Friday, December 5, 2008

IS THE GLASS OVERFLOWING?

I have suffered through two very depressing "recessions" in the 1970's and 1980's. They take a mental and a physical toll, but we learn to live through it.

Those of us who had parents that lived through the The Great Depression understand, and should remember when we didn't have school milk money or the fifteen-cent bus fare, we walked to school.

Now with easy credit vanishing it reinforced the adage, "there is no free lunch." The results: today's (Dec. 5, 2009) BLS Commissioner's statement, " . . . the unemployment rate rose to 6.7 percent in November, 1.7 percentage points above the December rate." But, also in that statement (http://www.bls.gov)are facts such as:
*Two-thirds of the recent job declines occurred in the service-providing sector as well as the gargantuan losses in industrial labor. However, there has been an increase in health care employment. Are we getting, not only older, but more stupid to the real world of economics?

Everything is relative. Mining is suspending strategic extraction, steel production is down, food prices increase, but fuel prices are on the decline. It's all supply and demand. Food and toilet paper are recession proof but auto's are not.

Then there are issues pointed out in today's chem.info (http://chem.info.com) that "U.S. Squandering Millions Due to Clumsy Project Management." Okay, we know we are wasteful. How many of us glut up at COSTCO only to waste half of the fresh products we purchased because we can't consume them before they go bad?

The same thing happens in industry -- world wide. We don't pay attention by organizing our thinking as well as our spending habits. We spend like drunks and then scratch our heads because we ran out of juice. I won't even talk about the AIG bailout without wanting to throw up.

So the solution: stop the flow, shore up the defences, financially and mentally. It doesn't take an MBA to figure this one out. Quit spending so much frivolously and own up to the fact that we can't be everything to everybody and every nation.

Thursday, November 20, 2008

MARKET MYTHS

Jorina Fontelera, reported in her ThomasNetIndustrialNewsRoom article, Light Friday: Great Depression Myths and Bailout Bashes (Nov. 14, 2008): We are probably misguided if we believe our current state of affairs is at all like the Great Depression. To quote:

"1. Herbert Hoover Believed that markets were self-correcting. Fact: Hoover believed in government intervention to support incomes and employment. His policies kept businesses from cutting wages as the economy fell and championed many of the ideas in Franklin D. Roosevelt's New Deal such as central planing and control of the economy."

This tells me that we are repeating the past in that the current administration will inherit the last administration's foibles, if that's what they are. The current administration inherited the predecessors problems, or what goes around comes around.

"2. The October 1929 crash precipitated the Great Depression. Fact: The crash triggered the passing of countervailing tariffs that caused the international economy to collapse."

A bit different this time, but the crash of the international economy is directly related to the U.S. ability to stay afloat.

"3. Where the market failed, the government stepped in to protect the people. Fact: The Agricultural Marketing Act caused farmers to lose export markets and raised prices from hard-pressed consumers, which both lowered farm productivity and drove farmers off their land."

Where there is cause there is affect or influence. Because the corn market got way out of whack and the price of fuels got way out of whack hasn't seemed to have created a great collapse in the other factors that produce, food, energy and medical related needs. These last three, according to this week's CPI grew a few tenths of a percent where things like transportation absolutely tanked.

I won't go on with the list, but Ms. Fontelera's article is worth reading -- it puts values in perspective again. I believe that the value remains where value belongs, in the products and things that we really need to live. The rest of the stuff, SUV's and $5million houses aren't really necessary in today's economy. Check the archives at http://news.thomasnet.com/IMT/archives/2008/light-friday-111408-great-depression-

Friday, November 7, 2008

VALUE IN EDUCATION

One of my favorite blogs, a chock full of stuff site, is ThomasNet Industrial News Room. If you don't already subscribe to this free site, take a look. Everyday the site has informative and useful information.

Today was no exception, and I think it dovetails with Bureau of Labor Statistics Commissioner's Friday, November 7, 2008 "Statement . . . that non farm payroll employment declined by 240,000 in October, and the unemployment rate rose to 6.5 percent."

Sure, there are all avenues of excuses now why employment is the lowest since we can remember in this lifetime, YA-BUT,what about manufacturing?

If you are a manufacturer or a dealer, do you not receive, on a daily basis, at least four major auction notices a day of some manufacturing business going to auction? According to an article written by David R. Butcher, NEW EDUCATION COUNCIL TO SHAPE MANUFACTURING WORKFORCE, some higher houses of learning are taking notice --we are losing our manufacturing expertise.

Now there's an epiphany. We've only been shipping the jobs and the technology offshore for the last thirty years. Dare I say that dreaded word, "DUH?"

Further, the article says, "As International competition intensifies, U.S. manufacturers are having a difficult time finding qualified people to replace the retiring baby boom generation in increasingly sophisticated, high-tech, jobs. Well double "DUH."

