iaao 2014 intangible presentation - final

INTERNATIONAL ASSOCIATION OF ASSESSING OFFICERS LOS ANGELES CHAPTER

OCTOBER 8, 2014

FUNDAMENTALS OF SEPARATING REAL PROPERTY, PERSONAL PROPERTY, AND INTANGIBLE BUSINESS ASSETS

Fall

Appr

aisa

l Sem

inar

Robert E. Dietrich, MAI, CRE, CCIM, MRICS Sr. Director, Specialty Pract ice Valuation & Advisory Services Col l iers International Newport Beach, CA

Justin R. Glasser, MAI, ASA Senior Manager, Tax Economic & Valuation Services KPMG, LLP San Diego, CA

IAAO Fall Appraisal Seminar

Speakers

2


3

BOB DIETRICH, SENIOR DIRECTOR

Robert E. Dietrich, MAI, CRE, CCIM, MRICS Senior Director

Colliers International 20411 SW Birch Street Suite 310 Newport Beach, CA 92660

Education, Licenses & Certifications B.S. University of Arizona Member, Board of Directors of the Appraisal Institute

(2008 – 2012) President, Southern California Chapter of the

Appraisal Institute (2014) President, Southern California CCIM Chapter (1997) Volunteer of Distinction Award, Appraisal Institute

(July 2012) MAI designation - Appraisal Institute CRE designation – Counselors of Real Estate CCIM designation – CCIM Institute MRICS designation – Royal Institution of Chartered

Surveyors Member – Lambda Alpha Licensed Appraiser (15 States including California,

Arizona, and Nevada)

Professional and Industry Experience

Robert E. Dietrich is the Director of the Specialty Valuation Practice of Colliers International Valuation & Advisory Services, and is located in the Newport Beach office.

Mr. Dietrich has performed valuations involving a wide variety of property types ranging from high rise offices to farms and ranches. He has appraised special purpose properties such as port facilities, ski resorts, and others. Areas of specialization include planned developments, subdivisions, leasehold/leased fee analyses, and project modeling. He has appraised all types of commercial, industrial, and multi‐family properties in the Western United States for more than 30 years. Mr. Dietrich has been designated as an expert in real estate valuation issues in courts and has testified on over 60 occasions in State Superior Court, federal court, Bankruptcy Court, US Tax Court, JAMS, state and county assessment appeals boards, and others. He was selected as an independent arbitrator and has been approved as a commercial appraiser by several nationally chartered banks and government agencies.

Representative Clients Latham & Watkins

Wells Fargo Bank

American Ag Credit

Metropolitan Water District

Elsinore Valley Municipal Water District

AEGON USA Realty Advisors

William Lyon Homes Company

Tribune Company

Representative Complex Assignments Compensation for inverse taking of water

Rental value for a recreation lake in Southern California

Valuation of largest development company in California

Valuation of largest land holding and development in Bermuda

Valuation of 2.2 million acre cattle ranch

Valuation of Queen Mary Seaport development

Valuation of highest grossing retail complex in US

Valuation of 18,000 acres of almond orchards in Central Valley


4

JUSTIN R. GLASSER, SENIOR MANAGER

Justin R. Glasser, MAI, ASA Senior Manager

KPMG LLP 4747 Executive Drive Suite 600 San Diego, CA 92131 Function and Specialization Real Property Transfer Pricing Litigation Support Education, Licenses & Certifications Masters of Science in Real Estate, University of San Diego Alpha Sigma Gamma Award Recipient B.A. in Economics, University of California at San Diego Member, Appraisal Institute, MAI Designation #497209 Member, American Society of Appraisers, ASA Designation # 106380 Appraisal Institute Panel Member for Financial Reporting Contributing reviewer, The Appraisal of Real Estate, 14th Edition State of Arizona Real Estate Appraisers License # 31944 State of California Real Estate Appraisers License # AG045014 State of Colorado Real Estate Appraiser License #CG100042083 State of Hawaii Real Estate Appraisers License # CGA1038 State of Florida Real Estate Appraisers License # RZ3544 State of Maine Real Estate Appraisers License # CG3337 State of Michigan Real Estate Appraisers License # 31944 State of Montana RE Appraisers License # REA-RAG-LIC-6037 State of Oregon Real Estate Appraisers License # C001151 State of Pennsylvania Real Estate Appraisers License # GA004001 State of Texas Real Estate Appraisers License # 1380207 State of Utah Real Estate Appraisers License # 8548636-CG00 State of Virginia Real Estate Appraisers License # 4001017045 State of Washington Real Estate Appraisers License # 1102240

Professional and Industry Experience

Justin is currently a senior manager in the Valuation Services practice of KPMG LLP. He is located in the firm’s San Diego office where he assists in the preparation of valuations, highest and best use studies, and purchase price accounting of tangible assets relating to commercial and residential real estate development including: multifamily, office, hotels, destination resorts, gaming outlets, master planned communities, manufactured home communities, manufacturing and distribution facilities, retail developments, restaurants, banks, movie theaters, and undeveloped land.

