The 8th Edition (p.69) specifies "post-restoration maintenance" as one of three classes of cost to be reflected in appraised value. The 1997 Field Form Report for Cost of Cure specifically allows for such costs (compounded). The draft 9th Edition, similarly, allows for plant establishment costs.

(As an aside the 9th Edition language is much more accurately descriptive of the properly included items. As a cost approach to value establishments "costs" are properly part of the necessary overall costs. "Post-restoration maintenance" could easily be misconstrued to include or refer to regular, ongoing maintenance expenditures. These are properly operating expenses, which would be the same as incurred for the original plant, and which are NOT properly part of the capital, replacement cost (cost of cure).)

(As another aside if one assumes that the "cost of cure" is used as a damage award and the award is made today (in financial year 0), then compounding the post restoration establishment does not seem proper and is excessive. If the damage party receives the simple sum of those costs today and will not incur them until years 1.....x, the damaged party can invest the funds at the stated rate of interest that would have been used in compounding so compounding is unnecessary. Going a step further, if the post restoration establishment costs are projected forward to allow for inflation then they should be reduced by a sinking fund factor if the award is to be made today. But that's a whole nother issue.)

The real point of this thread is to consider how such establishment expenses are properly considered in TFM. It does seem proper to consider them... they are necessary for the survival of large plants, the literature seems to suggest 1 year per diameter inch. The question is whether these costs are already reflected in an installed and guaranteed unit cost/" which is gets extrapolated OR should be estimated and added in (either as a markup to the unit cost before extrapolation or as additional items after extrapolation) before depreciation.

What do you think?

Reply to post by Scott Cullen, on February 17, 2000 at 14:41:24:

I do not think any additional establishment costs should be added to Trunk Formula Method (TFM).

AS I've stated before, I think of TFM as a compounding cost method, where the compounding rate and term are determined not by fiscal or economical values we impose, but by the growth of the tree itself. We start with our economic factor, the 'common denominator' of value, then 'compound' it based on the cross-sectional area of the trunk at specified height. This area is determined by the tree- its growth rate over a period of years.

The basic value, or $/square inch, is based on nursery production costs (when using wholesale costs, with other factors included when using other cost bases). We take the cost to produce one square inch of tree, and extend or compound it to the size of the subject tree.

Reply to post by Russ Carlson, on February 17, 2000 at 14:41:24:

Russ, I think we conceptualize TFM somewhat differently. That's your 2nd paragraph... I'll deal with that last.

I'll start with your last paragraph which is more directly to the point of this thread. You said "We take the cost to produce one square inch of tree, and extend or compound it to the size of the subject tree." That's very descriptive (except for the compounding part)... it's exactly what is done. We extend or extrapolate the unit cost to the size of the subject. "Production" is the proper term to use since the underlying theory of "replacement cost approaches" is to produce the replacement rather than buy it off the shelf (think of building a new house rather than buying a new one). If you use wholesale unit cost production stops at b&b in the wholesaler' yard. If you use installed unit cost production gets the tree on site and installed today. Arboriculturally, this large tree put in the ground will still require establishment period care. I would suggest that those establishment costs should be accurately reflected. So are you suggesting that "installed unit cost" already includes establishment costs OR that there should be no such costs in TFM but there should in CoC?

Now, back to your conceptualization. I don't think "compounding" is an accurately descriptive term here. The trunk area unit cost is extended or extrapolated in a linear (excepting ATA), or arithmetic fashion over increasing units of trunk area... there is no compounding math here. The increment in trunk area over the "replaceable" size tree we obtained the unit cost from is a indeed function of the subject's growth rate over a term of years. But it is incidental. There is no explicit consideration of the term of years and the replacement tree hypothetically growing under nursery conditions might have an entirely different term of years to reach subject size. In any case we don't care. TFM considers size units independent of time.

In fact if we did try to accurately reflect the nurseryman's or grower's costs over a term of years approximating that needed to produce the subject, the unit cost would need to change over time because the individual tree is taking up more and more nursery land and the unit land cost allocation should be increasing. But we DON'T do that. We extrapolate a 4" (or whatever's) tree's land cost over a much larger tree's size.

