10. Resale discount to the value caused by the limits of vessel exposure period for sale

The marine engineering, commercial vessels and other assets as a part of the marine companies’ complexes are often evaluated as the objects which are sold with a discount connected with limited duration of sale exposure period. And the high capital intensity is one of preconditions of judgments about sale of similar assets in time essentially smaller the typical marketing period as for capital–intensive assets this period is rather great.
           The issues of the given section about evaluation in case of limited duration of exposure period for sale of an asset has no direct relation to an estimation of the difficulties arising during transfer of the asset through the basic technological stages that is considered above (Chapter 9) as an estimation of factors of the corresponding discount and external economic obsolescence.
           The matter is that technological duration of commercial vessel or other asset of the marine company construction and duration of recycling are usually short–term in comparison with duration of productive operation and there is no alternative possibility to sell an asset during acceptable exposure period if sale is made during transfer of technological stages. And mentioned alternative possibility to sell during acceptable period of exposure is included just into the structure of methodological preconditions for asset value discount estimation in case of a short exposure period.
           The issues printed below are concerned with the generalization and the methodological analysis for the evaluation of the resale discount at the second hand market sale when limited duration of exposure period for sale is more important than the difficulties of the parties shifted to the seller, this aspect concerning new assets and constructed vessels was considered earlier (Chapter 9).
           The extent of the economic importance of expensive assets exposure for sale can be judged on the basis of historical reviews as it is known, that some large fortunes were gradually formed by buying up marine commercial vessels being sold at the second hand market in case of limited duration of exposure period for sale with corresponding value discounts. An example is the business of the known businessman, ship–owner and millionaire Aristotle Onassis.
           Some authors consider the following methods for determining the resale discount related to limited duration of exposure period for sale.
           To determine the resale discount V.V. Galasjuk has offered a concept of «loss–free sales of goods at prices below their market value»: the losses arising from selling goods at the prices below their market values would be compensated by the seller’s incomes from distributing cash facilities received earlier from the sale of the lesser money amount for these goods. Apparently, the «drawback» of this approach is that it is based on the analysis of the seller motivation, but not the buyer one, though the interests of the buyer should be considered as an important factor when estimating the vessel or other capital–intensive asset which the seller is forced to sell.
           The technique of the qualimetric approach to estimation of the value in case of the compelled sale offered by G.G. Azgaldov is based on calculation of the resale discount by expert determination of the factors of importance forming a «tree of qualities» of an estimated object. Working out of «trees of qualities» perhaps is a subject of researches and in applied tasks can be difficult.
           The technique offered in the International academy of appraisal and consulting is that the resale discount is predetermined by two factors F(T_MV, t_MV) and F(El), related to the limited duration of exposure period compared with the required for the adequate marketing exposure period and when one of parties is compelled to sell the vessel, and the other party aware of this.
           It can be presented it as product of two functions:

DF = F(T_MV, t_MV)×F(El) ,

where DF – the resale discount (Discount Forced), defined as the difference between the commercial vessel (or other asset of the marine company) market value and the value in conditions of compelled sale DF = MV – MVF, where MVF is the value in conditions of compelled sale (liquidating value, Market Value Forced); T_MV – the duration of the typical marketing period for vessel sale at market value; t_MV – the duration of the exposure period at the compelled sale; El – the factor of elasticity of the supply in relation to the demand (marketing indicator).
           When using the technique of International academy of appraisal and consulting for evaluation of the resale discount, it is required to determine factor of elasticity of the supply to demand El.
           When the sale of the commercial vessel or other real asset of the marine company is forced and the exposure period is to short compared with the typical marketing period the value corresponds to the bottom limit of reasonable (fair) prices range that is unprofitable for the seller.
           From the economic point of view the concept of the typical marketing period is connected with the possibility of commercial vessel sale at higher price provided that the exposure period is increased to certain limits.
           In case of the compelled sale with the resale discount with the account reasonable benefit of the buyer the obligatory elements influencing the discount to the value DF are the typical marketing period and market value MV which would have developed in case of unlimited and not compelled sale.
           Considering only the element of the buyer’s activity, which is connected with acquisition of the commercial vessel from the owner forced to sale during the short period of time, less than typical marketing period T_MV, the resale discount DF to the market value MV on the basis of discounting under the rate i is calculated by the formula

