Mineral Property Appraisal or Mining Business Valuation

INTRODUCTION

As in so many other professions, the requirement for specialists in the appraisal field is an absolute necessity. Real property appraisers have the necessary real estate background and training to do real property appraisals. Similarly, business appraisers have the requisite business credentials and financial training to do business appraisals. While they share some common appraisal standards, the professional disciplines and the required knowledge differ. The purpose of this American Society of Appraisers Release is to assist the appraiser user in determining when a business appraisal and/or a real property appraisal is required. The release is divided into the following five sections:

1) The Basic Difference Between Business Appraisals and Real Property Appraisals

2) Knowledge and Qualifications of Business Appraisers and Real Property Appraisers

3) Similarities and Differences: Business Appraisal and Real Property Appraisal Approaches

4) Business Appraisal or Real Property Appraisal Check List

5) Examples of Business Appraisal and/or Real Property Appraisal Situations

1) The Basic Difference Between Business Appraisals and Real property appraisals

There are significant differences between business appraisals and real property appraisals. The American Society of Appraisers has a major and separate appraisal discipline for each type of appraisal. The need for this distinction flows from the fact that in most cases what is being appraised is quite different.

The Standards Board of the Appraisal Foundation clearly recognizes the distinction between real property, personal property and business appraisals. In Uniform Standards of Professional Appraisal Practices, there are separate standards covering real property (Standards I through 6), personal property (Standards 7 and 8) and business appraisal/valuation (Standards 9 and 10).

Real property appraisal involves the valuation of land, improvements and associated rights. Business appraisal has to do with the value inherent in ownership of a commercial, industrial or service organization pursuing an economic activity. The following will assist the appraiser user in determining the applicability of a business appraisal, real property appraisal or both:

Clear Examples of Where BUSINESS APPRAISAL is Appropriate

Common Stock

Preferred Stock

Debt Instruments

Warrants

Options

Sole Proprietorship Businesses

Business Partnership Interests

Employee Stock Ownership Trusts

Intangibles:

Patents

Trademarks

Copyrights

Goodwill

Customer Lists

Employment Contracts

Covenant Not to Compete

Intangible Drilling Rights

Franchises

Licenses

Clear Examples of when Real Real Property appraisal is appropriate

Residential Properties:

Single Family Detached Homes

Condominiums/Town Homes

One to Four Unit Apartments

Dormitories

Vacant Land

Subdivision Properties

Commercial Properties

Shopping Centers

Retail Malls

Office Buildings

Apartments

Industrial Properties

Factories

Warehouses

Truck Terminals

Agricultural Properties

Special Purpose Buildings

Public Buildings

Non-income producing properties

Churches

Examples of Where Both BUSINESS APPRAISAL and Real property appraisal Disciplines may be Jointly Required

Agricultural Properties (various types)

Marinas

Amusement Parks

Mobile Home Parks

Bowling Alleys

Nursing Homes

Car Washes

Private Airports

Casinos

Recycling Centers

Cemeteries, Mortuaries

Restaurants (Going Concern)

Franchise Operations if Property Owned

Service Stations

Golf Courses

Ski Resorts with Residential Land

Grain Mills and Elevators

Theatres

Hospitals

Time Share Ownership Interest

Hotels, Motels

These businesses are distinguished by the fact that the real estate is a special purpose property and is a major asset of the business. Many certified commercial real property appraisers have developed the necessary credentials, experience and expertise to analyze both the business values and the real estate values in the special purpose properties listed above. Nevertheless, the purchaser of valuation services should be aware that, in the above types of assets, both the services of a business appraiser and a real property appraiser may be needed.

2) Knowledge and Qualifications of Business Appraisers and Real property appraisers

The business appraiser draws heavily on the theory and practice of corporate finance and securities analysis in addition to the requisite understanding of economics, business management and accounting. Typically, but not always, a business appraiser may have a business oriented degree supplemented by an advanced degree. Some of these individuals will also have certification as Certified Public Accountants (CPA) or Chartered Financial Analysts (CFA), as well as business appraisal credentials. The umbrella labeled "corporate finance" really covers the financing of all kinds of business entities, regardless of whether they happen to be in the form of a corporation partnership or sole proprietorship. The basic thrust of business appraisal is the appraisal of an interest in an operating entity.

A real property appraiser should have detailed knowledge of real property appraisal techniques; real property appraisers must be more or less conversant with the fields of building, civil

The following checklist helps determine which discipline - business appraisal or real property appraisal - is the pertinent appraisal discipline when valuing an entity. In some cases, as indicated by the checklist, both disciplines may be required.

A BUSINESS APPRAISAL A Real property appraisal

Is the entity to be appraised:

A commercial, industrial or service organization pursuing an [ ] A residential or commercial property (such as a single family

economic activity other than the sole operation of real estate? residence, apartment house or office building)?

An equity interest (such as a security in a corporation or [ ] An interest in real estate (such as tenant in common or joint

partnership interest)? tenancy)?

A fractional or minority interest (i.e., less than 100 percent of the [ ] A whole or partial interest in real estate?

entity)?