Wasn't it in Europe, I believe Germany the leader in this, where a K-12 student was led down the path of either college or trade school. Those that attended and finished trade school are engineer quality. Now the U.S. is recognizing this as a possible solution. Teach science, and math. I happen to be a proponent of liberal arts and I fervently believe that you need art, music and communication as well as physics to be literate. The history of the great thinkers of the world is that they could think in more than one dimension. Mathematicians were philosophers and great artists were mathematicians -- hand in glove.

If the jobs aren't here, if the wages aren't here, if the manufacturing plants aren't here, are we going to ship the new hierarchy of educated machinists and engineers to China to join the rest of our technology.

Come on now. If we want to compete, lets compete. Quit listening to those silly MBA's who hedge funds to put and mostly take. And unions, get real. You can't have it all. You may have to subsidize your own health insurance, I've been paying my full tab for more that thirty-years. Some of you will have to learn like most small businessmen, to support yourself if you want to survive. Keep manufacturing here in the U.S. so that we can compete and cut the deficit -- you think that a new administration is going to save you? Uncle Vinnie would say fugit-about-it. The new admin is going to help those who already stand on their own two feet because we are running out of money.

Thursday, November 6, 2008

Pick-Up-Sticks?

I've been off of the blog for a month, almost two. The same washing machine that has the world in a mix affects all of us and I'm viewing the mess as the old game of Pick-Up-Sticks. If you attempt to sort one thing out of a pile chances are the whole mix collapses.

We tread carefully now; just ask your bank for a loan. To post anything worthwhile about the economy is ludicrous -- who wants to hear it anyway? We've finally finished the elections -- thank you, and now we have serious issues. We can see today's BLS post, -1.0 percent in manufacturing, but still 3.3 percent in durable goods manufacturing; -7.3 percent in non durable goods manufacturing. What does this mean in the flux? You would surmise that one supports or detracts from the other. It tells me that we, as a nation, are importing most of our durable goods, TVs, dishwashers, personal computers and Mini-Coopers -- nothing new about that. The increase in aircraft sales will increase the numbers, but then there are glitches, like a strike at Boeing, or domestic auto manufacturing is down. Pick-Up-Sticks.

BUT seriously, can you believe the "downfall of TWINKIES?" According to an article from Jeff Reinke of Advantage Media, the manufacturer of American icon, the TWINKIES is in Chapter 11 Bankruptcy -- awful! The company filed four-years ago and is still working it out.

What a fickle public we are to let that wonderful pastry fall into the bin. Where's our country going? Before the Golden Arches and Taco Bell came TWINKIES. After school it was TWINKIES to bolster the one that was in your sack lunch.

I believe that a boost in the old standbys Rainbow Bread, Bunny Bread, Hostess Cupcakes and TWINKIES will bring our poor economy back on it's feet. AND don't forget MOON PIES too. Oh-you're counting carbs.

Tuesday, September 30, 2008

THERE MUST BE A PHOENIX IN ALL OF THIS

I attended an M&A seminar today, and I learned something. The market may be wounded and questionable, but it's not dead. The mega-deals may have gone away for awhile, but we are living proof that we aren't going away anytime soon.

Okay, the market has taken a big hit, but even as I write this, the market shows signs of life and the government's bail out plan is yet implemented. The market may bounce like a ball for awhile. We aren't holding our breath though.

Public ownership aside, there is private placement money still on the loose and looking for opportunities. And, remember, quality sells in any market. If your balance sheet and assets look bad, clean them up. A knowledgeable buyer won't buy junk in most markets and certainly not under the present circumstances. Manufacturing still looks good while building and construction are way down on the bottom. You know that all of this is cyclical even in the worst of times. We still have to have shelter, eat and commute.

In my business of appraising machinery and equipment, us practitioners are waiting and seeing like most folks. We don't know if manufacturers are going to retrench or re-credit. They can't very well be looking for credit when the greed merchants have already put the lid on legitimate sources.

Compounding conditions are the rehabilitating and rebuilding of devastated areas like New Orleans, Biloxi, Galveston, and cities in Missouri, Iowa, and Colorado, only to name the ones that I can remember; they're so many. We want to give our citizens help via the government resources also. So everything hits at the same time. But, what's new?

Monday, September 15, 2008

The financial world took a hit today!