The resale discount DF to the market value is influenced by the indicator of duration of the typical marketing period TMV which value demands substantiation in order to determine the resale discount DF and the value in compelled sale MVF correctly.
           The duration of the typical marketing period T_MV for vessel sale at market value MV is a macroeconomic index and depends on following circumstances: on the general economic situation and on characteristics of the market segment.
           To determine the duration of the typical marketing period T_MV that is an exposure period selling at market value it is necessary to consider the concept of basic definitions: vessel value in use and the value in exchange.
           The value in use corresponds to estimation by the proprietor of the good concerning the possession of the commercial vessel (or other asset of the marine company). The value in exchange means commercial vessel evaluation by the economic environment.
           Immediately after acquisitions that is previous exchange for a sum of money and establishments of the property rights the vessel (or other asset) economically is in a dual condition – using and exposure for an exchange, that is the vessel (or other asset of the marine company) is presented to an exchange continuously immediately after property establishments irrespectively of whether the proprietor realizes that the vessel is continuously presented to an exchange.
           The owner keeps from exchange due to the insufficient sum – the value in exchange offered for a vessel in a corresponding segment of the market, which, as the exchange does not occur, is less than the value in use, therefore the exchange is excluded and productive operation proceeds.
           The condition of a continuous exposure for exchange does not follow from the preliminary taken belief of the owner concerning the choice of continuation of productive operation of the commercial vessel (or other asset) or sales.
           Whether the vessel will be sold and whether its productive operation will be continued, it depends on supply and demand parity at corresponding segments of the market, rather than on personal desire of the owner as he is rational. It is rationality of the owner proved by his present solvency (that is not less than the rights concerning his own vessel), which means an adequate reflexion of the market environment and his own economic interests in this environment serving as a criterion for the decision of sale.
           As for the choice to sell the commercial vessel or to continue the productive operation the owner is influenced by the supply and demand parities, that is the owner of the commercial vessel is a subject influenced by an economic environment, and in this sense the owner is not free to decide to sell the vessel or not, and he searches for the answer in the market demand and supply analysis, it means that the owner is rational in his choice of decisions to sell the commercial vessel or to continue productive operation.
           If the rights of the owner in respect of the vessel (or other asset of the marine company) correspond to Article 209 of the Civil code of the Russian Federation (or comparable property regulations in the USA, Britain, Canada or European Union) and include together in a complex the rights of possession, distribution and use the continuous characteristic of commercial vessel exposure for sale follows from complex property of the acquired rights among which besides the right of commercial vessel use (operation), the right of disposal is presented too. It means that the owner has the right to sell the vessel at any day, depending only on the market environment, that is, after vessel acquisition simultaneously with productive operation she is continuously offered for sale and the owner estimates the market environment in terms of analyzing whether he can continue productive operation of the commercial vessel.
           The continuity of the commercial vessel exposure for the subsequent sale from the day of purchase follows only from the set of the property rights: possession, disposal and use acquired when purchasing the commercial vessel.
           One can say, that the exposure of commercial vessel (or other asset of the marine company) period selling is defined by the following three objective elements:
           – Beginning of the exposure period to sale – it s the time of commercial vessel acquisition;
           – Structure of acquired property rights complex among which there is an right of disposal if the property rights correspond to Article 209 of the Civil code of the Russian Federation (or other comparable regulations) that means, that after acquisition the vessel (or other asset) is continuously offered for sale;
           – Conjuncture of an economic environment, that is the relation between supply and demand in market environment, which predetermine the value in use and the value in exchange, taking into consideration, that the value in exchange exceeds by a distinguishable size the value in use at the day when there is an exchange and the exposure period for sale in this case ends.
           It is necessary to underline, that when selling the distinguishable size of excess of the value in exchange over the value in use is not equal to the resale discount, and corresponds to a distinguishable error of estimation of the value in use, the value in exchange and the market value.
           While selling the commercial vessel, for the seller the value in exchange exceeds the value in use by a distinguishable size, and for the buyer the value in use exceeds the value in exchange.
           It should be added, that the first of the specified elements defining the period of an exposure to sale, namely the day of commercial vessel (or other asset of the marine company) acquisition is objective too and is a generalization of the set of two other elements only for the former owner – before vessel purchasing.
