Trees: What is Your Tree Worth? (part 2)

Part 2 - The Cost Approach (Replacement Cost and Trunk Formula Method)

By William M. Fountain and Ellen V. Crocker 

Trees provide numerous environmental, economic, and even health benefits to city residents.  However, it can be difficult for homeowners to assess the value of individual trees or landscape plantings and to budget for the costs associated with their care. To help shed light on this issue, this three part series, “What is Your Tree Worth?” will introduce key concepts in assessing the value of landscape plants as well as the costs associated with repairing, maintaining, and improving their health.

How is the value of trees assessed?

There are three main assessment techniques that professionals use to determine the value of trees: the cost approach, the income approach, and the market approach. In this article we will begin to discuss the cost approach method, describing the first two types of cost approach methods: replacement cost and trunk formula.  The second two cost approach methods (cost of repair and cost of cure) will be covered in the next section, Part 3, along with an explanation of the income approach and the market approach.

Cost Approach:

When assessing property values, real estate appraisers consider both the estimated cost of the land and the estimated costs of construction.  The cost of depreciation is subtracted from this value to give an estimate of the current value.  With landscape plants, a similar estimation is made for the cost of replacement or the calculation of the current value for plants too large to transplant.  The condition of the plant, location, and species are depreciation factors.

The cost approach is sub-divided into four methods; Replacement cost method, trunk formula method, cost of repair method, and cost of cure method.  Determining which method should be used can be challenging and is typically site and situation dependent.  Because of this, it is often beneficial to calculate tree value or the cost of a tree loss using two or more methods. The first two cost approach methods (replacement cost and trunk formula) are covered in this section and the second two cost approach methods (cost of repair and cost of cure) are covered in the next section, Part 3.

Replacement Cost

The replacement cost method is the easiest to calculate and often most appropriate of the cost approach methods.  It involves estimating the cost of finding, purchasing, transporting, and installing the largest available plant(s) of the species lost, or of a similar species.  The cost of removal of the old tree and restoration of the area to its former condition is also included as expenses involved with the replacement method.  These replacement plants are up to the size of the individual plant(s) lost.  The cost of supplemental care necessary for newly transplanted specimens to become reestablished after transplanting is added to the cost of obtaining and installing the replacement plant(s).  Supplemental costs such as insurance, fees, permits, overhead, and profit are also taken into account.

Trunk Formula Method

The trunk formula method considers the species, condition, size, and location of trees to assess their value.  This method is used for trees, but not shrubs and vines, since trunk diameter is challenging to assess and less informative for these plants.

The trunk formula method is one of the most commonly used (and misused) techniques for assessing values of trees and, because of this, here we will go into greater detail about the major components of this method: 1) species factor, 2) tree condition, 3) tree size, and 4) tree location.

1) Species Factor – One component of the trunk formula method is assigning different plant species particular values to aid in estimating their worth. The rating factor for each species, determined by a committee of plant experts, takes into account the performance of landscape species in different geographic regions. Factors that influence the tree species rating in this system include:

• Climate Adaptability: heat/cold hardiness, frost tolerance, drought tolerance, storm (ice, snow, wind) tolerance.
• Growth Characteristics: tolerance to different sites, vigor, structural strength, aesthetics, life expectancy, pruning requirements, potential to be invasive.
• Soil Adaptability to structure & texture, drainage, moisture, acid/alkaline, mineral element (nutrients).
• Resistance/Tolerance to diseases, insects, air pollution

The value of a particular plant species varies with geography; the same plant (or even cultivar within a species) can score differently in different locations based on USDA hardiness zones (http://planthardiness.ars.usda.gov/). It is important to note that the rating system considers the general geographic location of the plant and not the particular condition under which a specific individual is growing.

Because the species factor rating cannot distinguish different ecological areas within a geographic region or variation within a particular plant species, keep in mind that it may not be the most accurate assessment of tree value.  In addition, there are sites where growing conditions are so unfavorable (i.e. extreme pH or moisture relations) that only one or a very limited number of species can survive.  Under these adverse conditions, an assessor can adjust the species-rating list.

2) Tree condition - The condition of trees or other landscape plants can be assessed by comparing their health and structural integrity before and after damage.  However, trees with a high risk of failure and with the potential to cause harm should not have a valuation performed and should instead be promptly assessed by an individual qualified in performing an International Society of Arboriculture (ISA) Tree Risk Assessment®.

            Factors influencing tree condition include, but are not limited to:

• Structural Integrity: Factors include broken or dead roots, raised soil, broken or dead branches, decay, codominant stems, included bark, and asymmetrical growth.  With trees, structural integrity can be very important, but it is rarely an issue with shrubs and vines.  Instead, these plants are generally assessed only on their health and abiotic disorders.
• Plant Health: Factors include mature size, leaf color and size, shoot elongation, and potential for failure in the future.
• Other issues including abiotic disorders, physical injuries, chemical damage, limited growing space, improper installation, and poor maintenance practices.