The Wall Street whack over the weekend of September 14-15th -- couldn't you just feel it coming? Yes, the proof that Bears make money, Bulls make money and Pigs get slaughtered is right there on the news channels today.
Not that major funding mismanagement has anything to do with it, I'm sure, but the Bureau of Labor Statistics ,PPI, August 2008, and out Sept. 12, 2008 show a goods decline by 0.9 percent in August "seasonally adjusted."
Further, the "index for finished energy goods declined 4.6 percent in August etc. etc. That's all awash now in the wake of Hurricane IKE.
So in the wake of man made and natural disasters -- what's next?
If we knew that there wouldn't be any problems we couldn't plan for. In the consulting business where properties are inspected and values researched, look for changes -- again.
According to what I see via the Internet and friends reporting in: The prices in stainless are dropping, but carbon steel remains high and looks positive. Precious metals, they're always up and down, but reasonably steady today. And, despite auctions of prime manufacturing facilities by the day, manufacturing in the U.S. still has some life.
Current economic signs, who knows? They're like the weather, but we can't stop planning, it's just not the way we Americans do things.

Friday, July 25, 2008

SWIM WITH THE FISHES

Swim with the Fishes?
By: Alan C. Iannacito

Think of a school of fish all rushing for the same bait. You understand how fast a single, voracious, cold blooded, torpedo like, vertebrate can target and devour its prey. Just imagine what a whole school of barracuda could do.

Now think of adjectives like “cold blooded” that can have double meanings. Cold blooded can define an animal with internal body temperatures that vary with the temperature of its surroundings. Or, cold blooded as in a total lack of kindness, pity or care for somebody’s suffering. Think about those two differences or similarities in relationship to industrial markets and unlimited money.

Does unlimited money mean private funds, governments; individuals? History teaches that money has always influenced or attempted to control markets. There are unregulated pools of capital whose managers can buy or sell any assets. Whatever drives industrial markets there is money available to invest in commodities like corn, soybeans, energy other raw materials, and interim products like steel and gold bars.

Raw materials are influenced by demand and by the cost of extraction. The cost of another commodity, oil to make fuel for example, helps drive the cost. Iron ore, bauxite, copper ore, nickel, gold ores and the like are processed into radiated gold seeds for the treatment of prostrate cancer, to aluminum packaging, ships, utensils, planes and seemingly infinite uses.

Where does all of this start? The earth, the oceans; the air we breathe. Increasingly, a lot of it comes from scrap metals and recycle too. We tear up the earth and the atmosphere when we extract metals and fuels. It’s like plastic surgery. In today’s hopefully regulated extraction parameters most of it looks good on the outside, all smooth and neat, but the cuts and scars are in the inside where no one notices. So recyclables are good.

What’s not so good is that scrap metals may come from perfectly usable things like the wiring just installed in your new house, the tin from your factory roof, the stainless steel vessels that you may have in your yard for future use. I mean, watch out there, nail down the silverware or you may find it has gone missing.

Years ago I was involved in the dismantling and reselling of vessels and used equipment from a Brooklyn brewery. The sales crew was advised to skedaddle out of the location before 5:00pm each day, because, you could actually hear things moving in the far reaches of the brewery as the scavengers gleaned the guts of the brewery pipe lines and electrical wiring. Was I going to be the person, flashlight in hand, to walk into the bowels of an unlighted nasty hole to inquire “who’s there please? And, will that be cash or credit card?” You get the picture.

So, in my profession as a machinery and equipment appraiser, what does this do to the value of equipment? Scrap value is good today, salvage materials are better, and late machinery still has a good market. That means that costs increase, and despite what the media reports, manufactured goods still have a market. This also means that industrial machinery appraisers are looking more closely at materials markets that are steady for certain things. Look closely into your salvage yard. Now is the time to clean and glean. Scrap dealers call it, “cleaning the corners.”

Of course this is all cyclical, but I believe that the cycles get more mileage as the population demands more, restrictions grow, shortages abound and there are those increasing mouths to feed. Like those voracious fish big money finds what’s hot and targets the bait. Sanford and Son is a nostalgic benchmark, but the big guys are global conglomerates with plenty of money funding their scrap heaps.

Now this rhetoric is only from my personal experience in buying and selling, and there’s that waggling phrase: “yah-but.”

Yah-but what about the recent “Open Letter to All Airline Customers,” from UAL and signed by twelve major air carriers telling us why crude oil and fuel costs have skyrocketed. Airlines lay the blame on commodities traders driving the price, buying, selling and never taking delivery of oil. Who knows without examining all of the facts? Reality says that the interest in a perceived scarcity of commodities and strategic metals influence speculators. Like “futures,” buy short sell long, buy, sell and add weight to the commodity like a growing ball of string.

This goes back to the example of some scrap metals. If it’s scarce it becomes valuable. A Bloomberg News article had an interview with some steel producers, Nucor and Arcelor-Mittal, that the “price of steel-making raw materials such as iron ore, coal and scrap metal will continue to rise for several years, keeping pressure on manufacturers.” It’s all relative: demand, money, and supply -- like bait fish.

Friday, June 6, 2008

OIL as an Economic Indicator

OIL as an Economic Indicator
By: Alan C. Iannacito

Oil, a most loved and maligned commodity. What makes it so? We know the answer, but we’re too self-centered and impatient to own up. If we didn’t consume so much we’d find the stuff more reasonably priced. Ahem, is this the law of supply and demand? That’s much too easy an explanation and one that we are tired of hearing.

