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Appraisals for Specific Purposes

In general, the most common reason an appraisal is done is to determine market value for a potential sale or purchase. However, there are more specific situations (e.g., an exchange, partial taking, estate taxes, gifting, environmental constraints) that may also require an appraisal.

The appraisal techniques used for these specific situations are the same; the sales comparison approach, the cost approach and the income capitalization approach. Depending on the specific circumstances it may be that one or more of the techniques is more appropriate than the other(s). This determination is made by the appraiser and should be explained in the analysis of valuation in the final report.

Appraising Market Value of Timber Only

For merchantable and non-merchantable timber the sales comparison approach and income capitalization approaches are generally the most applicable. For non-merchantable timber the cost approach can also be used.

Appraising for a Timber Sale

When a valuation is being done for a timber sale you are generally appraising market value. In this case the income capitalization approach is most applicable. If you are having an appraisal done to submit a bid the sales comparison approach is probably the best indication of value because it accounts for competition in the market.

Appraising for Timber Damages

When a valuation is being done for a timber trespass, fire, or other casualty the income capitalization approach is the most applicable. This method can be used to arrive at a before and after valuation. The sales comparison approach can also be used.

Appraising for an Exchange (Section 1031 Transaction)

Timber Only Exchange — For a timber exchange the income capitalization approach is the preferred method. It accounts for any physical differences between tracts such as species mix, grade, logging costs, access, etc. However, there are certain circumstances when the sales comparison method must be used; either when public timber is involved, part of a legal dispute, or when it is part of an estate.

Entire Property — If all parties agree that each property must be valued at market value, then all three approaches can be used. If use value is the only concern then the cost and income capitalization approaches give the best indications of relative value differences.

Appraising for Section 631 Capital Gains Treatment

When a valuation is being done for purposes of Section 631 of the Internal Revenue Code market value is the primary goal. This applies only to merchantable timber.

Section 631(a) — When appraising for Section 631(a) the market value of the timber must be determined as of the first day of the tax year in which the timber was cut, irrespective of when the timber was actually harvested during the tax year. Either the sales comparison or income capitalization method can be used. The sales comparison method is more likely to capture the full effect of market changes over the entire tax year.

Section 631(b) — An appraisal is not needed when a Section 631(b) election is made. Market value is determined by a contractual agreement in which the seller is paid a stated amount per unit harvested.

Appraising for Gifting Purposes

The Internal Revenue Service rules require that all three appraisal methods be used if appropriate. The report must be done to USPAP standards in a stand alone or summary format. And if the gift is to a charitable organization, Form 8283 must accompany the appraisal report with the appropriate sections completed by the appraiser.

Appraising for an Estate Tax Return

The market valuation of forestland for an estate tax return is no different from appraising for a sale or liquidation. Section 2032A (Valuation of certain farm, etc., real property) of the Internal Revenue Code permits certain real property to be valued for Federal estate tax purposes on the basis of its "current use" rather than at "highest and best use." This is commonly termed "special use valuation."

Real property may qualify for special use valuation if it is located in the United States and is devoted to either (1) use as a farm for farming purposes or (2) use in a closely held trade or business other than farming. In either case there must be a trade or business use.

The term "farm" includes orchards and woodlands. The term "farming purposes" includes the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.

In making the election, two valuations must be determined for the affected property: special use value and market value. With respect to woodlands, either bare land or standing timber or both may be specially valued. Timberland special use valuation procedures must follow the general special use valuation rules applicable to farms, as set out in the IRS regulations. No valuation procedures specifically applicable to woodlands are provided. Two methods of farm valuation are described: the "farm method" and the "multiple factors method."

Farm Method

The farm method is determined by dividing the average annual gross cash rental for comparable land used for the same purpose and located in the locality, minus the average annual property tax for such land, by the average annual effective interest rate for all new Federal Land Bank loans. For purposes of the preceding sentence, each average annual computation shall be made on the basis of the 5 most recent calendar years ending before the date of the decedent's death.

Multiple Factors Method

If no comparable rented timberland can be documented, the executor may elect to value the property using the multiple factors method.

The regulations list the following five factors. (the method explained under each of the factors is the procedure that can be used to determine value)

Factor 1. The capitalization of income which the property can be expected to yield for farming or closely held business purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors.

Determine the present value of annual as a sustainable harvest with the first harvest 11 years out, one year after the moratorium is over. A site specific capitalization rate is used which is a combination of 10 year stumpage appreciation and average growth.

The discounted cash flow model from the income capitalization approach is used to arrive at net present value of 1 acre of bare forest land for each productivity class represented, then a weighted average is calculated. The discount rate used is a combination of average inflation, growth and stumpage appreciation.

Factor 3. Assessed land values in a State which provides a differential or use value assessment law for farmland or closely held business.

Some states have forest land assessed at values set by statute to match the productivity classes of timberland.

Factor 4. Comparable sales of other farm or closely held business land in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales price.

It is important that "bare forest land" values are used if available, and that these comparables are zoned for forest use only.

Factor 5. Any other factor which fairly values the farm or closely held business value of the property.

Appraise the immediate harvest value of all merchantable timber and discount for the holding period of 10 years. Immature timber stands should be valued using the income capitalization approach.

The final step in the Five Factors Method (Section 2032A appraisal) is to average the factors into a final indication of value.

Average the results of factors 2, 3, and 4 then expand by total acres to arrive at total value of land.

Average the merchantable timber value from factors 1 and 5.

Add (1) and (2) above and add results to the immature timber value from factor 5 to arrive at final special use value of the property.

The IRS has ruled that each factor relevant to the valuation must be applied, although, depending on the circumstances, certain factors can be weighed more heavily than others. (Revenue Ruling 89-30) Technical Advice Memorandum 9328004 discusses the applicability of the multiple factors method to woodlands and how it is to be used to specially value forest property.