He has performed valuation of development lands in Central America and the Caribbean, including Belize, Haiti, Island of St. Kitts, and Island of Petite St. Vincent. Also, Justin has provided valuation services related to lost profits associated with timeshare points associated with thirteen properties in California, Hawaii, and Mexico for purpose of litigation. Other litigation support includes valuation services related to a hotel property located in Laguna Beach, Orange County, California and a number of real property assets located in San Francisco and San Diego, California.

Representative Clients Archstone

Bascom

Armada Hoffler

Capital Properties

Pillar Communities

RedHill Realty Investors

The Blackstone Group

CBRE Global Investors

Tropicana Entertainment

Cornerstone Real Estate Advisors LLC

GEM Realty Capital, Inc

UBS Realty Investors, LLC

ING Investment Management, Inc.

IMH Financial Corporation

Kiawah Development Partners, Inc.

Fedinco Ltd.

Hilton Hotels Corporation

MGM Mirage

Dubai World

Hyatt Corporation

Luxury Resorts & Hotels

Westport Capital Partners LLC

Harrah’s Entertainment Inc

Tropicana Entertainment


Ice Breaker

5


6

ICE BREAKER

Is the dishwasher personal property or real property?


Important Note

7


Appraisers and assessing officers who attend this session should not be misled that they are now competent to take on any assignment involving a business-related property.

This session, in and of itself, does not impart a level of competency. The appraiser or assessing officer should be aware of this and not mislead his/her client to the contrary.

This session contains diverse opinions regarding appraisal theory and applications.

The Appraisal Institute does not advocate a particular theory or method.

IMPORTANT NOTE

8


Evidence of Intangible Assets

9


EVIDENCE OF INTANGIBLE ASSETS

10

Tangible Benefits Mineral Rights, Water Rights,

Air Rights (As Vacant)

Shelter (As Improved)

Intangible Benefits

Royalties (Natural resources)

Ground Rent (Land)

Property Rent (Improved Property)


Owner Occupied (Fee Simple)

Income Property No Services (NNN Lease)

Income Property Limited Services

(Multi-tenant Office,

Apartments)

Income Property Substantial

Services (Hotel, Assisted

Living)

11

Intensity



Uniform Standards of Professional Appraisal Practice (USPAP)

Intangible Assets - Nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment.

Standards Rule 1-4(g) - “When personal property,

trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items.”

12



Total Assets (Business)

Tangible Property

Real property & Personal property

Intangible Property

Franchise Agreements & Other Contracts;

Assembled Workforce, Advanced Bookings; Patents; Trademarks;

Copyrights; Trade names; Intellectual Property

Financial Assets (Working Capital)

Cash; Marketable securities; Accounts

receivable; Supplies & Inventory

13



The valuation premise used to measure the market value of an asset depends on the highest and best use of the asset by market participants. In-use: If the asset would provide maximum value to market

participants principally through its use in combination with other assets as a group (i .e., highest and best use is “in-use”), the asset would be measured using an “in-use” valuation premise.

Going Concern (Business)

In-exchange: If the asset would provide maximum value to market participants principally on a standalone basis (i .e., highest and best use is “in-exchange”), the asset would be measured using an “in-exchange” valuation premise.

Liquidation (or Salvage) Value of Tangible Assets

14



Communicating Value Opinions

15


Terms that may be confusing and are often used incorrectly: Business Value Business Enterprise Value Going Concern Goodwill Intangibles

COMMUNICATING VALUE OPINIONS

16


Appraiser must communicate three things: The type of value being reported (market value, fair

value, investment value, etc.) The assets or asset classes included in the value

opinion The valuation premise In Use (Going Concern) In Exchange (Liquidation/Salvage Value)

COMMUNICATING VALUE OPINIONS

17


Valuation of Business Combination Market value as a going concern including real property,

personal property and intangible property. In Use Premise Limited Services Investment Properties

Market value of the total assets of the business as a going concern (enterprise value), including real property, personal property, intangible property and financial assets. In Use Premise Expanded Services Inclusive of all items on balance sheet

EXAMPLES

18


Valuation of Tangible Assets Market value of tangible assets as part of a going

concern or business combination.

In Use Premise (Going Concern)

Sold with Business

Market value of tangible assets as part of an asset acquisition.

