Wow, things have been quiet here.

The 9th Edition GPA is set for introduction (but not release apparently) at the ISA Conferenece next week and is on the agenda for the ASCA Conference this Fall. So I thought I'd open this thread to encourage any a) current opinion on the rumored changes, b) feedback on the changes introduced at either of the presentations or c) comments on the 9th in general once it's published.

Reply to post by Scott Cullen, on July 27, 1999 at 08:02:06:

Since I'll be in the ISA Board meeting all day Saturday, I'll be counting on the rest of you guys to give me the scoop on what's new.

Reply to post by Russ Carlson, on July 27, 1999 at 08:02:06:

I'm happy to report that the workshop was extremely helpful and very well presented. What a Crew that CTLA is!!!!
Verytreelylew

Reply to post by lewbloch, on July 30, 1999 at 15:16:59:

Well Lew, we would not have expected any less of you CTLA guys! But, your opinion is not Independent, Impartial and disinterested.... I hope we hear from some of your audience when they get home.

Reply to post by Scott Cullen, on July 27, 1999 at 08:02:06:

CTLA appears to have reversed on two (2) significant changes which were proposed in draft.

1) SPECIES RATING. The species rating has been retained in TF after an initial proposal that it be dropped. Apparently many individuals and groups had voiced opposition to such a change. IMHO retaining species is most important for a) maintaining consistency with earlier editions and the culture which has evolved, b) maintaining maximum accomodation for appraiser judgment, and c) maintaining explicit treatment of all factors. But CTLA's initial suggestion for dropping it should not be forgotten. It would have been the same as rating all species at 100%. Simply because the rating has existed and groups have produced lists the culture has often been read to mean species can never be 100%, "there are no perfect species, let's be 'reasonable.' " There are good arguments to be made that species ratings should often be 100%, as for example suggested by Favero in an earlier thread.

2) INSTALLATION COST in TF. The draft changed from 8th in that installation cost for a replacement size tree (say 4") was added in to the equation after extrapolating out unit cost for the replacement size tree to the size of the appraised tree and depreciating for Condition and Location. CTLA appears to have gone back to extrapolating out plant cost and installation cost (if the appraiser has chosen to apply it) and depreciating the entire amount. IMHO this is much more consistent with a generally accepted Depreciated Replacement Cost Approach to value: add up all costs to reproduce the appraised object (materials, labor, transport, overhead and profit) and depreciate the total to the value of the appraised subject. Again all factors are consistently and explicitly considered rather than the appraiser or CTLA arbitrarily or implicitly reducing the cost inputs to make values more "reasonable."

Reply to post by Scott Cullen, on July 27, 1999 at 08:02:06:

Even if CTLA were to drop species rating as a factor, the exercise of producing lists of ratings was of value, at least in the Mid-Atlantic Chapter. Several local governments adopted the ratings for use on, e.g., development project valuations. As keeper of that information for the chaptewr, I have had numerous inquiries from "outsiders" who want to use the ratings to select trees and to help them decide what trees to retain on a site.

Reply to post by Scott Cullen, on July 27, 1999 at 08:02:06:

The 9th Edition makes a great step forward by distinguishing the three (3) traditional appraisal approaches to value: depreciated replacement cost (the familiar RCM, TFM & CoC); sales comparable or market; and income.

The cost approaches remain the workhorses but there may increased use of the others in the future. The 9th Edition provides an example of the Income Approach which is specifically Direct Income Capitalization and presnts the formula Value = Income / Rate, i.e. V=I/R.

In the example presented at the ISA conference session it was $100,000 = $10,000 / .10. That is, if an appraised object (tree, business, piece of equipment, whatever) provides $10,000 annual net income and the rate of return is 10% then the appraised value is $100,000. A number of people observed that this at first seems counter-intuitive, as the rate of return goes up value declines if income remains constant. E.G $10,000/.20=$50,000 "If something has a higher rate of return shouldn't it be worth more?"

Here's the explanation. There is an inverse relationship between capitalization rate and value if income remains constant. It may seem intuitive that value and rate should increase together, but that cannot happen if income is constant. Think of it this way: if you want or require a 10% return on your money and you invest $100,000 (in a bank account, in bonds, in a truck, whatever) you'll require a $10,000 annual net income or return. If you require a 20% rate of return on the same $100,000 investment then it must produce $20,000 annual net income. Here the value of the investment and the rate are givens and you solve for income. I=VxR. Say the givens are income and rate (the truck will produce $10,000 in income you require a 10% rate of return on your money) and you want to know what you can afford to pay for the truck, that is what's it worth? Solve this time for value. V=I/R or $10,000/.10=$100,000. If income is constant at $10,000 and you need a 10% return the truck is worth no more than $100,000 to you. If you require a 15% return the truck is worth less. $10,000/.15=$66,6667.