Difficult to split up (perhaps because the owners do not have a [ ] Owners have a direct claim on their real estate interest?

direct claim on the assets)?

Does the entity to be appraised:

Derive its revenues from providing goods or services? [ Derive its revenues from the use or leasing of real estate?

Primarily use assets such as machinery, equipment, employee skill [ Use real estate as its primary asset?

and talent in providing goods or services, and depend on assets

other than or in addition to real estate to generate earnings?

Conduct an economic activity which is more important than the

location of the real estate where the economic activity is being Conduct an activity wherein the location of the real estate is a

conducted? primary valuation factor?

Likely have a value that fluctuates with conditions in its industry (as

t

opposed to fluctuations in the real market)? Have a value which fluctuates primarily with the real estate market?

Does the entity have:

Intangible assets such as patents, trademarks, copyrights, [ ] Assets that are primarily tangible real estate. Insignificant or no

franchises, licenses, customer lists, employment contracts, non- intangible assets?

compete covenants and goodwill which the entity uses to generate

earnings?

Substantial assets that can be moved? [] Real estate and real estate related assets that cannot be moved?

Primarily tangible real estate assets that produce the economic

A variety of tangible and intangible assets which interact to activity in the form of lease revenue or real estate use?

produce economic activity?

Operating expenses that are limited to real estate oriented

Significant operating expenses such as management, labor, expenses such as property management and maintenance?

marketing, advertising, research and transportation?

5) Examples of Business Appraisal and/or Real property appraisal Situations

1) A REAL PROPERTY APPRAISAL

a) Mr. A owns fee simple title to a small shopping center which he personally manages. Mr. A is getting divorced and the value of his ownership interest in the shopping center is an issue in the dissolution of marriage action.

A BUSINESS APPRAISAL

b) Mr. X owns, as a sole proprietor, a retail store that bakes and sells cookies. The cookie business leases a store in Mr. A's shopping center. Mr.C is preparing a personal financial statement for the bank and thus wishes to know the value of his business.

A BUSINESS APPRAISAL

c) Mr. X is interested in selling one half of his cookie store to his brother-in-law. Mr. X and his brother-in- law have agreed to hire a competent appraiser to set the price for the sale of a 50 percent interest in the cookie store.

2) A REAL PROPERTY APPRAISAL

Ms. L has just received her current tax assessment for her primary residence from the local assessor's office. The estimated market value of her home and the resulting property taxes increased 100% from the prior year. She is alarmed and seeks a market value appraisal to check the reasonableness of the assessor's value estimate.

3) A BUSINESS APPRAISAL AND A MACHINERY & EQUIPMENT APPRAISAL

Mr. B owns 75 percent of the outstanding stock of B Ski Resort, Inc., which owns and operates three ski resorts. All three ski resorts are more than five years old and have operated profitably in at least three of the last five years. B Ski Resort, Inc. wishes to borrow operating funds from a national bank and will pledge accounts receivable, inventory and ski lift equipment on the loan. The real property is already pledged on an existing long-term loan. Mr. B will also personally guarantee the debt.

4) A BUSINESS APPRAISAL AND A REAL PROPERTY APPRAISAL

Mr. C is a limited partner owning 10 percent of the limited partnership interests in capital, income and distributions in Apartments Limited, a Limited Partnership, which has as its sole asset a 1,000 unit apartment complex. Mr. C is negotiating with the general partner of Large Apartment Limited whereby the general partner would purchase Mr. C's limited partnership interest.

5) A BUSINESS APPRAISAL W A REAL PROPERTY APPRAISAL

a) The valuation of 100-percent of the issued and outstanding stock of Corporation D,which was owned by Mr. D, who died. The purpose of the valuation is for Federal Estate Tax purpose. Corporation D owns 1,200 acres of farm land, all of which is leased on a sharecrop arrangement to individual farm tenants. Reference, Revenue Ruling #59-60.

A BUSINESS APPRAISAL

b) Mr. D's estate distributes the stock of Corporation D to Mr. D's four sons in equal 25 percent interests. Shortly after receiving his distribution of 25 percent of Corporation D stock, son #1 dies, and it is now necessary to value his 25 per@ent interest in Corporation D for Estate Tax purposes.

A BUSINESS APPRAISAL

c) Mr. Z, one of the tenants sharecropping the farms, also operates a custom farming business in which he performs various farming tasks for the operators of farms for a fee. Mr. Z is interested in bringing his son into an ownership position in this company which was incorporated two years ago. The

corporation owns no land but stores machinery on the rented farm. It has elected to be taxed under Chapter "S" of the Internal Revenue Code.

6) A BUSINESS APPRAISAL

The F & F Limited Partnership owns four video rental stores, all located in the same city. Mr. F3 is a limited partner in the F & F Limited Partnership. He owns 10 percent of the capital and has a right to receive 10-percent of the distributions and 10-percent of the net income and expense. Mr. F3 intends to gift his limited partnership interest in F & F Limited Partnership to his daughter.