There’s more to it than supply and demand. In our ever clever inventiveness, we’ve created a need. We are good at making things and obsessive in their use. Why eat one brownie when we can eat the whole pan? The simple answer: gluttony. This is more than sin; it is unbelievably wasteful, resented by those who suffer and absolutely without parity between the rich and the poor.

Current in-your-face examples are our playthings: SUV’s, ATV’s, motorcycles, packaging, furniture, et al. If you think of it there is plastic somewhere, somehow either as structure or decorative material in the construction of most hard goods and packaging. To paraphrase MODERN PLASTICS WORLDWIDE e.weekly, (June 2-6, 2008), the underlying rise in petroleum and natural gas has caused the continuing rise in the cost of plastic resins. What is plastic but oil as an industrial transfat? So what’s new? Plastic resin is and has always been a commodity subject to price fluctuation. Okay consider the rest of the story.

Petroleum and natural gas are wanted by every developing country in the world, notably China and India. But if you look at NATIONAL GEOGRAPHIC Magazine’s June, 2008 Issue, learn about western Siberia’s Khanty-Mansi monster oil-field and where the flow goes. It’s a funnel from Siberia throughout Continental and Eastern Europe, and that’s it. They’re voracious consumers too. (Paul Starobin, Send me to Siberia, NGM, June, 2008).

I’m not knowledgeable enough to comment on the oil optimists or the naysayers but what has occurred is the direct result of the increased demand, and control. Remember we as consumers have contributed to the exponential use of oil. It has gone way past the need to fuel vehicles and transportation and electricity and the making of butter and guns.

Still we are captive to gadgets and gizmos at Wal-Mart prices. Here’s the long term kick in the pants. That cheap Chinese labor may still exist, but it’s a certainty, that the increasing demand for fuels, driving the prices worldwide will affect the costs of those cheap goods. No more cheap steel and plastic because of the high cost of shipping across oceans and atmospheres. What a turnaround we could see if it’s cheaper to make stuff at home than ship it from across the seas. What a concept. I’m not clever enough to figure that one out on my own. For a complete analysis see CIBC World Markets, StrategEcon, “The New Inflation,” By Jeff Rubin. (CIBC World Markets, May 27, 2008). Log onto http://research.cibcwm.com/res/Eco/EcoResearch.html.

There’s only one reality. Don’t need so much. Oh, I’m sorry that I’ve said it, but why do two person households have three cars, two ATV’s and a stable full of dirt bikes? Here’s that answer: because it’s fun, it creates jobs and it’s better than Prozac™ I’m guessing.

Sunday, May 18, 2008

Owning Up to Your Losses

Valuations of Personal and Business Assets

Nature leaves us reeling with a mass destruction of personal and business assets. Many of these assets will not have been accounted for or insured. Those whose lives are affected by disaster and disorder plod the road to recovery. Damaged or lost properties are reconciled to their losses. There was not adequate insurance or there was no insurance. The property owner is in a fix, and realizes that it is up to them or the affected businesses to recreate and begin again.

Those with a legitimate and demonstrated need may have opportunities for assistance from banks, government agencies, relief agencies and private individuals. This won’t happen without evidence. The loser has to make an effort.

Evidence? What did nature take with her? How does an individual or company account for it? Losses range from the miniscule but essential items to hundreds of assets worth millions of dollars in commercial, manufacturing or process equipment?
Examples:
• Auto/Truck Dealerships
• Chemical plants
• Construction sites and rental yards
• Dry Cleaners/Laundries,
• Gas stations,
• Hotels, Motels, Casinos,
• Household furnishings, appliances, personal health equipment,
• Office furniture, fixtures and equipment,
• Oil rigs,
• Manufacturing plants and equipment,
• Marinas, docks, yards, craft.
• Medical/Dental offices and clinics.
• Nursing homes, hospitals and health care facilities.
• Retail stores,
• Refineries,
• Restaurants,
• Transportation companies,
• Ships, barges, ship repair facilities,
Accounting for years of accumulated personal property, from simple household items to large industrial and commercial business assets is a task when it comes to age, model, type, serial numbers, condition etc. Despite total loss of records and documents there is a way to assess your loss.

To begin the process:
• Create the list, from memory if you have to, or from recovered photos or documents of the extent of the loss. Visualize the essential items that were lost and that you need to continue on with your life or your business.
• Evidence is found in accounting and legal records, if available. Evidence may also come from authorities, business banking, loan records, county records, tax assessors, earlier appraisals, customers, friends; relatives.
• Be fair and equitable in the assessment of your losses. Relief agencies tend to be conservative, and they want proof. Also, do not expect to recover value for every knick-knack or memento. Be content to recover the essentials.

