February 3, 1993 DAAVALUATION OF CITY OF OKEECHOBEE UTILITY SYSTEM
SCOPE OF THE ASSIGNMENT PROCEDURAL OUTLINE
SUBMITTED BY:
JACK CRAHAN, MAI
STATE -CERT. GEN APPR. #0000383
DEIGHAN APPRAISAL ASSOCIATES, INC.
2000 SE PORT ST. LUCIE BOULEVARD
PORT ST. LUCIE, FLORIDA 34952
SCOPE OF THE APPRAISAL
The scope of the appraisal is to estimate the Market Value of the Fee
Simple Estate interest in the City of Okeechobee utility system, as of a
given date. After concluding the market value of the fee simple estate,
the appraiser allocates this to other specific ownership interests which are
identified and discussed later in this text.
Property Description The subject property consists of a water and
sewer utility owned by the City of Okeechobee. The utility has about
4,100 water customers, 1,350 of whom are also served by sewage
treatment facilities. The system supplies water to the Okeechobee Beach
Water Association. However, the contract for this purpose expires in 1994.
Water for the system is supplied by a 3.2 -MGD capacity, surface water
plant. The City of Okeechobee is in the process of developing, in two
phases, a groundwater, two -MGD plant. A 0.6 -MGD plant also provides
sewage treatment. Plans are underway to expand the wastewater
treatment plant to 1.3 -MGD.
Components of the system vary in age, ranging from about 65 years to
new. Thus some of the system's structures are reaching the end of their life
expectancy. Some of the system's components are new, under
construction, or were recently rehabilitated.
Definitions In valuing the utility, the appraiser must first identify and
define the type of value most appropriate to the subject system, then
base his valuation upon its stipulations. In this regard, based on the
subject utility and its characteristics, the appraiser seeks its MARKET VALUE,
which is defined as follows:
'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:
a) buyer and seller are typically motivated;
b) each party is well informed or well advised, and acting in
what he considers his own best interests;
c) a reasonable time is allowed for exposure in the open
market;
d) payment is made in terms of cash in United States dollars, or
in terms of financial arrangements comparable thereto; and
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e) 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."
(Source: Uniform Standards of Professional Appraisal Practice,
1990, The Appraisal Foundation.)
Note: This definition of "Market Value" reflects terminology currently in use
by leading professional appraisal organizations and, consistent with the
collateral requirements of the lending industry, the need to obtain the
most probable selling price should the property be placed on the market
under the conditions herein specified.
Likewise, the interest appraised must also be defined. For this assignment
the interest appraised is the FEE SIMPLE ESTATE:
"which is absolute ownership unencumbered by any other
interest or estate; subject only to the limitations of eminent
domain, escheat, police power and taxation."
(Source: The Dictionary of Real Estate Appraisal (1984)
Once the fee simple estate value is concluded, it will be allocated
among specified ownership interests.
The Date of Appraised Value is identified as the last date upon which the
subject utility will have been physically inspected by the appraiser valuing
the system.
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PROCEDURAL OUTLINE
Data Collection This includes a general study of the Okeechobee
environs as a whole, identification of the specific area which the system
now serves, and would likely serve, and forecasts of population growth
and analysis of trends impacting the utility system. Projected utility
connections to the subject would also be based on establishment of
existing capacity, volumetric usage and other evidence from the existing
reports on the system, and input from experts familiar with utilities.
Data specific to the subject utility will also be analyzed, including City
Atlas drawings, construction diagrams, operation and maintenance
reports, inspection reports on system conditions, repair and rehabilitation
studies, agency permit applications /approvals, expansion/improvement
plans and historical cost summaries. From these data, the engineer will
develop quantity estimates of existing facilities, including current and
proposed projects. City and County officials are to agree to a listing of
assets, compiled from the foregoing analysis, which are contained in or
are part of the subject system.
The appraiser and engineer will physically inspect the subject property,
assessing the general overall condition of the components, identifying
needed repairs or deficiencies, reviewing current treatment qualities and
evaluating the system for compliance with current municipal /agency
standards.
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The Valuation The appraiser is required to consider all available and
accepted appraisal methodologies, which include the Cost, Sales
Comparison and Income Approaches to Value.
1. The Cost Approach is based on the premise that the value of a
property can be derived by adding the estimated value of the land to
the current cost of constructing a replacement for the improvements and
then subtracting the amount of depreciation (i.e. deterioration and
obsolescence) due to all causes.
a) Vacant Land: The appraiser uses the Direct Sales Comparison
Approach to value the land pertinent to the physical components
(plants, etc.) of the utility. With this method, sales of similar or
comparable parcels are analyzed, compared, and adjusted to
provide a value indication for the land being appraised. This
approach best reflects market behavior and is the most common
technique for valuing land.
b) Improvements: A replacement cost of the system's
components, including the proposed water treatment facility and
proposed wastewater treatment plant expansion, will be
developed. The replacement cost estimate will include "soft costs
such as engineering, management and overhead.
To conclude depredation, the engineer will estimate the remaining
operating life of the components. The remaining operating life of the
system's major components will be based primarily upon a review and
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evaluation of the City's existing maintenance and repair records.
Historical evidence of continuing maintenance efforts to prolong system
life will be identified. Professional judgements and experience will be
used for comparisons against accepted municipal standards and
practices for similar systems of age and type. Overall system inspections
will be conducted, along with city staff, of the systems' major
components. Efforts will be focused on determining representative
conditions which are typical of the system. A small amount of pipeline
samples or coupons would be taken by city staff for evaluation and
review. This would supplement any existing data from previous sampling
or repair work.
