Monday 19th of October 2020

THE THREE APPRAISAL APPROACHES AS THEY APPLY TO MARINE SURVEYORS APPRAISING MARINE ASSETS

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Whether or not marine surveyors appraising marine assets (yachts, pleasure craft, commercial vessels) are aware, there are standards that apply to the practice of appraisals. The standards are the Uniform Standards of Professional Appraisal Practice (USPAP), which are published every 2 years by the Appraisal Standards Board of The Appraisal Foundation (see my post What Is USPAP).

USPAP standard 8-2(a) requires “The content of an Appraisal Report must be appropriate for the intended use of the appraisal and, at a minimum:

(x)…provide sufficient information to indicate that the appraiser complied with the requirements of (USPAP) Standard 7 by:

(1) summarize the appraisal methods or techniques employed

(2) stating the reasons for excluding the sales comparison, cost, or income approach(es) if any have not been developed…

So USPAP requires that each of the appraisal approaches at least be considered.

Income Approach:

For the average yacht or pleasure boat survey / appraisal, the income approach would not apply simply because there is no income stream being produced by the vessel. However, for a yacht or pleasure boat that is chartered out, and thereby producing an income stream, the income approach must be considered as a viable approach to developing credible appraisal results. This is true for commercial vessels as well. However, In my experience it is difficult, if not nearly impossible, to determine the income stream of a particular vessel, if the vessel owner has a fleet, or the commercial vessel is used as a support tool for another commercial venture (i.e. pilot vessel, derrick barge, etc.).

However, since USPAP requires that all three approaches be considered and an exclusion be explained, a USPAP compliant appraisal report needs to address the income approach. A reasonable way to address this is a simple statement, i.e., “the subject vessel does not produce income so the income approach could not be used”, or “no information regarding the vessel’s income was provided (or available) so the income approach was not used to develop the opinion of value”.

Sales Comparison (Market) Approach:

Generally speaking most production pleasure craft and yachts have an active market, with sales and sales listings readily available. In this case the most practical approach to determine a credible opinion for the vessel’s Fair Market Value (FMV) would be the Sales Comparison (Market) Approach. Many of the vessel appraisals that I have done over the years include both the FMV and the Replacement Cost New (RCN). When both definitions of value are required and the Sales Comparison Approach is utilized, then the Cost Approach can be reconciled to the Sales Comparison Approach and used as a check for the FMV.

With the Sales Comparison Approach, the basic procedure is to gather data on sales and offerings on similar vessels, determine the comparability to the subject vessel, determine the appropriate units of comparison (i.e. size, age, horsepower, etc.), collect, analyze and adjust the data, and apply the results to the subject vessel.

Cost Approach:

For a one-off, or unusual, pleasure craft, yacht or commercial vessel, the cost approach may be necessary in order to determine credible appraisal results.

For the cost approach analysis, the appraiser determines vessel’s current day replacement cost; the cost of building a new vessel of like design, capacity, and/or horsepower at the current market rates for like utility. After deducting an estimated terminal value (generally residual salvage or scrap value), this value is then depreciated over the expected Normal Useful Life (NUL) of a similar vessel. The calendar remaining economic life is adjusted, either up or down, for the condition of the vessel as noted by the appraiser at time of survey to reflect the apparent physical remaining economic life, or Effective Age (EA) of the vessel.

Vessels with equipment or machinery that has recently been rebuilt or repowered could have years added to its remaining useful life, resulting in a reduction in the vessel’s EA. Conversely, equipment in need of repairs, maintenance, or repowering could have years removed from its remaining useful life.

In addition to Physical Obsolescence (depreciation) it may be necessary for the appraiser to apply Functional Obsolescence and/or Economic Obsolescence, in addition to depreciation.

Functional Obsolescence is defined as the loss in value or usefulness of an asset caused by internal inefficiencies or inadequacies of the asset. An example of Functional Obsolescence could be a mono-hull ferryboat compared to a high-speed catamaran ferryboat. The mono-hull ferry may be able to haul the same number of passengers but the time frame that it take to go from point A to point B would be higher, resulting in an inefficiency. Another example could be a pleasure craft or yacht equipped with old, obsolete, or fuel inefficient engines. Or a pleasure craft or yacht equipped with an original electrical system. The system was adequate for use when the vessel was built but cannot handle loads for current usage.

Economic Obsolescence is defined as the loss in value or usefulness of an asset caused by factors external to the asset. An example of Economic Obsolescence would be a single skin oil barge. The barge may be in excellent condition but cannot be used in the market due to laws and regulations preventing its use. Another example could be a commercial vessel falling under the California Air Resources Harbor Craft regulations. These regulations require certain commercial vessels to be upgraded to US EPA Tier 2 or Tier 3 machinery. If the vessel is not so equipped it would be prevented from working in the State of California more than 300 hours per year, resulting in a significant reduction in value due to economical obsolescence.

After adjustment for obsolescence the terminal value is added back with the result being the FMV by the Cost Approach.

In summary USPAP requires an appraiser to consider all three appraisal approaches necessary to determine credible appraisal results. If one approach is excluded the reason must be explained. The most common approach used by Marine Surveyors / Appraisers is the Sales Comparison (Market) Approach. For unusual, non-production vessels the cost approach may be necessary to develop credible appraisal results. The Income Approach is rarely used in appraisal in the marine appraisal industry due to a general lack of income information. However, it must still be addressed and it’s exclusion explained.

Dana R. Teicheira is a NAMS Certified Marine Surveyor and an ASA Accredited Senior Appraiser in both Appraisal Review and Management (ARM) and Machinery and Technical Specialties (MTS), with a designation in Commercial Marine Surveying. Mr. Teicheira is headquartered in Northern California and can be contacted at 707-769-9171 or by email at dt@maritimesurveyor.com

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