This formula is also described as the Present Value of a Perpetuity. It assumes that the income stream goes on forever. As an example if you invest $100,000 in an urban forest which is a perpetual system - replacement, regrowth and removal are all balanced - your $10,000 income (net after maintenance costs) goes on forever. If on the otherhand the asset has a limited life like a single tree or a truck, this formula makes another assumption: that at the end of the useful life your principal is returned, there is a "reversionary value" or simply "reversion." You get the 10% annual interest on the bond and the principal returned at maturity. But if the asset depreciates away like a truck or a tree you must also consider periodic recapture of principal or amortization(return OF your money) in addition to the return ON your money. So the total return you require would be higher. How much higher would depend on the remaining life of the asset.

So if net income remains constant rate of return must increase as remaining life gets shorter in order to recapture your investment. Or if income and rate are constant then value declines as remaining life gets shorter. That's why an older declining tree is worth less than a young vigorous one.

Sounds complex? Well it is. Even if there were easily measureable incomes from trees. The income approach has a lot of potential but approach it with caution, particulary Direct Income Capitalization. If you don't understand it, don't use it.

A more applicable income approach may be Discounted Cash Flow, particularly as various tree benefits models evolve (e.g. CityGreen(TM), Quantitree(TM), etc. Maybe in the 10th Edition.

Reply to post by Scott Cullen, on July 27, 1999 at 08:02:06:

In the past year or two, I have been trying to get CTLA to consider a refinement to the Replacement Method. Having read a late spring draft of the 9th edition before attending the 9th edition workshop (Tree Academy) at the ISA Annual Meeting at Stamford, I was eager to see if my strong feelings about the RM would be considered. They weren't in the Draft, nor mentioned in the workshop, so I voiced my thoughts to Jim Ingram at the end of the workshop. A few days later, Jim told me my ideas would be included in the 9th.

For years I have been applying the condition factor against only the wholesale cost of the plant/tree and the location factor against only the installation cost. That is the way I have set up my spreadsheets in Microsoft Excel.

Reasonning: I do a lot of appraisals (I always have a backlog of up to a dozen cases) and most are in situations where there is little chance that the tree/shrub will actually be replaced. The reasons are many: not important, no space left due growth of adjacent plants, site now too shaded for a (full sun) nursery replacement to become established, digging a new hole would injure adjacent trees, site not visible from house, yard, or path, claimant needs the money for other things, etc. etc. So why should you give the claimant the installation $? Location factors can eliminate or reduce the installation costs to a reasonable amount without affecting the wholesale tree cost which basically equates to the value of the former standing tree.
Seldom does the lost plant have a significant cost basis for the homeowner; he probably bought the tree or shrub as part of the land or landscaping. On the other hand, if the owner had either planted (or paid to have planted) the lost plant, then the location factors can be high enough to cover that effort or expense.

In all our guides and workshops, we never show examples of low value or low location situations and yet that may be the case with 99% of the trees we appraise, at least that is my experience. The last two appraisal workshops in Ohio included trees in wooded locations.

Now I'm wondering if my idea should be applied to the Trunk Formula.

Happy Labor Day Weekend,
Fred

Reply to post by Fred J Robinson, on August 06, 1999 at 07:31:19:

Hi Fred. I know a young man who starts next week at a nursery school adjoining the New Canaan Nature Center. if I run into your sister I'll say hello.

I agree with part of your suggestion but not with others:

FRED: "RE Replacement Cost Method (RCM) For years I have been applying the condition factor against only the wholesale cost of the plant/tree and the location factor against only the installation cost. That is the way I have set up my spreadsheets in Microsoft Excel."

SCOTT: As background for the reader, 8th (p.50 3rd printing) suggested depeciating installed cost (wholesale plant cost + retail markup + installation cost + profit) by Condition and Location. (There were some twists and turns distinguishing plants replaced in place vs. those not, but let's leave those aside for now.)