Or maybe you have to start from the beginning. What do you need, what will it cost, what is the loan or lease value? What if you don’t know where to start or what values to put on your losses?

Professional appraisers ranging from business intangibles, personal property, machinery and technical valuation, and real estate, are found throughout the U.S. and foreign countries

Losses are accountable; you have options and help to value your loss. Organizations such as the American Society of Appraisers (ASA), the Association of Machinery and Equipment Appraisers (AMEA), the International Society of Appraisers (ISA) and other specialty appraisal societies exist throughout the United States. Society members are found through their appraisal organization headquarters, local appraisal chapters, other appraisers, lawyers, accountants, tax assessors. When in doubt, use an online search engine.

What do you look for in an appraiser: experience and ethics. All professional appraisers follow the Uniform Standards of Professional Appraisal Practice (USPAP).

USPAP is required of all real estate appraisers in the United States. USPAP is not required for personal property or business appraisers, in most states. However, professional appraisers of all disciplines follow USPAP. These standards are the minimum requirements for appraisers in collecting and reporting the values of your properties.

Whoever you find to value your property, it is important that they adhere to the Uniform Standards of Professional Appraisal Practice (USPAP). Ask your potential appraiser, if they follow USPAP. If you don’t understand the concept log on to www.appraisalfoundation.org. You will find USPAP Standards. Find and read the pertinent information; be informed before you ask someone to do your appraisal.

You expect your accountant, your doctor, and your lawyer to be ethical and accountable. Expect the same from your appraiser.

These organizations have directories or online listings of appraisers.
• American Society of Appraisers at: www.appraisers.org
Multi-Discipline from business, personal property, machinery and technical valuations.
• Association of Machinery and Equipment Appraisers at www.amea@amea.org
Machinery and Equipment valuations.
When all else fails, use a search engine to find an appraiser in your area. Be specific to your needs. Bric-a-brac to industrial machinery and equipment; there’s a specialist in all disciplines.

Monday, April 28, 2008

There are persons in my profession who unwittingly undercut themselves when they believe that they are acting competitively. Like a dog chasing its tail, those individuals will probably not catch the elusive thing. They will continue chasing their perceived market with deceiving self-platitudes about how professional they are. But are they giving the client thoroughness and real value?

This deceit will destroy the quality of talent and decision making logic as well. Is it logical to give away one’s profession with poor judgment and poor economics? What is professional other than something or someone who has taken the trouble to learn through sacrifice and work?

Machinery and technical specialists work hard to make a living as professional valuation experts. My appraisal society strives to make their members professional through education, participation and a designation that is difficult to get but means something to those who aspire.

The definitions one finds in dictionaries and that great electronic tome in cyberspace, Wikipedia, “the free encyclopedia,” tells us that “A professional is a worker required to possess a large body of knowledge derived from extensive academic study, usually tertiary, with the training almost always formalized.”

“Professionals are at least to a degree self-regulating, in that they control the training and evaluation processes that admit new persons to the field and in judgment if the work done by their members is up to standard.”

Unlike real estate, personal property appraisal of which machinery and technical appraisals fall are not regulated or licensed. Personal property appraisers who strive for professionalism reinforce their standards through recertification. This means renewing our vows so to speak. We are required, every five years, one-hundred credit hours of education, participation in our society, and seven to fifteen hours of The Uniform Standards of Professional Appraisal Practice, USPAP.

All of this upkeep over five years means that we have to spend our money and time to achieve those one-hundred hours plus keep an office, pay ourselves and pay our taxes. As independent appraisers this paying of self gets more difficult as the playing field is inundated with legal and financial gopher holes.

Many of the people in our profession come from another life before they become appraisers. They may already have some financial independence that makes it easier to compete with neophytes who would enter the profession. They are also highly experienced with the knowledge to back opinions of value. But, this comes with a cost.

In addition to necessary living expenses it is mandatory to keep up our professional credentials. We are professional because we belong to a society whose regulations include ethics, minimum appraisal standards and rules of the road. This is inline with other professions.

Attorneys, CPA’s, and doctors are required to meet ethics and professional standards. In the technical appraisal field we have similar requirements but there aren’t as many of us.

What are appraisal services worth? I’m not speaking just in an economic sense, but through the sense of thoroughness and pride in an assignment well done.

Trades people like plumbers and electricians get “trip-time” and use a book to price services. You know they aren’t inexpensive. Are professional appraisal services worth at least a plumber’s hourly rate? Appraisers wonder sometimes about the client’s perception when an appraisal is proposed. What is a professional appraisal?

At the turn of the 20th Century, economist and sociologist Max Weber ( Maximilian Carl Emil Weber [maks vaybere] 1864-1920), said “professions are defined by the power to exclude and control admission to the profession, as well as by the development of a particular vocabulary specific to the occupation, and at least somewhat incomprehensible to outsiders.”

