be used, and here again, I quote from the EPA website (complete with their links):

Grant funds may be used for clean diesel projects that use:

• Retrofit technologies that are verified or certified by either EPA or CARB
• Idle-reduction technologies that are EPA verified
• Aerodynamic technologies and low rolling resistance tires that are EPA verified
• Early replacement and repower with certified engine configurations (incremental costs only)

That’s all for today. If this funding program doesn’t work for you, stay in touch. More grants are probably in the pipeline and I’ll let you know as I find out about ‘em.

Jack Young
NorCal Valuation

Lately, we’ve gotten a couple of calls asking for equipment appraisals at “auction value.” That’s a tough one! Auction value, you see, isn’t an appraisal value at all. USPAP requires compliant appraisals to define the value being used and to cite the authoritative source of the definition and I’ve yet to see any respected authoritative source—whether the IRS, any of various legal codes, courts, or appraisal organizations—provide a definition for “auction value.” And there’s a reason for that: Auction is a method of selling items, not a definition of value.

Yet the myth of “auction value” lives on — There is, in fact, as you may know, a definition of “auction value” listed in Wikipedia, but as we all know, however popular and useful Wikipedia is, it is not generally considered an “authoritative source” and certainly not one that most folks would want to march into court with.

So when I get the inevitable request for an “auction value” equipment valuation, I just give my head a shake and instantly shift into education mode, explaining that an auction is a manner of selling goods, not a definition of value, and that “auction” is no more a viable definition of equipment value than “shopping mall” or “flea market” would be.

Sometimes, it’s important to understand what something is before we can accept what it is not. To begin, then, with our deconstruction of “auction value,” let’s take a look at one commonly accepted definition of an auction — Webster’s states that an auction is “A sale of property to the highest bidder.”

We all know that there is a lot more to an auction than this simple and straightforward definition contains. Auctions may involve seller buy-backs, reserves, minimum bids, house bids, credit bids, buyer premiums, auctioneer commissions, run fees, marketing fees and so on. It may even be inaccurate to assume that items always sell to the highest bidder. Not all items that appear to have been sold in an auction actually do sell; occasionally, a top bidder doesn’t finalize payment and therefor, the item has not actually been sold. Even when items are actually, technically, irrevocably sold, however, the monetary amount that changes hands does not necessarily represent the value of the item, as discussed previously.

In addition, the incredible flexibility of the auction method allows the marketing and selling of a wide variety of items under countless different scenarios, any of which might supply a different selling/buying price and many of which presume different values. Some of these scenarios might include:

• A bankruptcy liquidation where items are sold piece meal on an as-is where-is basis to the highest bidder regardless of price, wherein items are often sold below the price they would sell for if marketed by a commercial dealer
• A benefit auction where items are often sold at values much higher than their fair market value in order to raise funds to support a cause
• A fine art auction of highly sought after rare art where the winning bid may set the fair market value of an item
• A typical equipment auction where items are properly marketed and advertised, wherein prices may very well approach fair market value but are often less
• A wholesale car auction where the seller is an active part of the bidding process and the selling price is very close to the wholesale value
• A real estate auction with a clear reserve

And these examples don’t even scratch the surface of all the possibilities in marketing and selling that the various auction processes may offer. Taking this all this information into account, perhaps all we can really agree upon is that, in the most general sense, an auction is a manner of selling items. What the “value” of those items sold may be is another question altogether.

So that request for an “auction value” appraisal? Obviously, an equipment and machinery appraiser must be prepared to take this as an educational opportunity. And as we know, an educational opportunity is best begun with a question: it is the equipment appraiser’s job to first question the user about the use of the requested valuation and to then educate the client regarding the proper value definition for that use. Based upon the scenarios discussed earlier, it’s clear that the term “auction value” could be used to request one of an extremely wide range of value definitions. Usually, it turns out that what the client is asking for is Forced Liquidation Value of the equipment in questions, but to make such an assumption would certainly be presumptuous. Far better to ask a few questions rather than making an assumption about what “auction value” means to the person asking for a machinery and equipment appraisal.

Surely there are some circumstances, though, when it is okay to assume that everyone knows exactly what is meant by “auction value”? Suppose you’re working at an auction company that specializes in a particular kind of auction and a prospective auction consignor asks for an estimate of what amount of auction proceeds may be realized should he/she consign certain items at the an upcoming auction. Is this case, you might feel comfortable referring to “auction value.” But even in a case like this, it’s important to avoid any possibility of misunderstanding. Rather than referring to “auction value,” it might be more prudent for the auctioneer to use language such as “estimated auction proceeds” and very carefully clarify exactly what that means and how that amount was arrived at, as well as clearly stating that you are not providing a USPAP valuation and that the information is only for the intended user — presumably the owner of the goods and the fellow asking the original question.