SCOTT: I think we have to go back to the essence of the Cost Approach to Value (which includes RCM, TFM and CoC). It is that the value of the appraised object is a function of the benefits it provides (or provided). Rather than try to quantify them (as in a benefits approach) a cost approach assumes that whatever the benefits were, if the plant is replaced the benefits are replaced, the damged party is made whole and value is restored and so Replacement Cost provides an indication of value. Replacement Cost traditionally includes all costs (materials, labor, transport, equipment, expertise, profit, overhead, whatever) . But this initial cost may overstate value if the object provides less benefits than the idealized replacement (in 100% condition in 100% location). So depreciation is applied to reflect factors such as condition, remaining safe useful life, benefit provided or experienced. Depreciation is typically applied to all elements of replacement cost.

FRED: "Reasonning: I do a lot of appraisals (I always have a backlog of up to a dozen cases) and most are in situations where there is little chance that the tree/shrub will actually be replaced. The reasons are many: not important, no space left due growth of adjacent plants, site now too shaded for a (full sun) nursery replacement to become established, digging a new hole would injure adjacent trees, site not visible from house, yard, or path, claimant needs the money for other things, etc. etc. So why should you give the claimant the installation $?"

SCOTT: I think we need to distinguish the significance of theses reasons for non-replacement, they don't all have the same impact on value. If the tree is in an unimportant location, out of view, if it is crowded out by others and adds little marginally to the landscape, the it delivers fewer benefits and should be depreciated to reflect that. If the site won't let the replacement plant reach the size of the old, or the owner wants the money for soemthing else or a hole can't be dug without damaging others am actual replacement may be impossible. But that does not mean the plant did not provide benefits. To the contrary it means the benefits can't be replaced and the money compensates for that. Assuming there was benefit=value the damaged party should get either the actual replacement or the cash equivilant to be made whole.

SCOTT: I agree , why provide an award including undepreciated installation cost if there were not = benefits. But if there were no benefits, why provide wholesale plant cost either?

FRED: "Location factors can eliminate or reduce the installation costs to a reasonable amount without affecting the wholesale tree cost which basically equates to the value of the former standing tree." You may know intuitively that the result you calculate taking all steps will come out pretty close to the wholesale plant cost only. At least some of the time. But maybe some of the time not. Accurate or not you are making implicit depreciation judgments which may not be consistent with the methodology applied by others and is not explicit in the analysis.

The BIG point is that if we have a Depreciated Replacement Cost Approach to value a) it should follow the traditional format of depreciating all components of replacement cost, b) it should be done consistently across methods (RCM, TFM, CoC) and c) all depreciation adjustments should be explicit. More is explained about depreciation and the depreciated replacement cost approach in my article "Tree Appraisal: What is the Trunk Formula Method" which is linked here on Knothole. There is a more detailed thread on consistent and explicit adjustments @ VALUATION: Factual vs. Methodological Determinations 6/10/99 (593).

FRED: "Seldom does the lost plant have a significant cost basis for the homeowner; he probably bought the tree or shrub as part of the land or landscaping. On the other hand, if the owner had either planted (or paid to have planted) the lost plant, then the location factors can be high enough to cover that effort or expense."

SCOTT: We must distinguish Replacement Cost, a function of production or reproduction used to provide a Cost indication of value, from Historical Cost. In a replacemnt cost approach historical cost may be an indicator of use or benefits to guide depreciation; or may be used to test reasonableness of the RCM result if the historical cost is fairly recent; but historical cost is not directly considered, it's a different quantity. It does not matter if the owner separately paid for the plant or not. What matters is the benefits it provides today and whether they will be missed tomorrow if the plant is gone. (This of course is in the abstract and the depreciation which is applied will depend on the definition of vale and applicable case law... there is at least one case cited in the literature in which the court ruled that indigenous as opposed to planted trees have no value separate from contribution to land value).

FRED: "Now I'm wondering if my idea should be applied to the Trunk Formula." SCOTT: As noted above depreciation should be explicit and consistent across methods. Sum all costs and depreciate the sum by all factors. Even if the arithmentic result can be made the same by variable treatment, the variation causes confusion. We must be consistent. On a related note, the selection of wholesale, retail or installed cost in TFM should be made by the appraiser not dictated by any group for all situations and it should reflect the cost to be incurred by the damaged party to accomplish replacement.

Scott

Reply to post by Scott, on September 04, 1999 at 20:02:46:

While I feel very confident that depreciation should be of the entire package of replacement costs - because it's consistent w/accepted practice and for consistency across methods - at least in the standard exercise I think:

a) we can certainly consider alternative techniques within methods as they are explicity identified as 'the xyz technique' or whatever and explained.

b) we need to do some more research and documentation on the sequence of depreciation adjustments. Does it matter? Do mathematical laws (distributive, mulplicative.. you remember them from 10th grade better tha I do?) make it all come out in the wash or does sequence cause a difference? What should the sequence(s) be? There is appraisal literature on the sequence of depreciation adjustments, I'll do some digging.