Scott

Reply to post by Scott, on February 17, 2000 at 21:26:02:

Re: your first paragraph- Replacement Cost and Establishment

I routinely argue against using the full installed cost in determining the basic value ($/sq. in.), as it artificially inflates the cost of producing a large tree. The concept (as I understand it) is that the cost of nursery production (per square inch) is extrapolated over the trunk area of the larger tree. The cost of production of one square inch of tree should not include ANY installation costs. Since the 8th Edition, we have separated out the Replacement Size part of the tree, and treated it separately by adding it back into the equation, with Replacement Cost. This covers the installation cost once.

As example, two trees growing on the same property, same species, size and condition. One grew up naturally from seed on site, the other was a planted tree. I can't see any justification for using a retail installed cost for basic value of a natural tree. And extending that, I can't justify a difference in the value of the two trees, just because someone carried and transplanted it at the site 50 years ago, if all other factors are equal. The wholesale cost represents (as best we can) the cost of growing an inch of wood. Even this is not entirely descriptive costs, but it gives a common basis for the process.

Imagine, if you will, a new house (since you suggested it). The house was built with 2000 square feet of living space, and sold on the market for $200,000. That equates to $100 per square foot. Now the new owner decides she wants a sun room added to the back, that will cover 150 square feet. Will it then cost $15,000? Probably not. You don't have to install part of a heater, part of a dishwasher, part of a bathtub. . . You are constructing what is added, not a small version of the finished whole. If you separate the cost of constructing the farmed part of a house, without all the other stuff that goes into it, you would be much closer to an estimate of the cost of an addition.

Re: your second paragraph

OK, I'll change my selection of terms. Compounding may not be the best term. A tree does increase the RATE of growth as well as the total amount, though, as growth rates (square inches per year) in younger trees actually increases. It is certainly NOT linear, except by coincidence. It is usually not until a tree actually begins to decline that the rate trend decreases (with allowance for variation in annual growth rates). The image above shows a 23-year old spruce, with growth in millimeters and the amount of new wood grown each year.

I chose the term compounding because it means building on what already exists and increasing the previous amount. So while the tree does not increase what is already there, it does add to it. But the amount added IS dependent on the amount already present. The larger the base, the more is added. For example, if you look at the year 1985 in the chart above, the growth ring was 6.9 mm wide, and added 2759 Sq. MM to the area. In 1994, the ring added 6.6 mm (less than 1985), but increased the area by 4287 Sq. MM (more than 55% increase over 1985).

So, while not a direct compounding in the strict mathematical sense, the tree is not adding wood in a linear fashion. It is more of an exponential increase. Perhaps we should consider it a form of amortization, with a variable rate determined annually (the growth rate)?

Let's take a vote! [g]

Reply to post by Russ Carlson, on February 18, 2000 at 06:12:05:

Thanks for the thoughtful response. My system is especially cranky this afternoon so I've printed it and will work up a response off line, to be posted later.

Reply to post by Russ Carlson, on February 18, 2000 at 06:12:05:

Russ said "I routinely argue against using the full installed cost in determining the basic value ($/sq. in.), as it artificially inflates the cost of producing a large tree. The concept (as I understand it) is that the cost of nursery production (per square inch) is extrapolated over the trunk area of the larger tree. The cost of production of one square inch of tree should not include ANY installation costs. Since the 8th Edition, we have separated out the Replacement Size part of the tree, and treated it separately by adding it back into the equation, with Replacement Cost. This covers the installation cost once."

Our difference may be in understanding of the basic concept. TFM, RCM and CoC are all essentially replacement cost approaches to value. Value, I think we agree, is equal to benefits (the present worth of future benefits, actually, but we've had whole threads on that detail). The theory of replacement cost approaches is that one way to indicate value is to estimate the cost of producing or building a new object thereby replacing the benefits. COST is related to production and is distinguished from PRICE which is related to exchange. If you buy something off the shelf, or the showroom floor, or the wholesale nursery yard or even a finished house ready to occupy you obtain it in exchange, for a PRICE paid. That is a market approach to value.

