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Making Heads or Tails out of a Machinery & Equipment Appraisal

Location of Subject Appraisal:Gastonia, North Carolina

Machinery & Equipment Appraisal Basics

USPAP Standard 7: Personal Property Appraisal, Development

USPAP Standard 8: Personal Property, Reporting– Self contained– Summary– Restricted use

M&E Appraisers No License required – Caveat Utilitor Machinery & Equipment Designations

– PPS - International Association of Assessing Officers

– ASA, AM – American Society of Appraisers– MCMEA, CMEA – NEBB Institute– CEA/ AEA - Association of Machinery & Equipment

Appraisers

Letter of Transmittal

Appraisal Contents

Appraisal Contents (Continued)

Scope of Work

Scope of Work (Continued)

Caveat Utilitor

The Subject Machine Shop Equipment Turning is a machining process in which a cutting tool, typically a non-

rotary tool bit, describes a helical toolpath by moving more or less linearly while the workpiece rotates.

Forming- A CNC press brake uses programs to automatically execute a series of bending operations that leads to increased productivity and flexibility.

Milling is the machining process of using rotary cutters to remove material[1] from a workpiece advancing (or feeding) in a direction at an angle with the axis of the tool.

Laser cutting is a technology that uses a laser to cut materials, and is typically used for industrial manufacturing applications. Laser cutting works by directing the output of a high-power laser, by computer, at the material to be cut.

Press with Bending Die & a Cutting Tool

Equipment Detail

Equipment Detail

Equipment Detail

Equipment Detail

2007 Mazak Hyper Turbo Laser

Historical Cost - $570,000

FMV Per Appraisal - $440,000

Gaston County Tax Value - $467,400

Difference = (6.2%)

2007 Ermak Press Brake

Historical Cost - $75,000

FMV Per Appraisal - $44,000

Gaston County Tax Value - $47,250

Difference = (7.4%)

2004 HAAS Lathe VF-4D Milling Center

Historical Cost - $70,095

FMV Per Appraisal - $54,000

Gaston County Tax Value - $17,524

Difference = 68%

3 CNC Mill HAAS VF-4D 36942 2004 Good Condition

5 $54,000 $25,000

Appraisal Notes HAAS VF-4D

M&E Appraisal Data Collection FormItem NumberDepreciation Schedule InformationTypeManufacturerModel No.Serial No.YearCondition:      

§ Is this machine working well and at peak function?§ How many hours each day in use?§ Does it need anything presently (repair/maint)?§ Are repairs done by staff or third party?§ Has any major repair been done lately?§ Is there a regular service schedule on this machine?§ Have there been any upgrades made?§ Have there been any special accessories added?§ Electrical Specs: wattage, ampage, ohms, etc.§ Capacity: ft dimensions, length, size, etc.§ How easily could you sell it?§ What would you ask for it?§ Do you keep maintenance records?§ If so can I get a copy?

Comments

When PurchasedPurchased New or UsedAmount Paid (including installation)Installation CostsWho purchased from

Appraisal Contacts (Partial List)TURNER BUSINESS APPRAISERS

List of contacts for M&E values Compressed Air Systems Jack Connor – assisted me on the J&L Appraisal. He provided information on Kaeser Air Compressors P: 800/626-8177 Web: www.compressedairsystems.com OSS, LLC – Scott provided me with information on the Clausing Lathe – J&L Appraisal 380 Wingo Heights Rd 4B Spartanburg, SC 29303 P: 864/585-3275 Web? Jeffreys – A division of Phillips Kip Asmuth – very helpful regarding the value of the HAAS CNC Mill & Lathe – J&L Appraisal P: 336/456-3242 Email: kasmuth@phillipscorp.com Bit Yack CAM Patrick Moonie – helpful regarding the pricing of the Cincinnatti Mill – J&L Appraisal P: 804/405-9540 Machinery Solutions Daniel Jones, Sales Manager – provided me with a second opnion on the Cincinnatti Mill and an opinion on the Doosan Lathe PO Box 130 Lexington, S.C. 29071 803/359-7000

Final Value Summary

Value Reconciliation

Seventh Inning Stretch

Mass Appraisal Method Trend & Depreciate

Making Heads or Tails out of the M&E Appraisal Compared to the Ad Valorem Appraisal

Source M&E Appraisal County Appraisal Reconciliation SSCategory March 28, 2012 January 1, 2012 Difference Percent Variance

Machine Shop Equipment $1,315,300 $1,084,582 $230,718 21%Shop Support and Ancillary Items $12,500 $6,912 $5,588 81%

Appraised Value $1,327,800 $1,091,494 $236,306 22%

Reconciliation of M&E Appraisal with County Ad Valorem Appraisal

Nuances Among the Appraisal Method Utilized by the M&E Appraiser vs. the Mass Appraiser

The M&E appraiser often utilizes the market approach The mass appraiser is prone to exclusively utilize the cost

approach When a cost approach is necessary USPAP SR-7.4

requires the M&E appraiser to calculate the accrued depreciation. The M&E appraiser must estimate the effective age of the property – Effective age can be greater than, equal to, or less than

chronological age The mass appraisal cost approach utilized in most

jurisdictions presume chronological age = effective age.

Economic Obsolescence The Inutility Method

Scale Factor 0.55 0.6 0.65 0.7 0.75 0.8Plant Utilization (actual/capacity) Inutility Factor Inutility Factor Inutility Factor Inutility Factor Inutility Factor Inutility Factor

50% 31.7% 34.0% 36.3% 38.4% 40.5% 42.6%60% 24.5% 26.4% 28.3% 30.1% 31.8% 33.5%70% 17.8% 19.3% 20.7% 22.1% 23.5% 24.8%80% 11.5% 12.5% 13.5% 14.5% 15.4% 16.3%90% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1%

100% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Inutility formula = [(Actual Production/Design Capacity)^(scale factor)] X 100

Scale Factor:Studies indicate cost-capacity factors average .6 to .7

Note:Design Capacity < Max Capacity. It is based upon a theoretical product mix and often allows for future expansion.

U.S. Capacity Utilization Rates

U.S. average capacity utilization total industry1972-2012 = 80.2%

Manufacturing average capacity utilization1972-2012 = 78.7%

Source: Board of Governors of the Federal Reserve SystemIndustrial Production and Capacity Utilization – G.17 Release Date July 16, 2013

Takeaways Obsolescence If the inutility calculation is utilized to quantify economic

obsolescence remember to ask questions:– Did you Calculate the RCN for the subject M&E?– How did you calculate the effective age of the M&E?– Did the market approach corroborate the obsolescence?

• Request copies of comps

The source documents which depict the plant capacity and the plant utilization

Perform your own analysis to determine what are customary utilization rates for the subject Company’s industry

Attempt to find comparables to verify the presence of economic or functional obsolescence

Takeaways M&E appraisal Caveat Utilitor – M&E appraisal is an unregulated industry

– There are plenty of good M&E appraisers – Perform some due diligence to ascertain the validity of the M&E

appraisal To corroborate the veracity of an M&E appraisal ask for these

items:– Data collection forms or their equivalent– Conversation notes and contact information to ascertain the

RCN and market approach– Ask the appraiser for the contact information of the expert

who gave him/her the tour at the subject company

Discussion & Questions

The Finish Line!