Now, I don’t believe that appraisers are a band of trained, gibberish speaking monkeys. We do try to achieve professionalism as Max Weber pointed out through:
1. The highest academic qualifications, i.e., university, college or other education not available to the general public.
2. Expert and specialized knowledge in field which one is practicing professionally
3. Excellent manual/practical and literary skills in relation to profession
4. High quality work in . . . creations, products, services, presentations, consultancy, primary/other research, administrative, marketing or other work endeavors.
5. A high standard of professional ethics, behavior and work activities while carrying out one’s profession as an employee, self-employed person, enterprise, business, company, or partnership/associate/colleague, etc.

It may be that I am overly conscientious, but I appreciate a job well done as well as the client does. I almost always exceed my estimated time but stay firm on the quoted estimate. I’ll later berate myself of selling short. I know what I’m worth, but try and convince a client that you can’t work for less than break even is difficult.

Lately, I’ve had to invoke that little piece in my engagement letter that says if I get more involved that originally contracted for, or the client starts slipping in more than contracted for, that they have to pay. Most clients are reasonable that way, but there are a few that will balk.

Attorneys and accountants generally bill by the fifteen-minutes whether it is face time or phone time. Appraisers normally couldn’t do that, but a continuing high cost of living may push us to it. Independent appraisers incur expenses for dues, education, travel to and from seminars and the upkeep of their credential.

Technical appraisers should bill fairly, bill equitably, but also bill professionally. Price competition is one thing but the old adage stands that the competition knows what their services are worth.

Friday, April 18, 2008

Non Cash Charitable Donations

Appraisals for Non cash Charitable Deductions?
There is a nasty wrinkle in IRS document 8283. The next time you are contemplating an appraisal requiring form 8283 please be familiar with “Part III, Declaration of Appraiser.” Read the fine print before you sign, second paragraph about half-way through which states:
Furthermore, I understand that a false or fraudulent overstatement of the property values describe in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (adding and abetting the understatement of tax liability) In addition, I understand that a substantial or gross valuation misstatement resulting from the appraisal of value of the property that I know, or reasonably should know, or reasonably should know, would be used in connection with a return of claim for refund, may subject me to the penalty under section 6695A. . . .
Oh yes, you can bet that I am thinking mightily about the IRS because I appraised over one-million dollars in charitable tax donations last year. All well researched and documented, but having worked for the IRS in similar matters I can assure you that the service does not skim easily over large donations. I’m waiting for the letter.

My question to appraisers: have you decided to scale back on any appraisals involving the taxpayer and the IRS? I’ve put a statement in my engagement letter, in red script that any legal fees involving the defense of the appraisal will be on the client. You can guess accurately how many tax related appraisals I have done since inserting that statement.

If you have any questions about Noncash Charitable Contributions you may download the entire IRS Publication 526 from the U.S. government website.

Thursday, April 17, 2008

Appraising Clutter

Appraising CLUTTER
By: Alan C. Iannacito, ASA

Clutter: we’ve all seen it, been stuck between it and worried exceedingly -- how to value the stuff? Stuff in the corners, stuff in the back room, stuff in the warehouse, stuff in the bone-yard.

In many cases the bone-yard is a temporary place for seasonable equipment. For example, the photo below shows a mix of seasonal items, obsolete equipment and scrap.
(photo not available)

Seasonal fish net/pots, tables and conveyors with the retired equipment of a Kodiak Island fishery.

Dealing with industrial mess is a matter of recognition, experience, and triage. Appraisers are asked to find value in clutter.

To begin:
• Ask the responsible plant staff what they want included and how important are the minor items.
• As you walk through, organize the items in your mind as well as on the listing.
• Classify equipment by utility and apparent value.
• Are the items obsolete or seasonal? Do they have future use at the location?
• Is the item important or is it in the pile because no one knows where it is, or has someone saved it because they thought that they may need it someday?
• Was it ordered and dumped because the plant really doesn’t need it now?
• Is it still on the personal property tax schedule?

Often idle equipment is brought from another plant and dumped for lack of a better place to put it. Maybe, the appraiser is the only reliable organizer because of fresh eyes or curiosity that wants answers. If we don’t know we ask. The example below was found in the corner of a hanger plant.

This Hanger/Cape machine, inherited from another plant, was buried behind boxes and work-in-progress. It has a limited market, and is of no use to the present location, but still has market value.

The above machine was placed on the manufacturing floor, but abandoned in place and hidden. In the same plant, I squeezed between, or walked from the tops of the equipment over machine tools, hanger wire formers and unrelated machinery. The inherited machines were shoved into a corner of the plant.

I listed the most marketable machine tools, lumped old an incomplete machines and made a note that the remainder had little or scrap value. I asked the people in charge before I discarded what I thought were cripples. Some of the nastiest looking equipment may have further use.

