BIGGS APPRAISAL. Value Trends in The Rail Fleet Southeast Association of Rail Shippers March 27, 2013

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BIGGS APPRAISAL Value Trends in The Rail Fleet Southeast Association of Rail Shippers March 27, 2013

Objectives of this Presentation Who is this Biggs Guy? Biggs Appraisal Your Expectations in an appraisal Freight Car Life Issues Current look at the market for various rail car types

Biggs Family in Railroad Industry Since the 1850 s

Ed Biggs Helped start the Kankakee Beaverville and Southern RR in 1977 a 26 mile shortline. He was the mechanical department and engineer. Various positions at Maryland and Delaware RR, Bay Colony RR and Seminole Gulf Ry. Directed operations at three rail equipment lessors, XTRA Inc, Chrysler Rail and Railcar Ltd. Senior Rail Equipment Appraiser for Norman Seip and Associates.

Biggs Appraisal Business focus: Inspection of freight cars, locomotives, maintenance of way equipment, passenger cars and railcar movers. Appraisal of value of rail equipment. Remarketing of Rail Equipment. Rail Equipment related consulting and research services.

The Uniform Standards of Appraisal Practices (USPAP) are the guide lines for all appraisers.

A Few General Points on Value You as a consumer should expect a clear understandable and credible appraisal of value of the subject equipment. I would like to give you a small refresher on how an appraiser values equipment. There are three recognized approaches to value, Market, Cost and Income. An appraiser is obligated to consider all three approaches to value.

Market Approach Market Approach: The market approach also called the Sales Comparison Approach, indicate value by analyzing recent sales (or offerings) of property that are similar (i.e. comparable) to the subject property. If the comparables are not exactly like the properties being appraised, the selling prices of the comparables are adjusted to equate them to the characteristics of the properties being appraised.

Cost Approach Using the cost approach the appraiser starts with the current replacement cost new of the property being appraised and then deducts for the loss of value caused by the physical deterioration, functional obsolescence, and economic obsolescence. The logic behind the cost approach is the principle of substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility.

Income Approach The value of a property can be estimated by its expected future benefits to its owner. Note: The income approach is not widely used by Machinery and Equipment appraisers: the reasons given include the difficulty in determining income that can be directly related to a specific asset, the concerns of income forecasts and the multitude of variables involved in this valuation approach.

Fair Market Value Fair Market Value is the cash price obtainable, in an arm s length sale transaction between an informed, ready and willing purchaser (other than a used equipment dealer or scrap dealer) under no compulsion to purchase; and an informed, ready and willing seller, being under no compulsion to sell.

Orderly Liquidation Value Orderly Liquidation Value is the estimated gross amount, expressed in terms of cash that could be typically realized from a liquidation sale given a reasonable period of time to find a purchaser (or purchasers), with seller being compelled to sell on an as-is, where is basis, as of a specific date.

Normal Useful Life Most financial transactions centered on General Service freight cars are based upon a Normal Useful Life of between 28 and 36 years depending on the service the cars are used in. Certain cars might have a much shorter Normal Useful Life as in the case of Eastern Style steel hoppers. These cars generally require a rebody between 18-22 years.

Having a Second Life. It is quite possible that Freight cars can now have an almost equal number of years of Interchange Service or a Second Life up to 65 years.

Extended Life Status Cars built after June 30, 1974 have a 50 year life. Cars built between July 1, 1968 and June 30, 1974 can attain 50 year life by meeting extended life rules. Railcar owners found that many active cars in their fleet had already had the big ticket upgrades made and it was very cost effective to extend the life of active cars. Most Life extensions occur just before cars reach their 40 year birthday.

A very important provision of the ILS rule The 65 year rule only covers the car body and not the running gear. That is where Rule 90 of the Field manual comes in Cars and or car parts Prohibited in Interchange. The big ticket items that cannot exceed 50 years are the truck bolsters and side frames.

If you re taking the long view on your cars life you will want to replace the bolsters and side frames with either new or reconditioned side frames that are at least 15 years newer than your car.

Where are we Today on Rail Car Values If you look at the AAR Supplied cars in Storage numbers of 20.4% or 311,739 cars stored as of March 1, 2013. You might think that there are plenty of free and available cars. That is just not the case. The majority of cars stored are either owned by a user or leased and not available. Available cars in the market in many cases require considerable, repair, modification of upgrades to be suitable for service. Quality cars of most types are scarce.

Values of Freight Cars Current value is tied to demand for commodities the cars carry. Move on the railroad is to higher capacity 286,000 Pound Gross Rail Load Cars with freight rates a tipping point. While I believe the values presented are representative of what may be realized they cannot be guaranteed.

Commodity Trends 2013 vs 2012 Based on the First 10 Weeks of 2013 with Average weekly carloads Chemicals down 3.3%, 29,675 Coal down 2.6%, 110,053 Farm and Food Products up 1.1%, 16,694 Forest Products down 3%, 10,954 Grain down 16.5%, 18,011 Metallic Ores and Metals down 8.4%, 23,393 Motor Vehicles and Parts up 6.2%, 15,431 Petroleum up 46.5%, 13,300 Source Association of American Railroads

Grain Type Covered Hoppers 4750 CF late 1970 s to early 1980 s range $17,000 to $22,000 cars in very good condition could be higher. 5150 CF Mid 1990 s range $35,000 to $40,000. Soft Exports of Grain and Drought related lower crop production have masked a potential shortage of cars

Plastic Pellet C214 Covered Hoppers Mid 1970 s to Early 1980 s 5700-5800 CF Range from $19,000 to $23,000 with values trending up as supply is tight. Mid 1990 s 5700-5800 CF $32,000 to $40,000. Assumes cars in good condition with a lining that is in good condition suitable for loading.

Open Top Hoppers H350 Type Mid 1970 s to Early 1980 s 3200 to 3800 CF Range from $15,000 to $20,000 Mid 1990 s 3200 to 3800 CF $28,000 to $34,000. This car type is referred to as an Eastern Coal Hopper. Steel body cars in Eastern coal show the effects of corrosion in thin side and slope sheets, thin door pans and cracks in chutes.

Mill Gondolas 1970 s to early 1980 s with 5 sides range $17,000 to $25,000 cars in very good condition could be higher. Mid 1990 s with 5 ½ to 6 range $35,000 to $40,000.

Tank Cars Demand for crude oil tank cars has pushed up pricing on all new tank cars. New tank car production is booked into mid 2015. Limited ability to produce other tank cars will cause pent up demand past 2015. Existing tank cars of all types have increased in value.

General Service Type T104 12,000 to 18,000 Gallon Capacity 1980 s Vintage $17,000 to $27,000 depending on gallon capacity. Larger cars in higher demand. Mid 1990 s 16,000 to 18,000 gallon capacity $38,000 to $45,000. Mid 2000 s 16,000 to 18,000 gallon capacity $59,000 to $67,000.

Buyer Beware Higher velocities on railroads mean that even late model cars can have high wheel and truck wear. Inspection of used rail cars prior to purchase is a good way to avoid problems. Cars that come into the market during periods of tight car supply may have issues that are costly to cure.

Biggs Appraisal Subjects of Value Spring 2013 Issue of Subjects of Value Newsletter. Articles geared to rail industry, equipment, value and subjects regarding topics that may impact value. If you find these Subjects of Value you should be on the mailing list. Newsletter