GLOBAL VALUATIONS - Definitions of Terms

Definitions of Terms

AD VALOREM: According to value.

APPRAISAL: (noun) The act or process of developing an opinion of value; an opinion of value. (Adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.

APPRAISAL REPORT: Any communication, written or oral, of an appraisal, appraisal review or an appraisal consulting service that is transmitted to the client upon completion of an assignment. The Uniform Standards of Professional Appraisal Practice (USPAP) defines three (3) types of appraisal reports; Self-Contained, Summary and Restricted-Use.

APPRAISAL REVIEW: The act or process of developing and communicating an opinion about the quality of another appraiser's work.

APPRAISER: One who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

ASSESSED VALUE: The official value estimate of a parcel of real estate or personal property for the purpose of applying a rate for the collection of real or personal property tax.

ASSESSMENT APPEAL: A legal process by which to obtain relief from an inaccurate or inequitable assessment. Commonly referred to as a Tax Appeal.

BANKED CUBIC YARD (BCY): Measure of the mineral reserve in the ground (bank) prior to extraction from the Earth. A Banked Cubic Yard (BCY) of a mineral reserve tends to contain more material due to compaction than a Loose Cubic Yard (LCY) of the same material.

BIAS: A preference or inclination used in the development or communication of an appraisal, appraisal review, or appraisal consulting assignment that precludes an appraiser's impartiality.

BUSINESS ENTERPRISE: An entity pursuing an economic activity.

BUSINESS EQUITY: The interests, benefits, and rights inherent in the ownership of a business enterprise or a part thereof in any form (including, but not necessarily limited to, capital stock, partnership interests, cooperatives, sole proprietorships, options, and warrants.)

CAPITALIZATION: The conversion of income into value accomplished by dividing the net income by a Capitalization Rate. Also see Direct Capitalization and Yield Capitalization.

CAPITALIZATION RATE: A rate used to transform net income into a capital sum representing the value of a property. Also see Overall Capitalization Rate.

CASH FLOW ANALYSIS: A study of the anticipated movement of cash into or out of an investment. (Also see Discounted Cash Flow Analysis)

CLIENT: The party or parties who engage an appraiser in a specific assignment, although not necessarily the party or parties paying the appraiser's fee for the performance of the appraiser's service in undertaking and completing that specific assignment.

CONDEMNATION: The act or process of enforcing the government's right of eminent domain.

COMMON LEVEL RATIO: The ratio of the assessment level of a class of property to the average, or "common" level of the actual or true market value level of that class of property. Generally developed through the use of a study of sales for a given time period. Most commonly used in ad valorem property tax assessing.

CONFIDENTIAL INFORMATION: Information that is either identified by the client as confidential when providing it to an appraiser and that is not available from any other source, or classified as confidential or private by applicable law or regulation.

COST: The amount required to create, produce, or obtain a property.

COST APPROACH: In real estate, an accounting method by which the estimated costs of constructing buildings and site improvements are compiled (including the costs of materials, labor, architectural and engineering services, building permits, cost of capital, contractor's overhead and profit, etc.) in order to determine the total cost to create these physical real estate features. These costs (depreciated for age when dealing with existing improvements) are added to the market value of the land, which is estimated in a separate market-based analysis. The total represents either the total cost-new to create the physical real estate improvements, or the depreciated cost/value in-place for existing real estate improvements, on a specific parcel of land that is either actually vacant or is hypothetically vacant in the case where there are existing improvements upon a parcel of land.

This methodology is most appropriate for use when attempting to estimate the value-in-use of a non-marketable service property, or when attempting to determine the economic feasibility of constructing an investment property, or a marketable non-investment property. However, for a variety of economic and ethical reasons (See, "The Cost Approach: It Does Not Indicate Fee Simple Market Value"), the Cost Approach is not appropriate for use when attempting to estimate the market value of the fee simple property rights associated with existing investment property, or existing marketable non-investment property.

CURABLE FUNCTIONAL OBSOLESCENCE: The correction of an item of functional inadequacy whose economic benefit exceeds its cost to cure.

DIRECT CAPITALIZATION: The conversion of a single year's net operating into a capital sum representing the value of the property. This method only considers the present year's net income and does not consider the anticipated future cash flows and reversion value. Sometimes called the "frozen" capitalization method because it capitalizes only one year's net income into perpetuity.

DIRECT SALES COMPARISON: See Sales Comparison Approach.

DISCOUNTED CASH FLOW ANALYSIS: A set of procedures whereby an appraiser estimates the quantity, quality, variability, timing and duration of periodic income, as well as estimating the quantity and timing of the reversion, and discounts each to its present value by the application of a rate (which may be called a "discount" rate, a "risk" rate, or a "yield" rate).

DISCOUNTING: Converting the value of one dollar scheduled or anticipated to be collected in the future to it's present value.