So whether you are an auctioneer being asked by a possible consignor for the amount an item might bring at auction or a machinery and equipment appraiser being asked by a prospective client for the “auction value” on his manufacturing, construction or ag equipment, take the opportunity to help clarify the appraisal needs of your caller—and provide some useful valuation education—by asking these useful questions:

• What is the purpose of the appraisal and who will be using it?
• What would be the marketing time period if the Subject Assets were to be sold?
• Are the Subject Assets assumed to be sold piecemeal or as a complete functioning unit? Would shipping and installation cost needs to be considered?
• What, if any, are the unique aspects of the Subject Assets? (custom made items, limited use equipment, special licensing requirements)
• Are any warranties still in place for any of the Subject Assets?

By getting the facts up front the equipment and machinery appraiser can work to educate the client and clarify and properly name the appropriate definition(s) of value that will best meet the client’s needs. You may be interested in the current list of value definitions used for machinery and equipment, as provided by The American Society of Appraisers.

Jack Young
NorCal Valuation

The concept of absorption is used relatively often in real estate appraisal and the same concept, known as “blockage,” is a well-documented in the art valuation world, particularly in tax-related appraisals. The term “blockage” — used by the IRS — derives from issues related to selling a large block of stock and seeing the related market decline. Equipment auctioneers, whether familiar with the term or not, have certainly see the same effect when selling a high volume of similar equipment, such as a fleet of Peterbilt trucks or a yard-full of John Deere backhoes. In the equipment appraisal profession, however, absorption is often underused. Kyle Martin, Supervisory Estate Tax Attorney with the Internal Revenue Service in Oakland, California, has stated in public meetings that the underuse of blockage is one of the more common mistakes he sees in appraisals he reviews. Mr. Martin was referring specifically to real estate appraisals, but the fact is that absorption is important in many different appraisal disciplines, including machinery and equipment.

So let’s talk about absorption: What is absorption? And when is it appropriate to consider absorption in equipment valuation?

Absorption is essentially an effect of the basic economic law of supply and demand which states that the greater the supply and the lower the demand, the lower the price will be. Using the concept of absorption in valuing equipment is a way of to take into account the length of the time needed for the assets to be absorbed by the current market at what price.The question that needs to be asked, when considering whether absorption is a factor in equipment appraisals is this one:

“Are there enough ready and able buyers willing to pay full price if the items were offered for sale at the same time?”

While an equipment appraiser may not know the answer to that question, just asking it improves the quality of the equipment appraisal work being done. And of course, someone knows the answer to that question. Creditable sources I’ve tapped for input have included used equipment dealers, auctioneers familiar with similar equipment, and experts in the particular industry.

The folks who can help answer the question of price are the same folks who can help formulate the appropriate absorption rate calculation. For instance, in a recent equipment appraisal I was researching values on fuel storage tanks, values that are extremely price/volume sensitive. In talking with industry experts, it was determined that if the number of tanks in question were released into the market at the same time, the result would be a 50% reduction in value. In light of this information, and given the fact that we were opining on the fair market value, we decreased the opinion of value on the tanks by 50% to account for the negative effect that would occur if this volume of tanks were to appear on the market at the same or relatively same time.

The Journal of Accountancy provides some background information on absorption that help illustrate the use and importance of absorption in estate valuation:

In the seminal art tax case in which blockage was first applied as a valuation concept, the agree-upon discount was 37%. In perhaps the most famous art valuation tax case — Estate of Georgia T. O’Keefe v. Commissioner — the executors of the estate sought a 75% discount in value, arguing that monetizing the estate would “flood the market” and reduce the instant fair market value. The court conceded a 50% discount on the collection’s un-discounted valuation of $36.4 million.

While most equipment appraisers may not be applying discounts to valuations in the millions of dollars, even smaller estates can benefit from the consideration of absorption. In a case involving gift tax, for example, the parents were transferring the assets of a very large farming operation to their heirs. The operation included 93 tractors and 500 miles of irrigation pipe. After doing the appropriate research, I established absorption discounts for each of these two categories.

When calculating absorption discounts for opinions of values, the critical elements of research are

• Actual past cases in a related industry (often hard to locate)
• Creditable, independent industry experts

Just as important as the research is how the concept of absorption is presented in the valuation report. Because absorption is not a commonly-used or well-understood concept, the narrative report needs to explain clearly and thoroughly what absorption is, why it is being used in this particular instance, how the absorption discount was researched, and how it is being applied to the assets being appraised. In addition, I always ensure that the work file contains all the documentation needed to support the valuation results.

