Valuation of Wastewater Treatment Plants

[Stephen J. Vertin MAI]

By the way welcome to the forum. I guess I have more questions at this point than answers. How big is your system? You completed a cost approach in a day? Where did you get the cost of piping and other materials, did you just use the developers figures and throw in land value? Since Marshall does not have these cost how did you verify? How did you handle the utility easements? Even small systems have extensive easements which are intrinsic to land value. How did you value them?

I'm thinking that a discounted sell-off, based on the anticipated sale and absorption of EDU's might serve best to accomplish this goal.

What does this mean?

Are you just blowing off income capitalization? Does your state controll fees? If so they are a great source of data.

For sales you need to contact some of the lager privatization companies. A good place to start is the American Water Works Association. There is a lot of phone work in collecting sales. There is no central data base.

 

[PropertyEconomics]

I have done them and based value on income capitalization. The preferred method is DCF. They are simply income generating entities. Wisconsin puts all operating expense information for most systems in the state on the Internet (comparable operating expenses). Sewer fees can be obtained by comparing to similar communities. Many of these systems are bought and sold to private businesses. These are very complicated appraisals due to easements used and owned in operations. Many of these appraisals have substantial extraordinary assumptions (as someone said depending on scope). The last one I did in 2006 I charged $25,000. To do a good job it takes at least a month. Let me stress these appraisals are not something you should try to figure out yourself. They are among the most complicated in the business. If you simply do a cost approach you have preformed the report using incorrect appraisal methodology. If someone on your state board knows how to do them and see you are simply performing a cost approach you will get your license yanked. There are sales; however, most are national. We have always done three approaches with most reliance on income.

Mr Vertin .. I ask this question out of respect and ignorance ... the income you use to derive the value ... is it income to the real estate or is it business income? Did you find these facilities to be leased to somone who then operates the business?

 

[Stephen J. Vertin MAI]

Property:

That is a very good question. Many interest appraised maybe separate concepts but in the end indicate similar final values. An example everyone can readily understand is fee simple vs. leased fee. While they are different interest the final value conclusion is often the same. It has been my experience when you have real estate geared toward income generation other than rents it is near impossible to separate interest. This is due to the entire function of the real estate being geared towards extracting income for the business.

Text book examples are landfills and water and/or sewer treatment facilities. What else can they be used for? Built-into their very nature is the concept of going concern. They are simply built to generate income through the vehicle called real estate. Buyers look at this income and capitalize it into perpetuity for these type properties. Most deed transfers indicate fee simple transfers. Most equipment can not be removed and is considered appurtenant to the land. The business is generated by the real estate and the real estate generates the business.

The argument of going concern value vs. fee simple value is irrelevant. The value conclusions are the same.

 

[PropertyEconomics]

Property:

That is a very good question. Many interest appraised maybe separate concepts but in the end indicate similar final values. An example everyone can readily understand is fee simple vs. leased fee. While they are different interest the final value conclusion is often the same. It has been my experience when you have real estate geared toward income generation other than rents it is near impossible to separate interest. This is due to the entire function of the real estate being geared towards extracting income for the business.

Text book examples are landfills and water and/or sewer treatment facilities. What else can they be used for? Built-into their very nature is the concept of going concern. They are simply built to generate income through the vehicle called real estate. Buyers look at this income and capitalize it into perpetuity for these type properties. Most deed transfers indicate fee simple transfers. Most equipment can not be removed and is considered appurtenant to the land. The business is generated by the real estate and the real estate generates the business.

The argument of going concern value vs. fee simple value is irrelevant. The value conclusions are the same.

I would think, even though the values are the same, from a pure real property interest standpoint you would be appraising the fee simple interest of the going concern? Perhaps those are contradictory usages but they seem to fit in this instance.