Business Personal Property Valuation

Business personal property (BPP) can be challenging to value because of the limited quantity of data available and primary reliance upon the sales comparison approach. Relatively speaking, a voluminous quantity of data is available when valuing real estate as opposed to valuing business personal property. Many real estate appraisals consider three approaches to value: cost approach, sales comparison approach and the income approach. By contrast, most business personal property appraisals depend primarily upon the sales comparison approach. While it is possible to develop a reasonable estimate of the market value for business personal property, the values tend to be more subjective than the value of real estate.

The sales comparison approach depends upon principles of substitution and supply and demand. Purchasers of business personal property will seek alternatives and choose the alternative most beneficial for them considering cost, quantity and quality. For real estate, comparable sales data is available with in-depth descriptions of the real estate, including quantity and quality. For business personal property, is more difficult to obtain accurate information regarding the quantity and quality of property involved in a sale. For example, assume the XYZ Company recently closed its Chicago operation and sold the furniture, phone system, network servers, personal computers and related items for an office with 30,000 square feet of space and 120 employees. The sales data includes the quantity of desks, chairs, file cabinets, personal computers, network computers, etc. However, it does not contain precise information regarding the condition and age of each of these items. Real estate is more homogeneous and easier to describe versus the sale of a quantity of business personal property.

Real estate appraisers often gain insight from preparing each of the three approaches to value for real estate assignments. However, personal property appraisers typically focused primarily upon the sales comparison approach. They do not have the benefit of contrasting the value conclusion via the sales comparison approach with values via the cost approach and income approach.

It is important to define the asset being valued. Referring back to our example of the XYZ Company which closed its office, is the assignment to ascribe a value to each item as though it is going to be sold individually or is it to assign a value to the aggregate collection of furniture, computers and equipment? An alternate approach would be to define a value based upon selling subsets of the whole. For example, the furniture to one purchaser and the computers and phone system to a second purchaser.

The definition of value also substantially affects the value conclusion. Market value would typically be defined as the value assuming both the buyer and seller are knowledgeable regarding the property, neither the buyer nor seller is under distress to buy or sell and an adequate amount of time is allowed to market the property. A liquidation value would also assume that both buyer and seller are knowledgeable regarding the assets. However, it would assume a very brief period of time to sell the property. Value in use describes the value of the assets to the current owner. It is not indicative of what a third party would likely pay to purchase the assets.

In addition to performing an appraisal to estimate the market value of business personal property, other techniques sometimes considered for valuing business personal property are IRS depreciation schedules and appraisal district depreciation schedules. These may or may not result in a value conclusion that is similar to market value. However, it is the writer’s experience that they typically produce a value in excess of true market value.

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Commercial Insurance Business Personal Property

This commercial insurance business personal property coverage along with the building property coverage, business income coverage, and extra expense coverage is usually written on the commercial property policy. This can be written on a stand-alone commercial property policy or it can be folded into a commercial package policy. Usually a package policy has two or more different lines of business coverages. The most common lines of business coverage are the general liability and property insurance combine together to make a package policy.

Business personal property is almost always covered within your insured building or outside the building on the premises but usually within 1,000 feet of the primary insured location. You do not necessarily have to own your business personal property. There’re many different categories of this type of property. Your property could be 100% financed by a bank and while they are the legal owner you still can provide business property insurance coverage. Many times businesses lease their business contents. Most common types of leased business personal property are the copy machine, the phone system or many different types of office equipment. In this era of the virtual office you could conceivably lease everything within your space. When you have a loan on your contents or the property you lease you will have to name the lessor and/or the bank as a loss payee on your property and provide the appropriate evidence of property insurance coverage.

Most businesses from time to time have personal property of others in their care custody or control. These items could be stored at their desk or work area or in a specific locker room storage location within the premises. You may or may not have any responsibility to provide reimbursement if employees personal property becomes damaged or stolen. Providing coverage for property of others will help alleviate that risk exposure. Property of others could also extend to your clients and customers if you are in a particular business that provides services for other people’s contents. Maybe you are providing repair or maintenance on their contents. While the client should have their own insurance protection for their personal property a business owner can sometimes be legally liable for the property that is within your care custody or control. This coverage can be afforded under the business personal property portion of the commercial property policy.

Usually in manufacturing businesses or distribution businesses the business personal property can transform into many different forms and shapes and locales. Business personal property which is of the inventory nature can increase in value from raw materials all the way through to the finished product. Having built-in protection for inventory fluxes as they increase from a work in progress standpoint can help prevent gaps in coverage and losses. In further articles we will explore the final two coverages

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