As more and more equipment appraisers become familiar with and confident of the appropriate and well-researched use of absorption discounts in our equipment valuations, our clients and the equipment appraisal profession will benefit from this valuable and underused tool.

Jack Young
Machinery & Equipment Appraiser
NorCal Valuation 

UPDATE, March 8, 2012: We got a call this morning from the fine folks at the Appraisal Foundation asking us to remove the link to the free Gold app USPAP publication originally included in this blog, so you will not be able to click through to that. The flip book link was allowed to stay.

As many of you know, USPAP (Uniform Standards of Professional Appraisal Practice) has been updated with a new edition. The Appraisal Foundation offers a link to a USPAP “flip book,” which includes the quasi-cool sound effect of pages flipping as you “leaf” through the book. A more practical source — and the one we downloaded here at our machinery and equipment appraisal office — may be this free 2012 -2013 USPAP.pdf available for download.

Here’s what’s new for 2012-2013 USPAP:

• Changes to STANDARDS 7 & 8: PERSONAL PROPERTY APPRAISAL, DEVELOPMENT & REPORTING;
• Changes to DEFINITIONS of “Client,” “Extraordinary Assumptions,” and “Hypothetical Condition,” as well as a new definition of “Exposure Time”;
• RECORD KEEPING RULE and related edits to the  ETHICS RULE;
• Revisions to Advisory Opinion 21, USPAP Compliance.

We talk about USPAP often in this blog. It’s a critical factor in any appraisal, as we pointed out not long ago when discussing Scope of Work. It’s important in particular for equipment appraisals that you suspect may end up in court or being reviewed by the IRS. In legal cases, for example, if the equipment  appraisal report you submit is not USPAP compliant, the valuation option may not be admitted in court.  And as our friend Roger Durkin reminds us, “… the IRS [has] redefined “qualified appraiser” and will look to USPAP as the appraisal practice standards.”

The Appraisal Foundation explains USPAP and its importance thusly:

The Uniform Standards of Professional Appraisal Practice (USPAP) are the generally accepted standards for professional appraisal practice in North America. USPAP contains standards for all types of appraisal services. Standards are included for real estate, personal property, business and mass appraisal.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 recognizes USPAP as the generally accepted appraisal standards and requires USPAP compliance for appraisers in federally related transactions. State Appraiser Certification and Licensing Boards; federal, state, and local agencies, appraisal services; and appraisal trade associations require compliance with USPAP.

And the American Society of Appraisers explains why all ASA appraisers, including machinery and equipment appraisers, should regularly invest in a formal USPAP course:

USPAP is reviewed and updated every two years to keep it current with changes in the marketplace. Practicing appraisers need to be cognizant of these changes … Personal Property appraisers [including MTS, aka Machinery and Equipment Appraisers] are required to take a 15-hour USPAP course and pass the exam every five years. All appraisers, however, should be looking at the changes to USPAP every other year and adjusting their practice accordingly.

Now more than ever it’s important to have an equipment and machinery appraiser who’s experienced, accredited and USPAP compliant when you need equipment appraisals for legal or tax purposes or any business situation from buy/sell to collateral lending/borrowing. While I don’t expect my clients to be familiar with the new USPAP publication (with or without the page-turning sound effects!), it’s important to you, as a client, that your equipment appraiser is fully cognizant of the important updates to USPAP.

Jack Young
USPAP-compliant Machinery & Equipment Appraiser
NorCal Valuation

As a machinery and equipment appraiser, I’m especially proud that the American Society of Appraisers board of governors has approved Robert Podwalny for Life Membership in the ASA. I was part of the nominating committee from the ASA NorCal Chapter and we were pleased to be able to make this announcement at last month’s meeting.

Life Membership is bestowed on Accredited Senior Appraisers and Fellows of the American Society of Appraisers who have, in the judgment of the board of governors and the member’s chapter colleagues, made outstanding contributions to the Society and the valuation profession. Bob’s long and outstanding service, like that of other Life Members, has contributed to the growth and development of the Society and has helped elevate the status of the profession among users of appraisal services.

