DEFINITIONS OF

Auction Replacement Value (ARV) – usually for insurance purposes is defined as a reasonable amount in terms of US dollars that would be required to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant auction market. Since the client regularly and routinely buys at auctions, the appraisers rarely examined the retail market. When applicable, sales and/or import tax, commissions and/or premiums are included in this amount. BE SURE THAT THE CLIENT UNDERSTANDS THE IMPLICATION OF THIS VALUE!

*Fair Market Value (FMV) – middle “secondary Market” value, usually for IRS purpose See page 3 for further explanation For Donation and Gift Tax purposes: Appraised "Fair Market Value" is the IRS definition as stated in the Treasury Regulation Sections 1.170A-1 (c) (2) is "the at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." (According to Technical Advisory Memorandum 9235005 [May 27, 1992], fair market value should include the buyer's premium.)

For Estate purposes: Appraised "fair market value" is the IRS definition as stated in the Treasury Regulation Sections 20.2031-1 (b) is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." (According to Technical Advisory Memorandum 9235005 [May 27, 1992], fair market value should include the buyer's premium.) The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item of property includible in the decedent’s gross estate, which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail.

Forced Liquidation Value (FLV) – lowest range “net” value, usually for a quick and forced sale purposes is defined as the net price in terms of cash, or other precisely revealed terms, for which the property would change hands if sold immediately, without regard to relevant market place and appropriate use. In certain cases, this may be a negative value as labor and other costs may be required to disassemble and dispose of the property in a quickly and expedient manner.

Marketable Cash Value (MCV) – middle/low “net” value, usually for equitable distribution, resale or estate planning purposes is defined as the net value a willing seller realizes after disposing of property in a competitive and open market to a willing buyer. Both the buyer and seller must be reasonably knowledgeable of all relevant facts, and neither being under constraint to buy or sell. Marketable cash value takes into consideration insurance, dealer commissions, advertising, travel, and shipping expenses that may be involved in the sale.

January, 2019 Market Value (MV) Market Value is a USPAP definition to be used as a guideline in establishing our definitions of value in each appraisal assignment. “Market value” is a type of value, stated as an opinion, that presumes a transfer of a property (i.e. a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in the appraisal. USPAP defines the elements that must be present in a market value definition, but does not provide a market value definition for use in an assignment. Market value is the most common type of value used in REAL PROPERTY appraisal assignments. Appraisers are cautioned to identify the exact definition of market value and its authority, applicable in each appraisal completed - FMV, RRV, MCV, etc.

Market Value (MV) is an example of a precise definition of value which can be used in an assignment. It can be used to establish a price guideline when the exact term Market Value is used in a legal context as defined by the Federal Deposit Insurance Corporation, Section 323.2 (g) is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) Buyer and seller are typically motivated; (2) both parties are well informed or well advised, and acting in what they consider their own best interests; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Orderly Liquidation Value (OLV) – low range “net” value, usually for quick sale purposes is defined as "the most probable price in terms of cash, or other precisely revealed terms, for which the property would change hands under required and limiting conditions in an orderly manner, generally advertised, with reasonable time constraints, in an appropriate and relevant marketplace, with knowledgeable buyers.” (ASA 1994 Handbook, p.2)

Retail Replacement Value (RRV) – highest value, usually for insurance purpose is defined as the highest amount in terms of US dollars that would be required to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market. When applicable, sales and/or import tax, commissions, advisement fees, and/or premiums are included in this amount.

Retail Value (RV) – usually to establish a price guideline for retail pricing is derived from “retail replacement value”. It is defined as a reasonable amount in terms of US dollars that would be required to purchase property of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market. Unlike “retail replacement value”, “retail value” does not include any fees or additional costs, such as taxes, framing, conservation, restoration, and additional commissions.

2 *Fair Market Value further explained:

According to USPAP, “Appraisers are cautioned to identify the exact definition of market value11, and its authority, applicable in each appraisal completed for the purpose of market value2.”

Further, USPAP, the STANDARD for the appraisal profession in the US, only defines Market Value, not “fair market value”. Market Value is defined as “a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. Comment: Forming an opinion of market value is the purpose of many real property appraisal assignments, particularly when the client’s intended use includes more than one intended user. The conditions included in market value definitions establish market perspectives for development of the opinion. These conditions may vary from definition to definition but generally fall into three categories: 1. the relationship, knowledge, and motivation of the parties (i.e., seller and buyer); 2. the terms of sale (e.g., cash, cash equivalent, or other terms); and 3. the conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale)”3 This is NOT a specific value definition to be used in an Appraisal Report. It is the guideline for appraisers to use in their assignments based on the specific value required for the purpose of the assignment. Appraisers are required to cite a specific value definition and its source in all Appraisal Reports.

When a client (insurance policy, lender, attorney) does not define “market value,” the appraiser is required to ascertain the appropriate definition with the client/user to ensure the client’s problem is accurately addressed.

