Valuation of Amenity Trees

[daltontrees]

OK so I didn't expect overpowering enthusiasm for this subject but I am quite dismayed by the general lack of interests. If anything I am surprised how anyone can get through a working year in arboriculture without bumping up against the subject and having to have a rudimentary understanding of it. But that's maybe just me...

 

A fair question then would be, why do we need valuations? To explain that, an understanding of what valuations are is needed. So here's my grossly oversimplified explanation. They are imitations of what would happen in the marketplace. That term 'marketplace' is used for global financial markets but we shouldn't overlook its origins in (say) a simple town market where buyers and sellers come together. Say ten sellers turn up with a cart of apples each and ten buyers turn up with empty carts looking to fill them with apples. Happy days, supply equals demand and the highest price will be paid for the best quality apples by the most discerning buyer. The lowest price will be for the desparate sale of the half rotten cartfull that the buyer only needs for pigfood. But somewhere in the midst of it all we can sense a market price for apples there at that time.

 

So a seller or buyer comes home and his neighbour asks him 'I have a cart of apples to sell next week at that market, how much will I get for them?'. Our man, fresh from the cut-and-thrust of the market, tries one of the apples and gives his neighbour an estimate of what he thinks the cartfull will fetch. And that is a valuation. An up-to-date, informed imitation of the market. Lesson one, valuations are only good for a time and a place.

 

Of course, there is no guarantee that that is the price that will be fetched. Say the seller turns up, the only seller that day, and ten desparate buyers turn up. The 'laws' of supply and demand suggest he will get a very very good price as the buyers compete. But say he turns up with nine other sellers and there is only one buyer. That buyer will smile to himself and systematically bargain the sellers down to a very good price. Lesson two, valuations are only as good as the assumptions that you make about the balance of supply and demand.

 

The seller also brings along a cartfull of pears, thinking he will get the same price as for apples, they're all fruit, after all. But no-one wants pears that day. He tips the lot on the way home, disappointed. Lesson three, don't use apples to value pears.

 

Bear with me, I will get around to trees eventually...

[daltontrees]

So why do we need valuations? Why not just sell the thing and see what you get for it? Well, you can only do that if you have a marketplace, you have sellers and buyers together at the same time in reasonable numbers, you have a product that buyers can try, touch, see. And maybe the seller doesn't want to sell at that time, he just wants to know what he can expect to get when the time comes. Can he take his apples to market, haggle a price with someone then tell teh buyer he was just fishing? No, he can't. But he can suss out the going rates for apples so that he can go home and ponder whether to plant apple trees or pear trees. He can work out how much planting will tcost, how long he has to wait for apples or pears, how much work is required, how much he will get for the apples or pears and for how many years. He can then make an informed decision about what to plant.

 

Vasluations are used when we buy a house and get a mortgage (back in the days when you could). What is the valuation saying. It says if you default on your mortgage and the bank repossesses and sells to get its loan money back, the house will fetch enough on the market to justify the risk of lending in the first place. There might never be such a sale, but an imitation of the market is needed, based on current house prices and current supply and demand.

 

Valuations are used when something is to be insured. There is never any intention to sell the thing. But if it is stolen or destroyed, the insurer will pay the owner. The amount is the hypothetical amout that would be needed to buy or make a replacement in the open market. It might be a wedding ring, it might be a car, it might be a house, but it's still an imitation of the market. Without any buyers or sellers having been directly consulted.

 

Another common use of valuations is for the sale directly off the market. Our man needs another cart of apples next week. He says to his neighbour, no need to take your aplles to market, I'll buy them from you. Perfect! But what's the sale price? So the neighbour asks around other people that have been to the market, both parties now have good knowledge and they strike a fair deal based on a mutually agreed valuatoin. Again, an imitation of the market. The seller won't accept less than he would get at the market. The buyer won't pay more than he would at the market.

 

I am still planning to get rounfd to trees. But there is another important principle to explain. The most important one for anyone hoping to understand the strengths and weaknesses of tree valuations. I will give it it's full sunday name and allow everyone a chance to run away in horror. Depreciated Replacement Cost. It's not that scary though, I will pick it apart for you.

[daltontrees]

Markets are highly imperfect. Lack of information, unreliability about supply and demand, people thinking apples will do for pears, wedding rings that have huge sentimental 'value', cars that wear out from the moment they are made and go down in value, houses that fool the buyer with new carpets to hide the rotten floor etc. But there is another dreadful shortcoming of markets. What if there is no market? Or if all the transactions in the market are kept secret? Or if transactions are so infrequent that they can't be relied upon as valuations? Or there is only one buyer and no seller?

 

Let me put forward the idea (in a utopian NHS society) of the hospital that is run by the state for citizens. Where then does the NHS buy a hospital? Or if it has one it no longer needs, who can it sell it to? The answer is obvious, as happens in reality. It builds one.

 

In building it, it enters a market where there are lots of sellers, otherwise known as building contractors and suppliers of bricks, windows, roof tiles etc. This is a market in which it can satisfy itself it is getting the best price. But here's the important bit. How much is the new hospital worth on the open market? Nothing (there are no buyers nad no demand). What is it's value? Well, the cost of building it. Cost becomes a proxy for value. Cost for a moment equals value because it is worth that to the occupier. The decision to spend that much on building it has been justified by the benefits that will come from occupying it.

 

That is a Replacement Cost valuation.