In Exchange Premise (Liquidation/Salvage Value)

Sold separate from Business

EXAMPLES

19


Cost Approach

20


When the cost approach can be developed reliably, it is very helpful in determining the appropriate allocation of value to tangible asset classes.

It may be appropriate to value certain

intangible assets by the cost approach (asset approach).

COST APPROACH

21


Issues: Allocation of each item of cost Cost Segregation Studies

Allocation of entrepreneurial incentive Recognition of and support for all forms of depreciation Physical Depreciation Functional Obsolescence Economic Obsolescence

Property rights adjustment Fee Simple v Leased Fee

Leasehold adjustments Above & below market rents

COST APPROACH

22


23

COST APPROACH

Real Property

Personal Property

Subtotal Intangible Total

Replacement Cost New

Direct & Indirect Cost $2,500,000 $210,000 $2,710,000 $150,000 $2,860,000

Entrepreneurial Incentive $250,000 $0 $250,000 $100,000 $350,000

Total Replacement Cost $2,750,000 $210,000 $2,960,000 $250,000 $3,210,000

Depreciation

Physical Deterioration ($600,000) ($42,000) ($642,000) $0 ($642,000)

Functional Obsolescence ($200,000) $0 ($200,000) $0 ($200,000)

External Obsolescence $0 $0 $0 $0 $0

Total Depreciation ($800,000) ($42,000) ($842,000) $0 ($842,000)

Reconciliation

Depreciated Improvements $1,950,000 $168,000 $2,118,000 $250,000 $2,368,000

Land Value Estimate $600,000 $0 $600,000 $0 $600,000

Market Value Conclusion $2,550,000 $168,000 $2,718,000 $250,000 $2,968,000


Sales Comparison Approach

24


For certain property types, real property rarely sells independently of intangible assets (e.g., investment properties, lodging properties).

If some method of allocating the sales price is available, it may be possible to do an allocated sales comparison approach.

Otherwise, the sales comparison will only provide an unallocated value of the going concern.

SALES COMPARISON APPROACH

25


Possible sources of allocation: Actual allocation by buyer & seller ASC 805 IRC 1060

Interviews of market participants Industry standards Historical Cost

SALES COMPARISON APPROACH

26


Income Approach

27


Methods Discounted Cash Flow (DCF) Discount Rate Terminal Rate

Direct Capitalization Cap Rate Gross Rent Multiplier EBITDA Multiplier

INCOME APPROACH

28


Determining Appropriate Method & Investment Rates Market Participant Assumptions Availability of Information Irregular/Regular Cash Flows Refinement

INCOME APPROACH

29


Limitations DCF - One limitation is the requirement to

accurately forecast net operating income for a number of years into the future (e.g., often up to 10 years). Direct Capitalization – One limitation is the

difficultly to implement without reliable transaction data from which to determine comparable capitalization rates.

INCOME APPROACH

30


Limitations (Continued) Income Approach – Primary limitation is that it does

not provide an allocation of tangible and intangible assets.

INCOME APPROACH

31


NNN Rent comps (ideal) Build-to-suit leases Applied to Replacement Cost New (RCN)

Rent-to-revenue ratio (from industry benchmarking study, interviews of market participants, etc.) Health Ratio

Sale-leaseback transactions Lease (or Rental) constant Applied to RCN less depreciation

ESTIMATING REAL PROPERTY RENT

32


Return of investment (straight-line replacement reserve) plus return on investment (depreciated cost x discount rate)

ESTIMATING PERSONAL PROPERTY RENT

33


Market Approach Leased fee (NNN) sale comps Comparable properties w/ similar risk and income

characteristics

Band of Investment Debt Equity

Bifurcation Rl + Rb = Ro

ESTIMATING REAL PROPERTY CAP RATE

34


Market Approach Individual intangibles sale comparables

Databases Pratt's Stats®

Survey Business brokers

ESTIMATING INTANGIBLES CAP RATE

35


Intangible Value

36


In many cases, properties are built for specific businesses which support a going concern. In these properties, there may be an element of non-taxable value in the going concern. If there is a non-taxable element of

intangible value, how do you extract it?

INTANGIBLE VALUE - CASE STUDIES

37


Drug Store Example

One type of leased property often creates a large intangible value component as well as real estate value.

