A 3-leader tree has been hit by a car and de-barked about 33%. The tree has other problems: it's under utility lines and has a weak structure. Let's say that its useful lifespan has been cut 67%. I think one leader will decline in the near term as a result of the accident, and if that happens, the tree probably should be removed rather than pruned. I am vacillating between recommending removal now, and recommending the owner wait a few years.
How does this fit into the appraisal picture? IF I say remove the tree now, the cost of removal becomes part of the loss. If I say remove the tree in 10 years, the cost of removal is not part of the loss. However, were it not for the accident, the tree probably would not have had to be removed for 30 years. Seems as though the removal cost should be amortized and a part of it included in the loss. Or is that all included inthe loss of value?

Reply to post by Ed Milhous, on April 02, 2000 at 11:37:19:

Interesting problem Ed.

A simplified appraoch... and one that many appraisers would probably use... would be to say value was x before the damage, value is now .33x (on an straight arithmetic basis). The real problem is how does that 67% reduction in life relate to present value.

Let's say your opinion of a 30 year remaining life and of value before the damage are correct. Given a 30 year life you probably made no deduction for ultimate removal... it's assumed to be in value already. So what you are really saying is that x is the Present Value (PV) of the stream of benefits to be experienced yearly over the 30 year life. Assuming a level benefits stream and some discount rate (say 30 year treasuries) you should be able to calculate the future benefits in each of the 30 years. Table those future benefits. Now calculate the PV of only the next 10 years. Subtract the 10 year PV from the 30 year PV and you should have the reduction in value on a PV basis. You might modify the stream of benefits to reflect lower benefits in later years as the tree declines towards death... but they should discount to the PV you started with (I assume by TFM or RCM or CoC). A front loaded, no level straem would give you a higher 10 year PV and lower loss.

Now the tricky part (first part wasn't for a finance guy like you!). Depending on the discount rate over a 30 year life the removal cost may have discounted to practically nothing over a 30 year term... maybe that's why it was not an explicit deduction. But if you plug in a removal cost in year 10 (future value of the work) and discount it to year 0 (today) and then assign a portion of it to the damage that might be reasonable. I'm not quite sure how to determine the portion... I'd have to do some modeling.

Let us know if that sort of approach seems to make sense to you.

Reply to post by Scott Cullen, on April 02, 2000 at 11:37:19:

Scott, I played with this some, but ran into some conundrums. So I gave it up and used more traditional methods.
I do think the use of accepted financial functions offers real-world validity to tree appraisal. At least such can be explained to the layman in terms s/he understands, and they are not so contrived as, for example, the TFM.
Perhaps if the stock market continues its nosedive, I will have time to twiddle w/this.

Reply to post by Ed, on April 02, 2000 at 14:33:03:

Yes, time to twiddle. I think PV and discounting could be used to establish and validate a lot of typical tree appraisal adjustments... but time is the problem.

I think TFM is not such a contrivance taken to its essence. It's just a calculation and application of a unit cost. I think it's more presentation complexity than anything.