The key here is to understand that there was a "production" cost to produce that item you paid a PRICE for in exchange. But that's not the production exercise that is being considered in a replacement cost appraisal. Any number of PRICES are indeed paid for different goods that go into producing a replacement.... lumber, nails, roofing, pipes, wires whatever goes into a house.... a b&b tree, soil amendments, guying materials, whatever goes into planting a replacement tree.... but they must be combined with transportation, labor, equipment, expertise, overhead and profit to complete the production exercise and replace benefits. We don't care what it cost Weyerhauser to produce the lumber or GAF to produce the shingles or the nursery to produce the tree, whether they made or lost money. We care what we paid for it and it's installation combined, i.e. the total COSTS to produce the replacement, in place where it will replace benefits.

That's my understanding, theoretically grounded in an accepted appraisal context. The citations are in the TFM article you've linked here on Knothole.

That brings us to how we estimate those complete PRODUCTION COSTS. In RCM it's straightforward. We get actual estimates to install the tree, or we get a wholesale price and mark it up by 2.5 - 3 times to estimate installed or PRODUCTION COST.

In TFM we start with that RC figure and work from there. First, I assume you meant to say that Basic Price is the $/sq.in. It's more accurate to refer to it as a unit cost. 8th edition does indeed separate RC from Basic Price. RC includes wholesale cost plus installation. Basic Value equals RC plus (Basic Price, i.e. unit cost, x incremental size units in the larger tree). 8th edition explicitly allows that the Basic Price or unit cost may be wholesale (as you suggest nursery production cost only with no installation), retail or installed. So 8th edition does not require that installation be considered only in the RC. It is appraiser judgment whether or not installation costs are also extrapolated out to the larger tree. I take the opposite position that you do and routinely argue that installation costs should be extrapolated out to the larger tree. That is consistent with my understanding of what PRODUCTION COSTS are supposed to represent. It is certainly intuitive that as size increases installation costs will increase as well.

You raise a good point. How accurately does extrapolation of installed costs reflect the actual PRODUCTION COST of a larger replacement tree? It may well overstate nursery "production" costs, but recall that in our analysis it is actually a PRICE which is only one component of our PRODUCTION COST. I don't have data to support this but I'd guess that even if from a simple size perspective nursery production unit costs decline as trunk area increases (as your graph suggests the tree is laying down a lot of square inches faster and 8th edition indicates this is the case in sizes up to 6 - 9"dbh) for certain sizes, it is also likely that installation unit costs might increase with area units. Beyond some point one would also expect that the nurseryman's invested costs begin to compound, adding soft costs of capital to the direct out of pocket costs. This is indeed a weakness of TFM... we only use it because we don't have readily available actual cost data, so we have little to test against. I think that is changing somewhat with the more frequent actual installation of larger trees. And we can test our result against other measures, such as contribution to property value. I routinely test TFM results with fully extrapolated installation costs with fairly typical depreciation adjustments against rule of thumb property value contributions and they usually come out in a reasonable range.

Now, the real key to the appraisal is how accurately or reasonably our initial indications of value (Basic Value in 8th Edition TFM) (in this case from replacement costs) reflect VALUE. If we have other indications of value such as contribution to property value or low liklihood of replacement or low contribution or poor condition that suggest that COSTS overstate value, then we must use appropriate depreciation adjustments (Condition and Location). Another reason I prefer to use all installation costs is that the initial indication can ALWAYS be reduced by depreciation if value is overstated. On the other hand, if wholesale costs alone are used because they result in initial indications of value that require less depreciation in some cases, there will be other cases in which value is understated and there is NO mechanism to correct it..... depreciation is a downward adjustment only.

As to your example of two similar trees, one grown naturally the other planted both 50 years old.... The key issue is not what costs were incurred 50 years ago or how they got to be what they are. It is what benefits they provide. And using a cost approach we have to replace those benefits. In any case identical trees should provide identical benefits and have identical value. So you're right there is no justification in a value difference. Replacing the benefits will require actually planting new trees, i.e. installation.