In appraisals of multiples in the bone-yard and castaways, it isn’t practical to value each piece by the cost, market, and income approach. The fees and expenses don’t warrant an estimate of each as in-place-in-use value, and estimating the economic life and cost-to-cure.

However, if the equipment is seasonable, i.e. canneries, fisheries, holiday specialties, sewing equipment, weather related equipment, it may have been shoved into a corner because there is no other place to put it. Appraisers still have to find such items and list them.

Pick out the machine in the picture below that has real value -- it’s not the old wash machine or the hose crimp in the background. (photo not available)

Foreground: 25LB “New Little Giant” Forging Hammer probably made about 1912 as an “improved” version with a wrap around hammer guard.

The “New Little Giant” forging hammer above looks like a display from a Smithsonian Museum, and it could be. Some of these machines, still in use, are over 100 years old. A blacksmith or metal artist can buy parts for the machine, and there are people in the blacksmith’s trade that rebuild and sell these machines. The one pictured has a market at $1500 in its present condition. Rebuilt 25LB trip hammers sell in the $5000 range. They have a mystique and an intrinsic value.

When I first saw the “New Little Giant” I was tempted to write it off as scrap. However, I found the name, and through the internet I found a community of trip-hammer users. For this appraisal the trip-hammer was a minor item, abandoned in the old forge shop. The owner forgot about it but remembered that someone had made an offer of $850 for the hammer a few months before the appraisal.

Past assignments have asked me to find and appraise industrial artifacts; old things that someone thinks have value. Clutters of foundry patterns are one example of what the manufacturer or a museum sees as valuable, when the market sees them differently.

Wednesday, April 16, 2008

Value-In-Use; Value-In-Exchange

The Practicality of Value-In-Use and Value-in-Exchange.
A visual and cognitive example of value-in-use is equipment installed in a manufacturing plant, and operating. Conversely, for value-in-exchange, what could the same item sell for removed from the installation; compared to other like and kind items?

Value-In-Use:
For value-in-use consider a dust collector, installed in southeastern U.S. pipe plant.
Estimated 1200 SF Area.

The dust collector is part of a working plant. For value-in-use, beyond the original cost of the unit there is added value for the freight, taxes and installation cost, including the ducting, drives, electrics and controls.
The considerations of value-in-use are: Physical Condition, Functional Obsolescence and Economic Life.

Given the location in an aggressive environment, the paint is worn from the collector. The heat through the system; the weather and the plant atmosphere have also eroded the galvanized duct work.

The dust collector has been installed and in use for fifteen-years. The structure shows serious physical depreciation. Again, the factors of depreciated value are:
· Obvious physical wear and tear. Judging from the exterior, what could the interior be like?
· Functional and environmental: Is the collector still up to standards or is it leaking into the atmosphere?
· Is the item still mechanically functional?
· What is the physical life of such a unit in such a place? For a valuation would we consider any published life expectancy guidelines? Is the reported physical condition based on the appraiser’s experience of having seen similar units? Should the appraiser ask the manufacturer or another expert about expectant life of such a collector?
· Functionally, is the collector 100% or has a new technology replaced any part of the unit? For this example, does the collector still use socks or another type of filter media? Are the drive and controls energy efficient?
· Economically, does it cost more to operate the collector than current models? Does the collector require constant maintenance?

For this example, the plant is still operational and the owners want to know Fair Market Value-In-Use. An appraiser will consider the replacement cost new (RCN) including the value added transportation and installation costs, less depreciation from all causes.

Therefore, assume the following hypothetical information. The numbers are examples and are not exact.

1. The equipment was purchased new fifteen-years ago, at a historical cost of: $18,500. The square foot of filter area is approximately 1200 SQ. FT. This is $15.42 per square foot.
2. The current trended reproduction cost from historical book value is $18,500 trended to a current $22,000 or $18.33 per square foot.
3. The manufacturer’s price for an updated unit is $25,000, or $20.83 per sq. ft. The newly manufactured unit will probably have some upgrades. For this example the trended number and the manufacturer’s new price average $22,000+$25,000/2 = $23,500. This is a combination of trended historical and current cost. This averages to $19.58 per square foot, which may account for some technical difference between the old and new technology. Or the appraiser can use the trended reproduction cost or replacement cost new only depending on the purpose of the appraisal.
4. Add current freight, taxes, electrical and ducting. For purposes of this example I’ve added 30% of cost, $7050 or a total installed cost of $30,550. Realistically the added value costs could increase greatly because of location, material and labor costs.

For booking purposes the company may have capitalized the entire installation or maybe expensed the installation cost. This is important to know if the appraiser intends to trend historical cost. For this example, the dust collector was written-off five years earlier and has zero book value. This has nothing to do with actual market value.