           Thus, the fact that the vessel (or other asset of the marine company) is continuously offered for sale – to an exchange for money, and therefore continuously is in condition of the exposure for sale.
           And the value in exchange is typically less than the value in use, except at the time of exchange, that is such in which the value in exchange is equal to the value in use or exceeds the value in use by the distinguishable size – by an error of estimation of value in use, value in exchange and market value.
           The equality within a distinguishable size of the value in exchange and the value in use is the economic reason to sell the vessel – to exchange her for a sum of money.
           The market value of the commercial vessel at the moment of sale is equal to the value in use and in exchange within an error, that is, within a distinguishable size which can be defined as the trade discount.
           Sometimes the trade discount which methodologically concerns an error of value estimation, that is evaluated difference between the value in use and the value in exchange or difference between these values and market value, is wrongly correlated with the resale discount.
           The error lies in the fact that if when defining market value, of the trade discount, that is a small size of a distinguishable error of evaluation, is applied instead of the resale discount connected with the duration of exposure period and the duration of the marketing period or with difficulties of the parties experienced and shifted to the seller, the result of the estimation is not the market value but the liquidation value.
           The equality of the value in use and the value in exchange can be considered as one of market value definitions – the theoretical definition along with algorithmic definition of market value as a result of the coordinated application of three independent approaches and along with standard definition of market value under Federal appraisal standards or other comparable standards, that is, market value can be defined independently from the methodological, algorithmic or standard points of view.
           It leads to introduction of the axiom based on belief that market value based on methodological definition, algorithmic and standard is a uniform concept.
           During the rest of the time – the period between vessel sales at market value – the value in use depending generally on commercial vessel profitableness is typically more than the value in exchange, depending not only on commercial vessel profitableness, but also on a relation between supply and demand and also on commercial risks. It is the excess of the value in use over the value in exchange that keeps the proprietor from selling the vessel.
           Changing supply and demand parity leads to the increase of the value in exchange to the size of the value in use or to depreciation of the value in use to the level of the value in exchange – when there is an insufficient economic efficiency of the commercial vessel, the proprietor has motives to sell the vessel. And the publication of the owner decision about sale does not mean the beginning exposure to sale, quite on the contrary – it means the end of exposure and the beginning of technical procedure of sale registration which duration is much less than the duration of the exposure period to sale.
           The duration of technical procedure of sale registration is short–term in relation to the duration of exposure period of the commercial vessel for sale that is in relation to the duration of the period during which the owner, after purchase, productively uses a vessel, simultaneously estimating the market about possibility to sell the vessel.
           The duration of the exposure period of the commercial vessel or other real asset of marine company T_MV – the typical marketing period – is equal to the most probable duration of the period between sales at market value in the corresponding markets.
           Probably, the duration of exposure T_MV for sale can be correlated with the duration of a payback period – to equate or accept multiple which, in turn, is in return conformity with the index of investments efficiency T_MV ~ TR~ 1/i (correlated with the sum of commercial risks).
           The vessel can be reoffered for sale at the markets in the states (jurisdictions) with higher rate of inflation, weaker economic and social infrastructure, not having own developed industrial manufacture that is in case of absence of national innovative economy.
           And functional and physical characteristics of commercial vessel remain unchangeable, but depreciation of value in use to the value in exchange is caused mainly by transition to other market with higher commercial risks, in particular to the second hand vessels market – when there is a change of economic environment characteristics.
           Usually the resale of marine commercial vessels or other assets (engineering and equipment) is done in less developed countries, and the resale of real estate – to less wealthy owners etc.
           From the point of view of the new proprietor the vessel value in use after acquisition exceeds the value in exchange that keeps it from immediate resale which can occur only in the next market separated in space (geographically) or in time.
If in order to determine the resale discount in case of sale in a period, essentially smaller the typical marketing period the following methodological assumptions will be used that:
           – Formula (10.1) transformed under the form of discounting by exponential functions (see article 13) of the Euler's number