For example, if a 20- year -old pump has a typical life of 25 years and the
engineer estimates a remaining operating life of 10 years, then the pump
is estimated to have an effective age of 15 years. It would thus be
considered to have depreciated 60
[15 years effective age
25 years operating Life]
0.60
In the above procedure, a component may be considered to be at the
end of its operating life, but is not penalized for outlasting its typical life
expectancy. The engineer will also develop cost estimates for
repairs /rehabilitation work of identified components of the system. These
cost estimates will account for any restoration work required due to
deterioration from deferred maintenance.
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The replacement cost estimate, less depreciation, will be added to the
value of the land as vacant, to value the system by the Cost Approach.
[d]
Note: To properly complete the analysis by this
approach, the appraiser and engineer will need additional
information on the following:
[a] detailed, itemized accounting of funds spent for the
proposed water treatment facility, as well as budgets
reflecting unfinished and incomplete work;
[b] time line of costs for any other ongoing projects relative to or
within the system
[c] approximate land area and location of the new water
treatment site; further, if any new well sites are to be located
on -site, where fee simple title is to be retained by the City,
then language reflecting the leasehold interest or easement
must be furnished
decision about the consideration of the abandoned sewer
treatment plant in the valuation; either to include the
pumping station and required supporting land (size agreed
upon) only, or existing land site plus salvage value of the
abandoned plant components
[e] determination of the location and dimensions of the site area
[f]
included with the water towers
decision regarding the inclusion of the operations center, also
known as the water maintenance bam, in this valuation, with
identification of the specific dimensions of the site to be
included
2. The Sales Comparison Approach will be considered; however, due
to dissimilarities from the subject among the utilities which have sold, the
transactions are not considered reliable indicators of value. We will
review our records and update our research on a state -wide basis in an
attempt to locate transactions involving any utilities similar to the subject.
If found, they will be considered in the final report; however, without the
additional data now in -hand, we state here that the final report will likely
express the conclusion that this method of valuation was not applicable
to this assignment.
3. The Income Approach analyzes a property's capacity to generate
benefits and converts these benefits into an indication of value. The
appraiser will develop an estimate of the utility's revenues and expenses
to arrive at a net operating income.
Input for this pro forma will come from analysis of all available and
pertinent data, including City of Okeechobee budgets for operation and
maintenance, repair /rehabilitation cost estimates from the engineer, and
the documents listed in the Addenda. The analysis, plus interviews with
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City officials, will assist in evaluating the impact on the pro forma of the
utility not being part of the City.
To test the reasonableness of the resulting rates, income, and expense
forecasts, the appraiser will verify them through a review of the same
items in surrounding and Tike -size utility systems, making modifications, if
necessary.
The appraiser will convert the ensuing cash flow stream to derive a value
of the subject system's debt and equity components. Discount rates will
be estimated from market analysis of current rates of return for both
municipal debt and equity. This procedure will yield a value of the utility
by the Income Approach.
Reconciliation The appraiser will examine the strengths and
weaknesses of each approach and conclude a value which is unbiased
and representative of the defined value sought. In this process both the
quality and quantity of information will be considered in concluding the
final value of the fee simple interest of the subject. In any appraisal,
reconciliation involves the "analysis of altemative conclusions to arrive a
final value estimate." In this regard, the appraiser reviews the entire
appraisal, examines differences occurring among diverse analytical
approaches and their conclusions, then makes an effort to resolve the
inconsistencies to generate a final, reasonable conclusion of value.
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Allocation The fee simple interest value represents the value of all the
interests, which include rate payers [or customers of the utility], bond
holders [debt], and the City per se. In the Allocation process, the debt
interest of the subject is derived by discounting the expected cash flow
stream to the bond holders.
The equity interest of the city is measured by discounting the difference
between the system's cash flow and the distribution to the bond holders.
The rate payers' interest is measured as the difference between the
depreciated cost approach value, less the bond holders' and city's equity
interests.
The following is a preliminary indication of the sources considered in the
appraisal of the Okeechobee utility system.
Preliminary Bibliography: To minimize duplication of expenses, the
appraisal process considers the following documents:
"Resolution #89 -5 (updated listing) Listing of Utility Rates"
"Comparison Analysis Water and Sewer Options Okeechobee area
Water and Sewer Task Force Final Report, 8/1991," PMG Associates, Inc.
"City of Okeechobee Utility Rate Study," dated 12/91, PMG Associates,
Inc.
Proposed $5,000,000 bond for the City of Okeechobee, "Water and Sewer
Refunding Revenue" Bond Series 1992A.
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Reese Macon Associates Utility Atlas Drawings and Maps
"Hydraulic Analysis of the Water System"
"Proposed Water Treatment Plant
Construction Plans"
"Capita! Improvement Needs" [identified in
Master Plan and City Budget]
"Upgrading the Existing Water Treatment
Planf report
Knepper Willard, Inc.
"PMG Financial Pre -1981 Financial Record Study'
Independent Auditors' Report Hill, Barth King, dated 2/10/92, "City of
Okeechobee Utility System Financial Analysis" prepared by PMG Assocs.
"Govemance Alternatives to Provide Regional Water and Wastewater
Services and Facilities to the Urbanized Areas of Southern Okeechobee
County' Nabors, Giblin, et al, report dated July 8, 1992
1987, 1989, and 1992 Bond Documents
Wastewater System Master Plan
Capital Improvement Needs [identified in
Master Plan and City Budget]
Preliminary Engineering Report "Expansion
of Wastewater Treatment Planf
Various Plans for Wastewater System
Extensions
Miscellaneous inspection reports on the system conditions of the City of
Okeechobee Water and Sewer Utility
Updated Comprehensive Plan [Water and Wastewater Elements]
NOTE: Data from the identified documents will be relied upon.
However, the information will be checked for reasonableness.
Any independent conclusions used will be based upon the
appraiser's judgement and expertise.
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