Robert B. Podwalny, FASA, has been an appraiser for over 30 years, during which he has been inducted into College of Fellows with the American Society of Appraisers. He is the past International Education Committee Chairman, Emeritus Member and Past Chairman of the Machinery and Technical Specialties Committee, Past Regional Governor for Northern California, Past President of the San Francisco Bay Area Chapter, contributing author to two “Valuation of Machinery and Equipment” textbooks, course developer and senior instructor of “Machinery and Equipment Principles of Valuation” courses taught through the ASA, Past Vice Chairman of the Board of Examiners for Machinery and Equipment for the ASA for 14 years, designated expert witness by the Oakland Superior Court and the Administrative Board in Maryland. He has taught valuation courses throughout the US as well as in Mexico, Romania, Slovenia, Canada, Russia, Kazakhstan and China and has developed and taught courses for the World Bank Economic Development Program as well as for the ASA. Mr. Podwalny continues as a frequent author of articles on valuation as well as a speaker at various appraisal conferences and meetings. Most recently Bob served as an expert witness in litigation involving ad velorem tax appraisal for the Alaska Pipeline.

In addition to his professional qualifications, Bob is an all-around nice guy and an outstanding colleague. In fact, I was just chatting with him the other day about  working together on a mining equipment appraisal assignment Colorado…

Jack Young
ASA NorCal Chapter VicePresident
NorCal Valuation

Equipment appraisals for insurance claims come in two categories: the equipment owner may need an equipment appraisal to engage with the insurance company, or an insurance company may request an equipment appraisal for fulfilling a filed claim. In both of these cases, standard operating procedure is to call the equipment appraiser after the damage has been done.

I’ve handled several cases, of both kinds, over the years, and cannot advise strongly enough the importance–especially to the owner–of having an equipment appraisal done while the equipment is in good working order. Once an over-the-road truck, milling machine, tractor or heavy equipment has been totaled by collision, fire or vandalism, or your manufacturing line for steel working, furniture making, food processing or textile processing has been damaged by fire, earthquake, landslide, flood or other unavoidable catastrophe, appraising its original value becomes–as you might imagine–a little more difficult.

Imagine how much quicker & less expensive an equipment appraisal for insurance claim reasons might be if the files on the equipment included a relatively recent qualified, USPAP equipment appraisal. Even if the equipment has not been appraised within the last few years, an equipment appraiser could refer back to the original appraisal done for insurance purposes to ensure that all the manufacturing, construction, agricultural, mining & aggregate, transportation equipment are adequately covered in case of loss or damage.

You do have that original equipment appraisal, right?

If there’s not an equipment appraisal to support your insurance coverage, can you be sure you’re adequately covered for loss of damage? Do yourself a favor and be sure your coverage is at least sufficient to replace your equipment at its current level. Be aware of any specific coverage language in your policy that may effect the premise of value and share that with your equipment appraiser.  Your equipment appraisers will generally assume Fair Market Value (FMV); your insurance agent will refer to it as Actual Cash Value (ACV).  You’ll call it “staying in business.”

Jack Young
Equipment Appraiser for Insurance Purposes
NorCal Valuation

Cost segregation studies are in the news recently due to the Peco Foods, Inc. v. the IRS court case, wherein the tax court upheld the IRS’ denial of Peco Foods’ reclassification of assets identified by a cost segregation study.

Late last year, another cost segregation study ran into trouble with the IRS in the case of Ronald Pearce and Daryl Pearce, Plaintiffs, v. Department of Revenue, State of Oregon, Defendant. Since one of the big advantages of a cost segregation study is the supposed approval by the IRS, some folks may be wondering if a cost segregation study is still an appropriate way to reduce tax liability and create additional cash flow.

The short answer is yes, a cost segregation study is still an excellent financial resource for owners of income-producing properties. Why, then, did these two cost segregation analysis situations go so wrong?

In the case of the Ronald and Daryl Pearce, the problem was that they didn’t use a cost seg professional. Although they had no experience or educated knowledge with cost-segregation methodology, they prepared and submitted a “diy” depreciation analysis. The Oregon Department of Revenue rejected the analysis, stating that their study “lacked sufficient documentation to support its allocation of costs.”

How to avoid this problem? Hire a professional with demonstrable experience in cost segregation analysis.

Avoiding the Peco situation is even easier — in that case, the cost segregation analysis itself was never actually in question.

Where Peco ran into trouble was that their specific asset purchase agreements — with provisions stating that “the parties would use these values for all purposes including tax and financial reporting” — limited Peco’s ability to re-characterize those assets in a cost segregation study.The question before the court, then, was whether or not the original allocation schedule agreements were enforceable, and with the conclusion that they were, the entire issue of cost segregation became moot.

As the iTax Blog succinctly concluded in a recent post:

The court never reached the issue of cost segregation when it ruled that the agreements were not ambiguous and that whether the acquired assets may be subdivided into component assets was immaterial because Peco may not deviate from its characterization of those assets as stated in the original allocation schedules.