As to your new house example, I'm not sure I get the point. The $100 unit cost is indeed derived from an overall cost that includes systems, site improvements, land and soft costs that will not be descriptive of the unit cost to construct the addition. It's the wrong unit cost. The correct unit cost would include the labor, materials, expertise, overhead and profit to construct the sun room. It would not be the wholesale cost of materials alone. You would not use the unit cost for a large, specimen Acer palmatum dissectum to estimate the cost of an Acer rubrum. You would not use the unit cost to install a large tree on an island where a rock ledge had to be blasted away to estimate the cost of installing a tree in a front yard next to the driveway. You would use representative unit costs. There is no argument here to exclude comparable installation costs.
As to compounding.... the tree growth rate may not be linear. It might be described by a compounding formula of some sort. But TFM does not deal with time and it does not deal with growth rates. (A growth rate equals change in size over time). TFM starts with a unit cost for an available size and applies that unit cost to an instantaneous size increase as if it could be accomplished today. There is no actual or implied passage of time. The extrapolation is simple and linear. Your question remains valid.... should our exercise be non-linear? ATA to some extent addresses this. The late Bob Marble also put forth a revised data set. I'm not sure that considering actual growth rates is the answer so much as assembling whatever real cost data we can to test results against. I'm all for anything we can introduce to make our data inputs more descriptive and accurate. A point that needs to made here is to distinguish data inputs or data sets from methods and from techniques within methods. Methods should be theoretically supported and clear and consistent. If a new method can be developed because it does somethings better then it should be recognized as a distinct method. If an existing method can employ an alternative technique, then that technique should be theoretically supported and clearly defined and named. If all that is really needed is an alternative data set, then if it does not distort the method, it should be named and used.

Going back to my response yesterday, I suggested that as a tree grows it might take up more nursery land and require a higher allocation of land cost. If we simply add up diameter inches that would not be true. The land cost is figured into each of (4) 4" trees so maybe it's already covered if we use them to replace a single 16" tree. But it takes that one tree more years to reach 16" and maybe it's canopy area is much larger than the aggregate canopy area of the (4) 4" trees. But then again, maybe the nurseryman grows shade container crops under the tree which recover the land cost and the tree matures there for free. So I'm not sure how or when that additional land cost argument applies.

Whew.

Reply to post by Scott Cullen, on February 17, 2000 at 14:41:24:

"The question is whether these costs are already reflected in an installed and guaranteed unit cost/"
If I asked the lndscp contractor to return and water my new tree, as necessary for survival, I bet he would want remuneration beyond his "installed & guaranteed cost". The tree I once had, which was a casualty loss, did not need this care. So, wouldn't some establishment cost be reasonable?

Reply to post by Ed Milhous, on February 17, 2000 at 14:41:24:

Ed said "So, wouldn't some establishment cost be reasonable?"

Well, I'd think so. It's partciularly true with the large trees we use TFM for. Isn't the rule of thumb 1 year per inch?

I would guess that a large tree multi-year watering program would be more cost effective with some sort of automatic irrigation system - drip or otherwise - than with weekly or more frequent manual watering labor. So the cost of that system could be estimated and added in a pretty straight forward fashion.

Reply to post by Scott, on February 19, 2000 at 09:26:11:

Suppose that my neighbor cuts my woodlot, thinking it is his. I added a cost for irrigation. What can I claim in addition when I calculate cost of cure? I didn't have a problem with weeds before, but now it's overun with Japanese honeysuckle... can I charge for herbicide treatments for ten years? What else?

Reply to post by Ed Milhous, on February 19, 2000 at 10:59:00:

I suppose whatever is "reasonable." I guess a few things go into that. ACCEPTED PRACTICE, if your state regognizes JH as an invasive exotic and recommend crontrol measures, maybe they are reasonable. If standard reforestation practice requires of recommends control, ditto. USE, intended, prior, highesst and best, likely. If t was in managed production, reestablishing that is reasonable. If it was out of sight out of mind, maybe not. DAMAGE and DEPRECIATION of cost indication. There's a whole separate thread on appropriate depreciation in CoC. Even if all these extra costs are supportable, do they add up to an unreasonable damage or value estimate. If the total costs are $100,000 and the value of the property is $30,000 is it reasonable. Like an overdue library book, pay a $400.00 fine or buy the book for $29.95? The last consideration may more properly be the judge/jury determination with appraiser merely laying out facts.