For insurance, in order to make the client whole after a loss, “market value” should be interpreted as “retail value”4 or “retail replacement value” as defined by the Appraisers Association of America. No other value accurately covers replacement of property with like, kind, and quality in the marketplace.

However, recently insurance policies have been written at “fair market value” and often without a discussion or definition of the value. An insurance adjustor recently stated that “there is a universal definition for ‘fair market value’” and that being the definition used by the IRS.

In actuality, there is NOT a universal definition for “fair market value” despite what we may have been taught/understood as appraisers. The definition of “fair market value” varies slightly throughout the Internal Revenue Code and among other federal statutory laws in the US including bankruptcy, state laws, and several regulatory bodies. In fact, the definition is so nebulous, “fair market value” is often decided case-by- case in many jurisdictions in the US. The definition of “fair market value” in US tax law can be found in Treasury Regulation Sections 1.170A-1(c)(2) and 20.2031-1(b) is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." (According to Technical Advisory Memorandum 9235005 [May 27, 1992], “fair market value” should include the buyer's premium.) Treasury Regulation Section 20.2031-1(b) continues "the fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever

1In many cases "fair market value" and "market value" are equal. It is doubtful that “fair” adds any varying components to "market value." 22016-2017 Uniform Standards of Professional Appraisal Practice, Page 4, lines 104-105 32016-2017 Uniform Standards of Professional Appraisal Practice, Pages 3-4, lines 92-103 4Often used in the case of a gallery where taxes or premiums are not a component of the value.

3 appropriate. Thus, in the case of an item of property includible in the decedent's gross estate, which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail."

This is NOT the appropriate definition for an insurance case. Insurance is NOT a donation, gift, or estate for taxes. As such, the Treasury Department’s definition is not applicable (however, includes some of the same components of other definitions of “fair market value”). The appraiser should always ASK the client or the user for the definition the client expects to use if in doubt. Any disagreement between the appraiser and the client/user regarding definition should be discussed before beginning the appraisal process.

The FDIC does not define “fair market value,” rather they define market value25: “Market value means the most probable price that a property would bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their own best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

Accountants also do not always use “fair market value”; rather they often use “fair value” which is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” [2: 20] and continues in the “Valuing ” section of the AICPA Audit & Accounting Guide for Companies [2.32] to state that “Many financial instruments are traded publicly in active markets; therefore, end- of-day market quotations are readily available. However, if quoted market in active markets are not available, fair value may be estimated in a variety of ways, depending on the nature of the instrument and the manner in which it is traded. Management’s best estimate in good faith (under the oversight of the board of directors or trustees) of fair value should be based on the consistent application of a variety of factors, in accordance with the policy followed by the fund, with the objective being to determine the exit price or amount at which the investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair value reported for investments is not reduced by transaction costs such as estimated brokerage commissions and other costs that would be incurred in selling the investments”. As noted in “Pending Content” in (FASB ASC 820-10-35-2B, “the fair value measurement of a particular asset or liability shall consider (a) the condition and location of the asset, and (b) restrictions, if any, on the sale or use of the asset.”)

When insurance companies use the terms “fair market value” or “market value” without defining the terms or loosely defining the terms, they open the door for their attorneys to petition for a lower market level in the event of a claim. Insurance companies will argue that “fair market value” as secondary sales at auctions - which is incorrect. Unfortunately, many appraisers have been indoctrinated to also believe this to be the proper methodology - also incorrect. “Fair market value” or “market value”, in most cases, require the following components: • price at which a property would change hands • transaction between a willing buyer and a willing seller • no force

5 https: //www.fdic.gov/regulations/laws/rules/2000-4300.html 4 • all parties knowledgeable • most common and appropriate marketplace The “most common and appropriate marketplace” allows appraisers to explore the retail or the wholesale market as relevant to the assignment.

Should a client insist on using the IRS definition for uses outside of taxes, the client must also acknowledge IRS Publication 56163, which discusses the facts on which appraisals are to be based: • sales or analyses of similar works by the artist • quoted prices in dealers’ catalogs of the artist's works or works of other artists of comparable stature • records of exhibitions • the economic state of the art market at the time of valuation • the standing of the artist in his profession.

And then there is the distinction between “fair market value” and “marketable cash value” used in a divorce. Since the purpose of divorce is equitable distribution, allowing each party to have an equal share of the assets, the logical valuation should be “marketable cash value” - the net value of the property after a sale. Money in the bank, stocks, and securities may have little or no transaction fees if cashed out. However, selling a painting with a hammer price of $100,000 may have a $40,000 sway in value based on the differences between “fair market value” ($125,000) and “marketable cash value” ($85,000) if using an auction as a premise for sales comparisons due to the premiums and expenses set by the auctions. Since the definition for divorce is set on a state-by-state basis, it is imperative that appraisers “identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value”7.

6 https: //www.irs.gov/publications/p561/ar02.htm 7 2016-2017 Uniform Standards of Professional Appraisal Practice, Page 4, lines 104-105 5