DISCOUNT RATE: An interest rate of return on capital that represents the reward for the perceived investment risk that is used to convert future dollar payments into present value. Also known as a Yield Rate and a Risk Rate.

EMINENT DOMAIN: The right of the government to take private property for public use in exchange for payment of just compensation.

ESTATE: A right or interest in real property; The property of a deceased person.

EXTRAORDINARY ASSUMPTION: An assumption, directly related to a specific appraisal assignment which, if found to be false, could alter the appraiser's opinions and/or conclusions.

FEASIBILITY STUDY: An analysis which measures the economic benefit of one or more actions vs. one or more alternative actions.

FEE SIMPLE ESTATE: All of the rights to real estate that may be owned; the entire Bundle of Rights.

FORCED LIQUIDATION VALUE is the estimated gross amount expressed in terms of money that could be typically realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date.

FUNCTIONAL OBSOLESCENCE: An impairment of the functional adequacy or desirability of a property or building when measured against current market preferences and standards. Such inadequacies may either be curable or incurable, a factor that is decided solely on the test for economic feasibility.

FUNCTIONAL UTILITY: The ability of a property or building to be useful and perform the function for which it is intended when measured against current market tastes and standards; the efficiency of a building's use in terms of architectural style, design, layout, traffic patterns, etc.

HIGHEST AND BEST USE: That single use, from among all other reasonably probable alternative uses that are legally permitted, physically reasonable, and economically feasible which creates the highest present value is the highest and best use.

HYPOTHETICAL CONDITION: That which is contrary to what exists but is supposed for the purpose of analysis.

INCOME CAPITALIZATION APPROACH: A valuation method involving various types of techniques and analyses used to estimate the value of income producing / investment property. Also called the Investment Analysis Valuation Method.

INCURABLE FUNCTIONAL OBSOLESCENCE: When the cost to correct of an item of functional inadequacy exceeds its added value benefit, it is considered incurable.

INTENDED USE: The use or uses of an appraiser's reported appraisal, appraisal review, or appraisal consulting assignment opinion(s) and conclusion(s), as identified by the appraiser based on communication with the client at the time of the assignment.

INTENDED USER: The client and any other party as identified, by name or type, as user(s) of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communication with the client at the time of the assignment.

INVERSE CONDEMNATION: A change in the allowed use of a parcel of real estate through governmental regulation that either substantially reduces or eliminates its utility and its value; A regulatory change having the same negative effect upon the use of a parcel of real estate as would a physical taking. Also called a Regulatory Condemnation.

INVESTMENT ANALYSIS: A study that reflects the relationship between acquisition price and anticipated future benefits of a real estate investment.

INVESTMENT ANALYSIS VALUATION METHOD: A valuation method involving various types of techniques and analyses used to estimate the value of income producing / investment property. Also called the Income Capitalization Approach.

INVESTMENT PROPERTY: A property that has value as an investment (investment value).

LEASED FEE ESTATE: The rights remaining to the fee owner (landlord) of a parcel of real under a lease agreement.

LEASEHOLD ESTATE: The rights / interest of a tenant in a parcel of real estate under a lease contract.

LIQUIDATION VALUE IN PLACE is the estimated gross amount expressed in terms of money that could typically be realized from a failed facility, assuming that the entire facility would be sold intact within a limited time to complete the sale, as of a specific date.

LOOSE CUBIC YARD (LCY): Measure of one (1) cubic yard (CY) of mineral reserve after extraction from the Earth; Loose material not subject to the Earth's compaction; One LCY can contain up to 30% less material than a Banked Cubic Yard (BCY) of the same material.

MARKETABLE NON-INVESTMENT PROPERTY: A property without an earning expectancy, but of a type that is commonly bought and sold, has a value generated by its expected use(s) and/or consumption.

MARKET VALUE: (Real Property) The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in the definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1) Buyer and seller are typically motivated; 2) Both parties are well informed or well advised, and acting in what they consider their own best interests; 3) A reasonable time is allowed for exposure in the open market; 4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; 5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sale concessions granted by anyone associated with the sale.

MARKET VALUE: (Personal Property) FAIR MARKET VALUE is the estimated amount, expressed in terms of money, that may be reasonably expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.

MARKET VALUE: (Personal Property) FAIR MARKET VALUE in CONTINUED USE is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date, and assuming that the earnings support the value reported. (This amount includes all normal direct and indirect costs to make the property fully operational and may not readily pertain to aircraft.)

MARKET VALUE (Personal Property) Fair Market Value - Installed is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date. (This amount includes all normal direct and indirect costs, such as installation and other assemblage costs, to make the property fully operational but does not have to be supported by the business earnings.)

MARKET VALUE (Personal Property) Fair Market Value - Removal is the estimated amount, expressed in terms of money, that may reasonably be expected for a property, between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, as of a specific date, considering the cost of removal of the property to another location.