,

with the account  with small values of the discounting rate i, at which
i≈ ln(1 + i), that is if i ≤ (0.15 ÷0.20);
           – There is a conformity of the duration of typical marketing exposure period exposure period with investments payback period (as a special case of proportionality) and with index of commercial risk T_MV ~1/i;
           – There is an assumption that the discounting rate i is rather insignificant, and the duration of typical marketing period T_MV for this reason is not small;
           – If to consider, that from the point of the systematic approach in frameworks of the general probabilistic assumption «the average vessel» (or other real asset of marine company) is in the middle of the period (T_MV ×½) between its previous and the subsequent sales at market value – the resale discount to value, in case of vessel sale in a period essentially shorter than the typical marketing period, can be estimated approximately as:
,

,

that is, the discount for the compelled sale of «the average vessel» (or other real asset of the marine company) in a period essentially shorter than the typical marketing period makes about 40 % of its market value MV.
           Generally, if the position during the marketing period t_MV/T_MV (relative value, in the applied purposes evaluated by the expert opinion is known), the resale discount in case of sale in period essentially shorter than the typical marketing period is determined as:

where t_MV is the duration of productive operation of commercial vessel (or other real asset of marine company) after purchase.
           Within the limits of the accepted assumptions the discount to value for liquidity in case of sale in a period essentially shorter than the typical marketing period for a new vessels (recently bought, when t_MV/T_MV = 0.0) can make about 60 % of value:

,

and for not a new vessels and at the end of commercial vessel life cycle, that is when t_MV/T_MV = 1, the discount to the value for liquidity can correspond to zero: .
           It is interesting to note, that the resale discount in case of vessel sale in a period essentially shorter than the typical marketing period when using the discounting by the Euler number exponential function by the factor eⁱ according to the resultant formula (10.2) does not depend on the discounting rate and it is connected only with mathematical constant e, if we don’t take into account that the duration of the typical marketing exposure period depends on the discounting rate i in exponent T_MV ~1/i in the assumption of correlation of the duration of the typical marketing exposure period with an investments payback period. And with the account the assumption of the typical marketing period correlation with a payback period and with commercial risks as the discounting rate the resultant dependence (10.2) the resale discount in relation to commercial vessel productive operation duration and period exposure for sale after purchase becomes .
           At the same time using the discounting (10.1) by factor (1 + i) unlike discounting by the Euler number exponential function (10.2) the resale discount depends on the discounting rate i in an explicit form, but there are no objective bases for definition of typical marketing period duration T_MV in an exponent which in this case is defined subjectively.
           Apparently, the expert estimation of the commercial vessel (or other asset of the marine company) position during the marketing period t_MV/T_MV in the proportional relation for definition of the resale discount by the formula (10.2) derived using the discounting by the Euler number exponential function is more logical than definition of the absolute size of typical marketing exposure period t_MV if for that there are no alternative convincing bases.
           Anyway, to determine the position during the marketing period t_MV/T_MV it is not required to consider dimensions and the expert decision should be accepted in the limited interval – from 0.0 to 1.
           In applied expert researches besides the economic index of the resale discount applied to value estimation for compelled sale conditions the index of the trade discount applied in case of market value determination based on comparable sales approach according to analogues is also used.
           It should be noted that mixing of these concepts is widespread enough, that, in this case would be a methodological error, namely if when estimating based on comparable sales approach the trade discount is mistakenly applied instead of the resale discount the received result is not market value and it corresponds to value for conditions of the compelled sale – liquidating value.
           The probability of this error is rather great as the concept of the trade discount methodologically and regulatively is not introduced in the applied economics, and by experts the colloquial term «the discount for trade» can be applied. This indicator is usually determined intuitively and applied as the adjustment to the market value when estimating based on comparable sales approach.
           To eliminate methodological error it is necessary to define what should be to understood by the term «the trade discount (extra charge)» in applied economy. Then it could be possible to find ways of the trade discount (extra charge) estimation, considering, that this index should not be mixed with the resale discount.
           Possibly, unlike the resale discount, the trade discount (extra charge) corresponds to a statistical error of value estimation and cannot be defined from economic methodology point.
           The value estimation error means an interval of values in which the value cannot be determined authentically that is an interval in which the value is accurate reliable.
           The smart seller will not reduce the value below the bottom level of its values and the smart buyer will not pay more than the top level of accurate values.
           As vessel sale (or other asset of the marine company) occurs, when the value in exchange distinguishably exceeds the value in use this distinguishable value meaning an error of estimation of value in use, value in exchange and market value, just corresponds to an error of estimation and can serve as a reference point for estimation of the trade discount (extra charge).
           Taking into account, that for expert estimation if is usually used not a standard value definition under Federal appraisal standards (or under other comparable standards) and not a theoretical definition as an equivalence of the value in use and the value in exchange and algorithmic estimation as a result of the coordinated application of three independent approaches, it is possible to judge about an error of an estimation, and hence, about the trade discount (extra charge) by the correlation of the values determined by independent approaches.
           The possibility of the trade discount (extra charge) estimation by the statistics depends on whether statistical regression is applied for the value estimation based on comparable sales approach or other suitable for estimation of the error model, such as, imitation, or the value is estimated based on comparable sales approach according to separate analogues and in that case it is necessary to have other expert way or a reference point to determine the estimation error by which it is possible to judge about the trade discount (extra charge).
           It is possible for example to correlate an error of estimation with the minimum value which can be estimated for real asset.
           For example, if the minimum of the marine commercial vessel value is residual liquidation value (scrap cost, that is value at the compelled sale of commercial vessel as sets of materials and without functional suitability of parts), without researches of statistical sets there is a basis consider expertly the of the scrap cost as an error of market value estimation which with accumulation of irremovable depreciation can decrease to zero, but with a certain error of zero estimation which is equal to the scrap cost.
           In this case, if the error of commercial vessel (or other asset of the marine company) market value estimation cannot be executed using the comparable sales approach by the statistical set of analogues, for expert determination of the trade discount (extra charge) in case of estimation by the comparable sales approach it is required to estimate also the residual liquidation value which, anyway, is not below the market value estimation error that is, it is proportional to the trade discount (extra charge).
           By the considered reasons if the trade discount (extra charge) is used in case of estimation based on comparable sales approach it should be determined and applied by absolute (monetary) value, contrary to popular examples of «discounts for trade» applied on subjectively appointed relative value – in relation to the value of the vessel (or other asset of the marine company).
           It is reasonable to add it is not quite clear if it is reasonable to apply the trade discount (extra charge) in case of estimation of commercial vessel or other asset of the marine company by the comparable sales approach not only because this index is not defined by the standard but also due to fact that methodologically it is not always clear what sign should be used to make the corresponding adjustment to the market value – a minus or plus.
           On the other hand, as the sale of capital–intensive assets, in particular marine commercial vessels, is practically always characterized by difficulties for the seller the general discount usually includes also the resale discount, besides the trade discount (extra charge).
           The total discount in the certain proportional relation depends on both the obstacles experienced by the seller (or on the limited exposure period selling) and the error of commercial vessel (or other asset of the marine company) estimation.
           Apparently, the values offered in information databases of broker companies for vessels or other assets of the marine companies sale that is so–called «the prices of the supply (demand)» (that is also not quite a certain concept from the methodological point) are a border of market values and can differ from market value by a distinguishable error of its estimation, that, by the way, serves as a concept of the price of the supply (demand).
           Between the value of the supply (demand) of the commercial vessel (or other asset of the marine company) and the market value determined based on comparable sales approach there is no present basic distinctions, and these indicators differ by an estimation error, and the value of the supply (demand) is methodologically defined through the market value.