Because Peco Foods attached a statement to Form 8594 allocating specific amounts of the Purchase Price to Processing Plant Buildings and Real Property Improvements, they cast the allocations in stone. The tax court found that the agreements were enforceable, the terms were unambiguous, and all relevant assets were covered. Peco claimed that it could reallocate the useful lives of assets under Code Sec. 338(b)(5), the “residual method,” which applies when the parties do not agree in writing as to the allocation of any part of the consideration. However, since all assets were covered by the agreements, and the agreements were enforceable, the residual method did not apply.

Because the original documents went into the level of detail of identification they are bound to stay within those allocations. In our experience, agreements containing such specificity are rare. Therefore, we don’t expect any significant impact from this ruling nor do we anticipate an appeal.

Despite the recent news of cost segregation analysis denials, then, the fact remains that a professional cost segregation report, complete with engineering studies, is an excellent and IRS-approved way to accelerate depreciation on income-producing properties in order to reduce tax liability and create additional cash flow.

Jack Young, ASA, CPA
Cost Segregation Analyst
NorCal Valuation

As a Sacramento equipment appraiser, I can verify that defining the scope of work is a critical first step in any appraisal process. Even before quoting a priceon an equipment appraisal, we need to closely define our scope of work. Scope of work is defined by our friends at USPAP (Uniform Standards of Professional Appraisal Practice) as the type and extent of research and analyses in an assignment, and USPAP states in no uncertain terns that is the appraiser’s responsibility to determine and perform the appropriate scope of work.USPAP’s Scope of Work Rule states that an appraiser must

1. Identify the problem to be solved
2. Determine & perform the scope of work necessary to develop credible assignment results
3. Disclose the scope of work in the report

But what does this mean to you, as an equipment appraisal client, or to me, as a Sacramento equipment appraiser?

It means we need to talk.

Because that crucial first step, identifying the problem to be solved, means I need to collect at least 4 pieces of important information from the client regarding his or her particular equipment appraisal:

I regret to announce that Robin Erdmann, ASA in RP and our former ASA NorCal Chapter President (2008-2009), passed away unexpectedly on Thursday, December 22, 2011, after a very short illness. He had just turned 60 a few days before.

Robin is credited with the resurgence of our ASA NorCal Chapter; we remain very grateful to him.

Our profound condolences to Irene, Robin’s companion of many years, and to Robin’s father. No services are planned.

What was this equipment appraiser thankful for in November? I got to spend most of Thanksgiving week working in & enjoying California’s Central Coast. Did a cost segregation study inspection of some recently acquired farmland near Fillmore, a machine shop inspection for tax estate purposes in the Salinas Valley area and one very long day of ASA meetings in Costa Mesa. The non-work related part? A camp-out at Eureka Dunes in Death Valley and some El Capitan Beach days near Santa Barbara. We also had a personalized tour of a surfboard manufacturing shop in Ventura! You can take a similar tour by watching this video.

You may remember my mid-summer ode to the Central Coast. During November, I enjoyed working the farms and manufacturing shops along Hwy 101 & I-5 just as much.

What kind of work takes me into the Central Coast? Ag equipment is the most obvious draw: the Central Coast is reportedly one of the most highly mechanized agricultural areas in the world and a lot of that mechanization needs to be appraised for a variety of reasons. It’s not just the spinach harvesters, though, or the fleets of agricultural transportation trucks and trailers that draw me out to the Central Valley. There’s the accompanying food processing equipment, cold storage facilities, and fertilizer production as well!

Non-ag is just as important. Manufacturing and construction industries are big players in the counties of Santa Barbara, San Luis Obispo and Monterey. Businesses in Salinas, Santa Cruz, Santa Barbara, Monterey, SLO, San Simon, Cambria and Lompoc need equipment appraisals for their construction equipment or manufacturing and plant equipment, whether for collateral lending, due diligence and management decisions, insurance, tax appeals or estate reasons.

And almost everyone who owns income-producing property could benefit from a cost segregation analysis.

If you haven’t taken advantage of this IRS-approved tax-saving tool yet, be sure to talk to your CPA or tax professional. We’re busy this month finishing up cost seg reports for apartment buildings in Sacramento, office complexes in Santa Rosa, a motel in Stockton, and that aforementioned agricultural property on the Central Coast, but call me now so I can schedule your inspection for our next long business trip through the Central Coast.

Jack Young, ASA CPA
Central Coast Equipment Appraisal
NorCal Valuation