Hi
Does anyone know how the interest rates in table 1 page 8 were picked? What are they based on? I was deposed recently and was ask where these percentages came from.

Reply to post by Hugh Tyer, on March 19, 2000 at 17:34:24:

That's an excellent question. (Maybe the webmaster will shift it over to the Valuation area).

IMHO CTLA should be providing exactly that sort of explanation along with theoretical support - including specific (not vague or general) citation(s) - for the various techniques or procedures to provide Foundation for the users who find themselves asked for it... typically in deposition or on the witness stand. Lew... are you out there? Where's the 9th going on this issue.

On this specifc point are the rates A) real interest rates, B) nominal interest rates or C) inflation rates (i.e. B minus C)? In any case I think (though I'll have to double check) that the Uniform Standards of Professional Appraisal Practice (USPAP) require the appraiser to support the selection of any such type of rate and the specific percentage.

The bigger issue is whether the use of compounding (at any rate) is A) theoretically supported as a valuation tool or B) is even descriptive of the damage incurred or the costs to be incurred to cure it. The research I've done so far suggests the answer is "no" to both questions in most instances.

Reply to post by Scott Cullen, on March 19, 2000 at 17:34:24:

The table on page 8 merely lists possible rates of interest for the appraiser to select. It is not an instruction, but gives some examples. Of course the appraiser may select an entirely different rate if he or she deems appropriate. As you know, Scott, as I have repeated it before, the GUIDE, and the forms are not instruction or how-to books, only a guideline to methodologies and suggestions. As you astutely state, the compounded interest may not be appropriate for many cases.
Very treely,
Lew

Reply to post by lewbloch, on March 20, 2000 at 07:04:06:

Lew, do you think the Guide should provide some guidance concerning when and why cost compounding might or might not be appropriate?

If not, where should the tree appraiser look for such guidance? Maybe there's a need for an "instruction or how-to" book or text.

Scott

Reply to post by Scott, on March 20, 2000 at 18:20:58:

Hi Scott,
Just got back into town or woul've answered sooner. Id I'm not mistaken, i thing the Guide does give some verbiage about when compounding might be appropriate. As you know, it is just another tool that the appraiser has to use.
Lew

Reply to post by lewbloch, on March 23, 2000 at 07:01:29:

How did the T&L conference go Lew?

You're right. 8th suggests compounding for shrubs, hedges and vines. 1997 CoC Form seems to provide some alternative data inputs but I don't think it offers much guidance on when and when not appropriate.

The research I've done finds no theoretical support for compounding current replacement cost to "grow" a plant to larger size in lieu of using multiple plants or a TFM type extrapolation. Yes it trends in the right direction but how do you know when it overstates value? There is a lot of literature that points out that pitfall. Compounding yields Future Value. You want Present Value.

If you use compounding of establishment costs as part of a damages estimate and the damage award is made today, you've over compensated for the "damage" related to those future expenditures.... the damaged party has the money in hand and can invest it and earn even more interest in the meantime. If the damage award is to be made today you should be using the exact opposite of compounding - discounting or a sinking fund factor - to reduce the future costs to present value.

I don't know where 9th is going on this but if there is no theoretical support or very limited potential application the does the Guide "owe" the reader more guidance or caution if it clearly says "go ahead, use compounding?"

Scott

Reply to post by Scott, on March 24, 2000 at 18:01:11:

Hi Scott,
I think the conference went well and we all learned things and had a good time.
I do agree with your comments about compounding and try to be careful when i use it. I don't think i have ever used it as part of C of C but have used it for large wisteria vines twice and on some shrubbery one time.
Keep it up!
very treely,
lew