Test questions

1. Causes of the commercial vessel (or other asset of the marine company) compelled sale.
            2. Concept of the value in case of the compelled sale (liquidating value). The resale discount.
            3. Standard definitions of liquidation value (in case of the compelled sale of the commercial vessel).
            4. Techniques of the resale discount determination. The methodical limitations and assumptions of V.V. Galasjuk, G.G. Azgaldov.
            5. Definition of the resale discount by the method of the International academy of appraisal and consulting. Factors and multipliers influencing an estimation of the resale discount.
            6. Influence of the exposure period duration and the typical marketing period for value in case of vessel sale.
            7. Typical marketing period as the duration of exposure period for vessel sale at market value.
            8. Definition of the resale discount with the account the limited duration of the exposure period of the typical marketing period (the formula derivation).
            9. Methodological definition of the market value by the correlation of value in use and value in exchange.
           10. Methodological concepts of value in use and value in exchange, as factors of the marketing period estimation.
           11. Stability of commercial vessel ownership, based on excess of value in use over the value in exchange.
           12. Elements of commercial vessel exposure for sale.
           13. Beginning of the exposure after buying of the right of disposal and the end of the exposure by sale of the commercial vessel as a result of excess of value in an exchange over the value in use (for distinguishable size, correlated with margin error of estimation).
           14. Beginning of the marketing period after buying the right of disposal as a part of property rights set in case of vessel purchase.
           15. Exposure ends with publication of the decision to sell the commercial vessel and the beginning of technical procedure of sale.
           16. The hypothesis of correlation of the duration of exposure of the typical marketing period to the multiple to payback period in interrelation with commercial risks and the discounting rate.
           17. Marketing causes of value in use depreciation to the value in exchange before vessel sale.
           18. Methodological assumptions when determining the resale discount to the value for vessel sale in a period essentially shorter than the typical marketing period.
           19. Resale discount in case of the compelled sale of a recently bought vessel, not a new vessel and «the average vessel». The relation of the discount to market value.
           20. Definition of the resale discount depending on commercial vessel position during the marketing period (the formula derivation).
           21. Estimation of the resale discount depending on commercial vessel productive operation duration and exposure for sale after purchases (the formula derivation).