Taking into account these factors, a numerical system is used to assign a score for condition. To learn more, consult the Guide for Plant Appraisal (9th ed.) pg. 34-35.

3) Tree size – For assessments, the size of deciduous trees and conifers that have been limbed up is usually expressed with the height, trunk diameter and/or canopy spread.  The size of shrubs and conifers, on the other hand, is usually expressed with height and canopy spread but not trunk diameter. To determine tree diameter, measurements are taken at the trunk heights listed in Table 1.

Table 1. Measuring tree diameter for different sized trees

The area of the trunk is calculated by squaring the radius (half the diameter) and multiplying by Pi (3.14) but D-tapes (measuring tapes with built-in diameter calculations that can be wrapped around the tree trunk) are frequently used to obtain the diameter. 

A few special considerations when measuring tree diameter:

• Trees with elliptic cross sections will have a smaller cross sectional area than trunks that are circular.  Elliptic trunks must be calculated using the formula:

Area = (0.785) (largest diameter) (smallest diameter)

• If the tree is growing on a slope, the diameter is measured 4.5 feet above the point half way between the upper and lower side of the slope. (Figure 1)

• If the tree is leaning, the diameter is measured 4.5 feet above the high point of the trunk and perpendicular to the axis of the trunk. (Figure 2)

• Branches of trees fork below 4.5 feet above the ground or are multi-stemmed (branching at the ground) are measured individually at 4.5 feet above the ground. (Figure 3 & 4)  The cross-sectional area of each branch is then summed.

• Sometimes trees are no longer on the site and images are not available.  In situations where only the stump remains, the diameter of the remaining tree can be compared to trees of the same species and similar size in the region.

• Trees reach an economic and aesthetic maturity.  To prevent the annual increase in size from exceeding the contribution to the value of the landscape, an adjusted trunk area value is used for trees exceeding 30 inches (76 cm) in diameter.  For more information, consult the Guide for Plant Appraisal (9th ed.) pg. 39.

4) Tree location -, Site characteristics are also important in calculating tree value.  The assessor considers the contributions and placement of the tree on the property.  The benefits offered by a tree to a particular location will be influenced by many factors including its size, shape, branch structure, foliage density, and association with other plants in the landscape.  For example, a planting adds value by acting as a privacy screen, a wind break, a snow block, controlling dust, preventing erosion, providing wildlife habitat, or influencing energy conservation.  In addition, tree placement can detract value, such as when litter from fruit becomes an issue.

The loss of a tree can depend greatly on its context.  For example, the loss of a single isolated tree is more significant than the loss of a tree from a cluster.  The loss of a tree placed to reduce the effect of winter winds would be more significant than an identical tree not serving this function.  The loss of a tree from a fence row is less critical than if the tree had been in a managed landscape however, trees that are not in managed landscapes may also be assessed for their value as timber or firewood.

A location rating is derived by averaging a tree’s site rating, contribution rating, and placement rating. To learn more, consult the Guide for Plant Appraisal (9th ed.) pg. 54.

Calculating assessment with the trunk method

Cost per square inch is calculated by looking at the cost of the largest available tree, installed and guaranteed for 1 or 2 years.  This cost is divided by the number of square inches of trunk area.  For Kentucky, $50 per square inch is used as an average for ornamental trees but the assessor has the option of recalculating this.

The trunk formula is calculated by multiplying each of the following values:

• Dollar value per square inch of tree (generally $50.00)
• Number of square inches of trunk diameter
• Percent value for the species rating
• Percent value for the condition rating
• Percent value for the location rating

Trees that are considered undesirable (invasive species, messy trees, or trees with foul smelling fruit), trees in poor condition, and poorly positioned trees may actually have a negative value.  For example, if a damaged tree would cost more to remove than it was worth prior to being damaged.

Keep in mind: the value assigned to a plant cannot exceed the change in sales value it represents for the property. This can become problematic when assessors assign a value to one or more plants in a landscape that is excessively high when compared to the market value of the property.  Also, it should be noted that as of this writing, the IRS does not accept the trunk formula method for evaluating loss.

Images

1.  Tree on slope. (Illustration from Guide for Plant Appraisal, ISA)

2. Leaning tree. (Illustration from Guide for Plant Appraisal, ISA)

3. Tree branch fork below DBH. (Illustration from Guide for Plant Appraisal, ISA)

4. Tree multi-stemmed branching at ground. (Illustration from Guide for Plant Appraisal, ISA)

About the Authors

Dr. William M. Fountain is an extension professor in the University of Kentucky Department of Horticulture and an ISA Board Certified Master Arborist.  Email @ Bill.Fountain@uky.edu

Dr. Ellen V. Crocker, University of Kentucky, Department of Forestry Extension and the Forest Health Research and Education Center.  Her focuses include eastern forest health, forest pathogens, education and outreach. Email @ e.crocker@uky.edu