Equipment Appraisal Blog | Understanding Machinery Appraisals

Whether you own a small business or are personally responsible for paying property taxes on your vehicles and equipment, you have likely questioned the validity of the value assessment assigned to these assets on a year-to-year basis. You look back at when they were purchased and how old they are, and try and determine if the numbers make sense in the context of actual market prices.

If you own a significant amount of furniture, fixtures, and equipment (FF&E) or vehicles, where the annual tax liability is substantial, you may have entertained the idea of disputing these estimates while looking to have the assessment adjusted to match your own internally calculated figures. Property tax disputes are not uncommon, however, if you go down this road, you will likely need independent support to present a sound case where the end result is fair and reasonable.

How are property taxes calculated on vehicles and equipment?

Unlike real estate taxes, where reassessments are completed by counties, cities, and towns every few years, based on an updated market analysis, assessments on vehicles and equipment rarely change from their initial estimates.

The purchase price and date of acquisition are the starting point where the assessor then determines a useful life and annual depreciation schedule matching the type of asset that is involved. For example, if you bought a new pickup truck for $40,000 this year, you pay property tax based on this initial cost, and again every year, under an internally calculated useful life depreciation table created by the assessor’s office. The useful life may be estimated at 10 years with annual depreciation of 6% to a salvage value of 40%. If you still own the truck after 10 years, the assessor may slow the depreciation even further going forward.

Every city and town has its own mill rate percentages which are applied to arrive at your tax payment, and cannot be disputed. The value estimate, however, is the area to target in any case where you believe it does not equate to market value. These assessments are usually calculated on very broad assumptions, while the depreciation is slow and on a straight-line basis. The salvage value estimates can tend to be quite high in comparison to fair market value

If you believe your property tax assessments are much higher than the actual market value, you can file a dispute, and even have it done retroactively, to cover prior tax periods in earlier years. It’s always a good idea to complete a detailed internal assessment first, and then reach out to an accredited appraiser who can independently perform an appraisal on your vehicles and equipment. The more prepared you are throughout the dispute process, the better chance you have of a fair and successful outcome.

Over time, business owners will need to consider investing in improvements to their facility and associated property if they have significant brick-and-mortar buildings where employees work and production is ongoing. Just like the purchase of real estate and equipment, these enhancements can be capitalized as a tangible assets and depreciated. In turn, they add value to the company’s infrastructure and can be appraised.

These investments are referred to as either leasehold or building improvements. The primary distinction between the terms is based on who the owner of the property is. If your business leases the building as a tenant with a landlord involved, then you would treat these as a leasehold improvement on your books. For internal depreciation purposes, they should be amortized over 15 years.

If your company owns the buildings and land, then the improvements are capitalized as part of the real property and treated as building assets, which are depreciated over a longer term, consistent with real property accounting rules.

From a valuation perspective, leasehold improvements can be appraised on an “in-place” or “installed” basis, since they only hold value to a building tenant while the business remains in operation. If your business relocates in the future, you cannot physically carry these assets with you to the new location.

As a result of this, in the long run, building owners reap the rewards of the improvements should their tenants vacate the premises, which can benefit their lease pricing and carry it over to a new company moving in even just a few years after the improvements were completed. Try to work with the landlord while you can, to gain some type of lease break or other benefit if you pay for these improvements.

You often see this scenario with heavy turnover businesses such as restaurants and related food services companies, as well as start-ups in tech and scientific industries. It’s a good idea to have an improvement investment concept in place, that you can show the building owner while you’re negotiating the lease terms. It’s also beneficial to work with your accountant and engage with an independent valuation firm to determine your best options as you move forward with your growth plans.

Machinery & Equipment valuations rely in large part on available market data that can be researched and considered. This information can be in the form of recent sales, current listings, new equipment pricing, opinions on normal useful life, and average annual levels of market depreciation.

Two of the most common sources of this data are equipment dealers (vendors) involved in the retail sale of new and used machinery, and auction companies, who liquidate thousands of used machines each and every year through advertised public sales. How does an experienced appraiser review these sources, and consider them when valuing similar assets?

The answer to that question will likely vary somewhat depending on the appraiser you are working with, however, it is important to first understand the differences between equipment dealers and auctioneers, along with the levels of value each of these sources equate to.

New and Used Equipment Dealers

These market sources are usually experienced in specific equipment types and manufacturer/model lines and can provide valuable insights on the overall market, new and used equipment pricing, normal useful life, and how the assets typically decline in value over time. This data and their general opinions are viewed as direct Fair Market Value comparisons, however, they can also discuss how they purchase used equipment such as typical buy/sell margins from an Orderly Liquidation perspective.

It is important to keep in mind that, although equipment dealers are considered experts in their specific market areas, there may be some level of bias associated with their opinions. It is always a good idea to consider additional perspectives in order to gain a balanced conclusion of value.

Equipment Auctioneers

Auction companies are well recognized in many types of equipment markets, most notably in construction, earth moving, transportation, material handling, machine tools, and certain industrial manufacturing industries. Auctioneers provide a convenient, time-sensitive opportunity to liquidate assets under an organized public sale, and may even provide guaranteed buy-out options as an alternative for those unwilling to take on the risks associated with a “no-reserve” sale.

Because these sales are in the public arena, much of the data can be discovered quite easily through company websites, online databases, and other open sources. Auction sales data technically falls under the comparison to Forced Liquidation Value from an appraiser’s perspective, and actual realized sales can vary greatly depending on the type of equipment, buyer turnout, seasonality, and any number of other factors. Because of the potential inconsistency associated with this data, it is important to understand how best to consider it in conjunction with other sources of data to then conclude on a reasonable value.

In summary, new and used equipment dealers, along with auction companies, are considered two of the most important market sources of data for machinery & equipment appraisers. Making sense of this information and ultimately forming an opinion of value for the actual assets being appraised is the most critical step in any valuation effort. Engaging with an experienced, independent, accredited appraiser will provide you with confidence that the result will be credible and reliable.

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.

As many are witnessing significant increases in residential and commercial real estate market prices and rental rates, due to the economic issues facing the country, the used machinery & equipment sales have experienced similar price adjustments. While appraisers and resellers can research and support these inflated prices based on actual sales, many banks and financial services companies are taking a more conservative approach when it comes to lending practices.

Still stinging from prior market “bubbles” which ultimately popped and led to significant defaults and write-offs in past decades, these equipment and real property borrowing sources are taking a more conservative approach when approving loans and investments using these assets as collateral.

Even before this most recent wave of used property value spikes, lenders would typically approve based on 60-80% of fair market value or 80-100% of an orderly type of liquidation value. This was considered normal business practice and for the most part, continues today. The biggest change we are seeing now is they are not taking every appraisal at face value with an understanding that current market conditions are in certain cases, unprecedented, with price increases at a dramatically high level.

Lending institutions are looking back at previous market levels for similar properties and equipment, and attempting to support a more reasonable value that will hold up over the long term. The biggest concern to owners and buyers looking to borrow or refinance is the lower level of funds approved, requiring a larger out-of-pocket cash down payment on the assets.

It is prudent to keep this information in mind as you look to acquire used machinery & equipment over the next year. While you may have no choice about the price you’re paying for these assets, the lending markets are becoming savvier in their approval practices, which will require more flexibility when settling up with sellers. If possible, try to keep an extra amount of cash on hand available to fill in the gaps.