7) A REAL PROPERTY APPRAISAL

Mr. C is a speculative office developer. He has purchased five acres of vacant land and desires to construct a 25,000 square foot suburban office building. lie has approached Main Street Savings and Loan regarding an interim construction loan, as well as a permanent mortgage loan. The S&L has indicated that any loan

approval would be subject to a market value appraisal.

8) A BUSINESS APPRAISAL

Mr. G owns I million shares out of the 100 million shares outstanding of the G Corporation, whose stock is publicly traded on the New York Stock Exchange. Mr. G serves as Chairman of the Board of the company. The closing price for Mr. G's stock on December 31, 1990 was $ 10 per share. Mr. G gifted 10,000 shares to each of three children on December 3l,1990. One of the children is a minor,one is an officer and the third is an employee but not an officer or director of G Corporation.

9) A REAL PROPERTY APPRAISAL

Attorney A represents ABC Limited Partnership, whose general partner has just placed the partnership into Chapter 11 bankruptcy. The sole asset of the partnership is a 1,200 acre parcel of unimproved land. The first lien holder is claiming that there is no equity in the partnership, and thus he should be allowed to complete foreclosure and take ownership possession of the real property asset. Attorney A needs a market value appraisal to ascertain the merits of the first lien holder's claim.

10) A BUSINESS APPRAISAL

Lawyer H is a senior partner in the H, X, Y & Z law firm, which has four partners and associates. The law firm leases its office facilities from an independent third party. The firm Is actively involved in various facets of the practice of law, and its attorneys consider themselves to be general practitioners. Mr. H is getting divorced, and the value of his interest in the partnership is an issue in the dissolution of marriage action.

11) A Real property appraisal

Mr. P owns a 15 unit apartment complex 200 feet from a major highway. Plans call for the state to widen the highway, which will then come within 15 feet of Mr. P's apartment complex. Mr. P needs an appraisal to determine the fair market value of the property which the state is taking, as well as a determination of the loss in value of his remaining property.

12) A BUSINESS APPRAISAL

An employee stock ownership plan owns 13 percent of the issued and outstanding common stock of Corporation A. Corporation A is actively involved in the manufacture of snow shovels. Adjacent to the company's manufacturing facility I  is a 12 acre parcel of undeveloped land which the company intends to use

for future plant expansion.

Reference Foltz vs. U.S. News 'where the court held that it was proper to value the minority interest owned by the profit sharing plan using an earnings approach without separately valuing the excess land, as the minority shareholders had no right to either force the company to sell such land or order the distribution of proceeds even if the land was sold. Further reference Revenue Ruling #59-60 (2)(a) and Department of Labor adequate consideration guidelines.

13) A REAL PROPERTY APPRAISAL

Mr. T, Mr. C and Mr. D each own a 33-1/3percent undivided interest in a 200 acre parcel of fan-farmland. Due to a disagreement, Mr. T and Mr. C wish to buy out Mr. D's undivided 331/3percent interest and need to obtain a fair market value appraisal of Mr. D's interest. The applicable state law dictates that Mr. D will receive a pro-rata share of the total value.

14) A BUSINESS APPRAISAL AND A REAL PROPERTY APPRAISAL

A restaurant owner operates a successful restaurant on a parcel of real estate that she owns. She wants to sell both the restaurant as a going concern and the real estate. The real property appraiser will typically separately value the real estate and establish a fair market rent. The business appraiser will use the fair rent figure provided by the real property appraiser to value the business. When he substitutes fair rent, the business appraiser will remove all real estate assets and expenses connected with the ownership of the real estate.

15) A BUSINESS APPRAISAL AND A REAL PROPERTY APPRAISAL

A casino owner and his spouse are pursuing marital dissolution in a community property state. They own several casinos, hotels and restaurants. The business appraiser 4ill work in concert with the real property appraiser to issue one report following the standards set forth in the Uniform Standards of Professional Appraisal Practice(USPAP). The business appraisal expert will focus on the statistical testing of the casinos' cash flow streams using regression analysis, and the development of the discount and capitalization rates using public market comparables and the Capital Asset Pricing Model (CAPM). The real property appraiser will focus on the hotels and their locations while also reviewing the results of the casinos' operating forecasts, and relating them to the hotel forecasts. The real property appraiser will establish the fair market value rent for the facilities, including the restaurants, and the business appraiser will use this rent in determining the business value of the business facilities. The real property appraiser and business appraiser will jointly summarize their valuation study and value conclusions in a thorough report. Both the real property appraiser and business appraiser will sign the report as individuals.

For more information, contact:

American Society of Appraisers
P.O. Box 17265
Washington, D.C. 20041
(703) 478-2228 FAX (703) 742-8471

This document is copyrighted by the American Society of Appraisers and was republished with permission in the Online Journal of International Finance located on the Internet at http://www.fvg.com. We have reproduced the document with the permission for non-commercial uses of the journal's publishers, The Financial Valuation Group International, Los Angeles, CA (U.S.A.). E-mail comments to oji@vgi.com

Discuss your mineral property appraisal, mining business valuation, or other mineral industry related concerns with Mineral Business Appraisal:
Michael R. Cartwright  michael@minval.com
Five Claret Court, Reno, NV  89512-4744
Tel/Fax: 775-322-9028

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