Reply to post by Scott, on September 07, 1999 at 14:09:18:

Scott, there is no mathematical difference in the sequence of depreciation, as used in the TFM (and other) methods, as long as the depreciation is the same type (multiplying a percentage). It must be applied at the same level of calculation, however.

In TFM 8th edition, we apply a rating (percentage) for species, then further modify that result (add Replacement Cost), then finally adjust for Condition and Location. The latter two can be taken in either order, as they are at the same level.

Heres an example:
We find Basic Value to be $6500, Replacement Cost $500, Species rated at 80%, Condition 70%, Location 60%

BV x SPP + RC x C x L
$6500 x 0.80 + 500 x 0.70 x 0.60 = $2394

BV x SPP + RC x L x C
$6500 x 0.80 + 500 x 0.60 x 0.70 = $2394

BV x C + RC x L x SPP
$6500 x 0.60 + 500 x 0.70 x 0.80 = $2424

BV + RC x SPP x C x L
$6500 + 500 x 0.80 x 0.70 x 0.60 = $2352

The point is that by changing the order at different levels, there is a big change, but order within the same level doesn't matter. The first two examples are both correct. The last two are wrong, as the order and level was changed.

(I do remember SOME of my 10th grade math.)

Reply to post by Russ Carlson, on September 08, 1999 at 08:03:10:

Thank Russ, good examples. Let me see if I have this right.

"Heres an example:
We find Basic Value to be $6500, Replacement Cost $500, Species rated at 80%, Condition 70%, Location 60%" You're using BV to mean the increment above replaceable size ("Basic Price" which is really a unit cost x additonal units of trunk area).

((BV x SPP) + RC) x C x L
Here BV is depreciated by Species, RC is not per 8th, they are summed and depreciated by C & L.

((BV x SPP) + RC) x L x C
Here the input to L & C operation is the same, only the order of L & C have changed. No arithmetic change.

((BV x C) + RC) x L x SPP
(($6500 x 0.60) + 500) x 0.70 x 0.80 = $2464
Here, I think, you've solved as BV depreciated by C + undepreciated RC. That sum depreciated by L & S. (Except, I get a diffeent result, haven't been able to replicate yours. The equation you've written, however could also be interpreted as:
((BV x C) + (RC x L)) x SPP or
((BV x C) + (RX x L x SPP))

(BV + RC) x SPP x C x L
Here, you've summed BV & RC and depreciated it by all three factors, which I think was per 7th and previous. Your result $2352 prooves. But conceptually the only difference is that you've depreciated RC x S ($500 x .8 = $400) so there should be a $100 difference but there's only a $42 difference. I haven't figured that out yet.

"The point is that by changing the order at different levels, there is a big change, but order within the same level doesn't matter. The first two examples are both correct. The last two are wrong, as the order and level was changed."

My point is that it's very easy to change the result by changing sequence or as you say level, and even order changes may be tricky if the base is changed. While the guide is a guide is a guide appraisers better be able to explain and stand behind a non-typical sequence.

Further, whatever sequence or order it should reflect the theory of depreciation, i.e. that replacment cost (materials, labor, transport, equipment, expertise, profit, overhead, establishment) for the idealized replacement should be depreciated to reflect the benefits that are or were provided by the subject. It can get very messy of you start depreciating components differentially. Maybe supportable but messy.

Reply to post by Scott, on September 08, 1999 at 22:41:28:

>>Scott wrote:
((BV x C) + RC) x L x SPP
(($6500 x 0.60) + 500) x 0.70 x 0.80 = $2464
Here, I think, you've solved as BV depreciated by C + undepreciated RC. That sum depreciated by L & S. (Except, I get
a diffeent result, haven't been able to replicate yours.<<

This is correct, as to my sequencing. And every time I tried it on 2 different calculators and a paper, it came out as shown... =2464

Maybe you've forgotten much more of 10th grade than you think!

Reply to post by Russ Carlson, on September 09, 1999 at 08:14:38:

"This is correct, as to my sequencing. And every time I tried it on 2 different calculators and a paper, it came out as shown... =2464. Maybe you've forgotten much more of 10th grade than you think! "

I remember some but am pretty lost without my RPN calculator. So I'm glad I used it to get 2464 as you did. What confused me was your initial post:

"BV x C + RC x L x SPP
$6500 x 0.60 + 500 x 0.70 x 0.80 = $2424"