 

Over time it gets worn out or stops being in the format required of a modern hospital. Yet is still operates, repairs are more expensive and it's not so efficient as it might be. That's called Depreciation.

 

Combine the two and you have Depreciated Replacement Cost.

 

For trees, planting costs are akin to building costs. Poor form, old age and defects are akin to depreciation

 

Which is the basis of CTLA and CAVAT. And if I am being kind there are elements of that in Helliwell too.

 

There, that isn't so complicated after all. There's no obvious market for mature trees. So we should value them on the depreciated replacement cost basis. Or shoud we?

[kevinjohnsonmbe]

Epic post!

 

I've taken the bait.

 

Should we value trees on the depreciated replacement cost as we might a hospital / car...?

 

Only if we choose to discard the notional (debatable) uplift it brings in the community, and since 1 persons 'notional benefit' could be another's 'notional nuisance' how are they reconciled?

 

Our democracy has given us local government and the tree officer is empowered and entrusted to make the decision for us. So we're trying to understand how they come to their decision...

[daltontrees]

Epic post!

 

I've taken the bait.

 

Should we value trees on the depreciated replacement cost as we might a hospital / car...?

 

Only if we choose to discard the notional (debatable) uplift it brings in the community, and since 1 persons 'notional benefit' could be another's 'notional nuisance' how are they reconciled?

 

Our democracy has given us local government and the tree officer is empowered and entrusted to make the decision for us. So we're trying to understand how they come to their decision...

 

Phew, thank goodness someone is looking in.

 

I wouldn't value a car on a DRC basis. Think of the tests. Are there lots of transactions to compare with the car being valued (yes)? Are there lots of buyers and sellers (yes)? Is there lots of freely available information about the market (yes)? Are cars specialised things (no)? Would you have to make one yourself becasue demand for them is so low or infrequent that no-one makes them for sale (no)? So cars are a classic example of open market comparison valuation, definitely not depreciated replacement cost. What about trucks? Still open market value, I think. What about Unimogs? I think they should probably be done on a DRC basis, checked by a open market basis, but it''s a marginal one (think of the tests). What about a tracked Unimog with a Hiab on the back and a snowplough at the front? You'd have to make it yourself or have it specially made and would be willing to pay the cost if it was going to provide a return to your (bizarre) business plan. That's what DRCs are for.

 

I will get round to public and private benefits of trees presently. This is the debate that shows some of the current thinking and metheodologies for the nonsense that they are. You are only a step behind me, insofar as you recognise the problem and how undemocratic it can be if it is ill-informed.

[kevinjohnsonmbe]

I think you flatter me with the 'only a step behind' comment! Although I would caveat that I had a 2 year old baby bouncing on me and a wife with a hang-over (having supposedly attended book club) to contend with while reading your epic post this morning.

 

I've been looking online and came across this link (which I found quite useful, maybe others that are 'watching' but not contributing might find it as useful as I did - perhaps I should have looked at the number of people 'viewing' the thread before I wrote that...)

 

http://www.forestry.gov.uk/pdf/FCRN008.pdf/$FILE/FCRN008.pdf

 

Looked on AA website and various others for a copy of Helliwell, will try local library and LA to see if theres any chance of borrowing a reference copy and get a bit more read-in.

[kevinjohnsonmbe]

550 views

[daltontrees]

Thanks for replying, yes that Forestry Commission document is pretty good. Berar in mind though, that it deals with methodologies that are used for street trees; in a way that is straightforward because street trees are antirely in the public domain (road verges, central reserves and so forth) and there are a couole of implications for the relative simplicity of this (i) there is no prospect of sale of the trees or their land and the values are unlikely ever to be tested or needed for anything other than accounting purposes and (ii) the amenity contribution of the trees is enjoyed only by the public, not bnecessarily by the owners of the tree or by private individuals.

 

My plan was to move on to your earlier questions about notional benefit versus notional nuisance next. I might not get a chance until later today though.

 

Even though the FC document covers a lot of good stuff, I alos plan to go through the various methods one at a time and point pout how they are done in practice and how good or bad they are and why.

[Andy Clark]

 

 

 

Even though the FC document covers a lot of good stuff, I alos plan to go through the various methods one at a time and point pout how they are done in practice and how good or bad they are and why.

 

 

Silly question, but why?

 

Most of the monetary valuation methodologies have been around for years now - and have been widely used in context of their relevant application, reviewed in the said same context, proven to work in the said same context, and therefore accepted by the industry and relevant related disciplines - including the insurance industry, as per the JMP, and mortgage valuation systems.

 

Don't get me wrong, I'm all for pushing boundaries and challenging the establishments where things clearly don't work and subsequently need to change/improve, but equally "if it ain't broke, don't fix it".

 

And to be fair, with the greatest of respect, I personally feel that that's why people aren't showing the interest in this thread that you had hoped for.

 

 

 

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[Andy Clark]

Epic post!

 

I've taken the bait.

 

Should we value trees on the depreciated replacement cost as we might a hospital / car...?

 

Only if we choose to discard the notional (debatable) uplift it brings in the community, and since 1 persons 'notional benefit' could be another's 'notional nuisance' how are they reconciled?

 

Our democracy has given us local government and the tree officer is empowered and entrusted to make the decision for us. So we're trying to understand how they come to their decision...

 

 

I think that there seems to be confusion throughout this thread between "amenity value" and "asset value".

 

The two are very different.

 

 

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