For Value-In-Use, how does an appraiser estimate life and depreciation? Possibly, the inspection or a recognized “life expectancy table” may influence the appraiser’s opinion that, on the date of the appraisal, the installed unit has ten-years of life remaining. For the example, I have given the installation a twenty-five year life and the current replacement cost total is $30,550.

At current RCN including value added costs or $30,550, depreciated by fifteen-years, or $30,550/25 = $1222 per year or $30,550 - $18,333. Then, is the Value-In-Use or Cost Less Depreciation value $12,217?

It is helpful to think of equipment by measured capacity or volume. That is units of measure, i.e. square foot of surface, cubic ft., horse power, BTU or hourly capacity. Using the example above, $12,217/1200 sq. ft. area = $10.18 per Sq. Ft., installed. We can use capacity costs over a range of sizes to extrapolate both cost and value. This is useful later when we compare Value-In-Use against Value-In-Exchange.

The appraiser wants to consider for value-in-exchange if the used equipment will be installed. The above example is $10.18 installed. There is a value added cost of 30% or $3.05 per sq. ft. for installation. Value-in-exchange may be $10.18 - $3.05 per sq. ft. or $7.13 per sq. ft.

Keep in mind that it may cost as much to install a used piece, maybe more, as it will cost to install a new item. It is also helpful to understand that in the past, the economy of scale is that cost per square foot comes down as the overall size increases.

Value-In-Exchange:
Continuing to use the example above of 1200sq. ft. x $10.18 - $3.05 = $7.13 or $8532.00. Is the value-in-exchange $8532.00?

What is value-in-exchange but the market value? What would a knowledgeable buyer buy the collector for and what would a knowledgeable seller sell the used collector for in an open market?

Here are some considerations when a knowledgeable buyer wants this dust collector:
What is the apparent physical condition of the collector?
Does the collector meet the expected capacity?
Does the collector meet EPA standards?
Does the collector need refurbishing and new filter media?
Will the buyer want to install new ducting and controls?
What is the cost of removal or will the plant remove the collector and lift onto the buyer’s conveyance?
How far will the collector have to travel? This is a large collector. Are special travel permits needed?
What will it cost to install at the new location?
Is the buyer a speculator thinking they could resell this item to their customer? Therefore, there is no consideration for new ducting or controls unless the seller is also the installer.
10.Will the buyer have to pay sales taxes on this used collector? This will depend on if the buyer is in-state or out of state and the selling states tax laws.

What if this size and type of dust collector were available somewhere else from a dealer?
Consider this:
1. A dealer has already thought like the end user when they acquired the dust collector. In today’s volatile and questionable markets, the collector was possibly a consignment or a residual from a complete deal.
2. Will the dealer or seller have to repaint or repair the dust collector to make it marketable?
3. Will the dealer or seller offer the collector “as is?”

Whatever the seller of the used equipment decides it all has to do with what they think that the market will tolerate. Here is the economic consideration of supply and demand at work.
For this example assume that manufacturing is viable and that there is a market for a used dust collector this type and size.

It is easy enough to find dust collectors but not always the exact capacity. This is one reason we consider units of measure on some manufacturing and process equipment. A valuation is a group of comparisons and averages influenced by condition, location and demand.
For this example I’ll use a recent market offering from a used machinery dealer.

Dust Collector by Schick, 1200 SF, 10 HP Blower, Cone Bottom.
Location: Southern CA.

Dealers will know that the replacement cost for our example is $18,000 to $22,000 with no value added costs or accessories.

If there is a potential market for the used dust collector, and the equipment is in salable condition, expect to see the asking price about 35% to 50% of the replacement price or in the range of $6300 to $10,000 – or higher if the collector is late model and very good condition. There is no consideration here for what the speculator paid for the used collector and their handling costs. Also, is a used collector with old technology? Maybe the seller is open to offers. Is this in line with Value-In-Use less the installation costs?

The used equipment dealer quotes $6,750 for the collector. It is in the sq. ft. range of the first example at $5.63 per sq. ft. For example only, this is in the 30%+ range on the replacement cost new.

The reality is that one sale doesn’t make a comparable market example. However, for this demonstration I chose only one comp. Normally the appraiser will check a range of comps.

Because the collectors in the examples are sock type, there could be some discounting because popular filter media today may be a replaceable cartridge or another collection system.

In comparing the used equipment installed and similar used equipment on the market at the time of the appraisal the estimated value in place may be low or it could be very reasonable. Because a knowledgeable buyer may negotiate the dealer’s asking price or ask for other non-monetary but other value added considerations.

Therefore, the example may demonstrate why appraisal is still an art, an opinion based on fact; not a science. Also, to reiterate, a number of offers and sales may compare or extrapolate completely different range of numbers.

The numbers I put in for examples are not correct, but, guesstimates based on past sales and appraisal experience. In a real assignment the appraiser should check with manufacturers and equipment dealers.