ORDERLY LIQUIDATION VALUE is the estimated gross amount expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser(s) with the seller being compelled to sell on an as-is, where-is basis as of a specific date.

OVERALL CAPITALIZATION RATE (OAR / Ro): A rate used to convert net income to an overall value of a property. See Capitalization Rate.

PERSONAL PROPERTY: Identifiable tangible objects that are considered by the general public as being "personal." For example, furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all tangible property that is not classified as real estate.

QUARRY: An open excavation for obtaining stone or other raw construction materials.

REAL ESTATE: The tangibles of land and whatever structures thereon that are intended to be permanently affixed to the land.

REAL PROPERTY: The intangibles of having interests, benefits and rights inherent in the ownership of real estate.

REGULATORY CONDEMNATION: A change in the allowed use of a parcel of real estate through governmental regulation that either substantially reduces or eliminates its utility and its value; A regulatory change having the same negative effect upon the use of a parcel of real estate as would a physical taking. Also called an Inverse Condemnation.

REMAINDER: In eminent domain, that portion of a property which is left in possession of its owner after a partial taking.

REPLACEMENT COST NEW: (Personal Property) Replacement cost new is the current cost new, of a similar new property having the nearest equivalent utility as the property being appraised.

RESTRICTED-USE APPRAISAL REPORT: USPAP Standards Rule 2-2(c) describes the Restricted-Use Appraisal Report as being unlike the Self-contained and Summary Reports in that the Restricted-Use Appraisal Report has a very specific purpose as being restricted to the sole and exclusive use of the client for whom the appraisal has been made. USPAP requires that this report "state a prominent use restriction that limits use of the report to the client and warns that the appraiser’s opinions and conclusions set forth in the report cannot be understood properly without additional information in the appraiser’s workfile." This type of report can never be intended for use by any third party.

REVERSION (VALUE): The estimated overall market value of a property at the end of a projected holding period.

ROLLING STOCK: Any mobile piece of equipment. Usually trucks, mobile cranes, excavators, pavers, loaders, rollers, etc.

ROYALTY: A share of the product or profit reserved by the grantor especially of an oil or mining lease. Usually the rent payment under a royalty lease agreement.

ROYALTY ANALYSIS: An analysis of a royalty lease agreement.

ROYALTY LEASE AGREEMENT: A contract between the owner of the fee simple estate to a parcel of land and a tenant mining operator. Payment arrangements in such leases vary, but virtually always include a rent, or "royalty" payment to the landlord / property owner based upon the amount of material actually produced or sold from the property.

SALES COMPARISON APPROACH: An appraisal technique in real property valuation that emulates the actions of market participants who purchase real estate for their individual use, either for business or personal use. In this method, which is essentially a form of comparison shopping, recently sold properties that are physically and locationally similar (comparable) to the property being appraised (the "subject" property) are compared to the subject property with each sold property being compensated in dollar amounts to make it equal to the subject property for differences perceived to have value in the local market place. The market value of the subject property lies within the range of compensated sales prices of these sales. This methodology is not suitable for the valuation of an investment property or a service property.

SALVAGE VALUE is the estimated amount expressed in terms of money that may be expected for the whole property or a component of the whole property that is retired from service for use elsewhere, as of a specific date.

SCOPE OF WORK: The amount and type of information researched and the analysis applied in an assignment. Scope of work includes, but is not limited to, the following: § the degree to which the property is inspected or identified; § the extent of research into physical or economic factors that could affect the property; § the extent of data research; and § the type and extent of analysis applied to arrive at opinions or conclusions.

SELF-CONTAINED APPRAISAL REPORT: The most detailed type of appraisal report that must contain virtually every document, every item of data, and every portion of every analysis and explanation of all analyses employed by an appraiser in reaching the final valuation estimate.

SERVICE PROPERTY: A type of property that is so unique that it only has value to the owner and is not commonly bought and sold in the market. e.g. An oil refinery. The only valuation method appropriate for the valuation of a service property is the Cost Approach.

SUMMARY APPRAISAL REPORT: Similar to the Self-contained Appraisal Report, with a lower standard of required documentation.

TAX APPEAL: A legal process by which to obtain relief from an inaccurate or inequitable assessment. See Assessment Appeal.

TAX RATE: The mathematical residual expressed as a percentage arrived at be dividing the total budget of the taxing district by the total value of all assessments in that taxing district.

USPAP: The Uniform Standards of Professional Appraisal Practice. The regulatory appraisal standards of the Appraisal Standards Board (ASB) of the Appraisal Foundation.

USE VALUE (VALUE IN USE): The value of a particular property for a specific use.

VALUE: The monetary relationship between properties and those who buy, sell, or use those properties.

YIELD CAPITALIZATION: A concept of appraising income-producing property that considers the present value of all anticipated future cash flows, including the reversion value. Yield Capitalization is unlike Direct Capitalization in that Direct Capitalization only considers the capitalized value the cash flow of a single year.