Sale Price $4,000,000 Sale Price $3,000,000

INTANGIBLE VALUE - LEASES

38


Drug Store Example (continued)


39

Market Cost Approach: Total Per SF Bldg.Land:

$9 times 50,000 Sq. Ft. = $450,000 $30.00Building:

$150 times 15,000 Sq. Ft. = $2,250,000 $150.00Subtotal: $2,700,000 $180.00Developer Profit: 7.0% $189,000 $12.60Development Costs: $2,889,000 $192.60Leaseup Adjustment: 4.0% $115,560 $7.70Value by Cost Approach: $3,004,560 $200.30 Round to: $3,000,000 $200.00

Income Approach (Local Market Rent and Tenant):Annual Market NNN Rent: $240,000 $16.00Cap at: 8.0%Property Value: $3,000,000 $200.00

Income Approach Lease to Walgreens (National Credit):Annual Market NNN Rent: $240,000 $16.00Cap at: 6.0%Property Value: $4,000,000 $266.67


Drug Store Example (continued)

On previous slide:

Cost to develop and value based on capitalized income is $3.0 million or $200 per square foot. General retail stores in area sell for $150 to $225 per square foot.

Leased to Walgreens, the value is $4.0 million or $267 per square foot. Walgreens-leased drug stores sell for $250 to $350 per square foot in region.

What is the $1.0 million difference in value attributed to?

Tangible (taxable) real estate, personal property, or intangible value?


40


Drug Store Example (continued) Legal Basis for Extracting Intangible Value: Walgreens believed a property in Madison, Wisconsin was over-

assessed due to taxation of intangible value. Walgreens appealed to Assessor and lost and then sued the City

(Walgreen Co. v. City of Madison). Walgreens lost at the trial, but appealed and the Wisconsin Supreme

Court overturned the verdict. The supreme court directed that the assessment would be based on

market rental rates in conformance with recognized appraisal authorities, such as the Appraisal of Real Estate.

Going forward in Wisconsin, contract rents will not be considered for assessment purposes due to inclusion of non-taxable intangible assets.


41


Many properties are built for a specific use such as a hotel. The hotel business cannot operate without the real estate, and value of real estate can be impacted by going the concern.

Are there intangible items included in the valuation of an operating hotel? If so, what are some of the intangible items? Trained workforce Brand Customer relationships Advanced bookings

How can the real estate value be separated from the going concern to avoid taxation of intangible assets?

INTANGIBLE VALUE - GOING CONCERN

42


Lets build a small hotel in Florida to see if we can identify intangible value. Assume Stabilized market 68% occupancy and $115 ADR, 2 years to stabilize. Land value $1 million, buildings $4 million, and FF&E $500,000.

$


43

Bui

ldin

g

Bui

ldin

g

Bui

ldin

g

Land

Land

Land

FF&E FF&E FF&E

Day 1 0% $91

$5.5 Million

Year 1 60% $101

$6.0 Million

Year 2 68% $115

$6.5 Million



44


Without regard to inflation, where are we in year 3 after we shut the hotel down for 6 months?


45

Bui

ldin

g

Bui

ldin

g

Bui

ldin

g

Bui

ldin

g

Land

Land

Land

Land

FF&E FF&E FF&E FF&E

Day 1 0% $91

$5.5 Million

Year 1 60% $101

$6.0 Million

Year 2 68% $115

$6.5 Million

Year 3 0% $91 $????

?


Court Cases

46


Roehm v. County of Orange (1948) California Supreme Court held that intangible assets and rights

be “reflected” in the assessment of property. GTE Sprint Comm. Corp. v. County of Alameda (1993) First District of the Court of Appeal held that identifiable

intangible assets had to be valued and removed by taxing agency under income

County of Orange v. County Assessment Appeals Board (1993) Appellate court held that using a cost approach method was a

valid means for directly determining the value of the tangible taxable property alone.

Service America Corp. v. County of San Diego (1993) Fourth appellate district held that that portion of income

attributable to intangible assets had to be excluded Only income generated by real property may be used to

determine assessed value when an income approach method was used to value the property.

BRIEF HISTORY

47


Shubat v. Sutter County Assessment Appeals Board (1993) Third District Court of Appeal ruled that it is appropriate to

deduct the appraised value of specifically identified intangible assets from the value of a going business concern in order to arrive at the assessed value of the remaining tangible taxable property.

“Maddy Bill” (1995) California Legislature codified as Revenue and Taxation Code

sections 110(c) through (f) and 212(c). Legislative provisions put many of the issues resolved by the

1993 appellate court decisions into statutory form Statutes created some confusion by including a provision

carried over from Roehm v County of Orange, namely that the presence of intangibles be assumed in order to put property to beneficial and productive use.

BRIEF HISTORY

48


State Board of Equalization (1998) Assessor’s Handbook Section 502, “Advanced Appraisal” Chapter 6 describes the correct manner for handling intangible assets

and rights. Page 152 states requirement that value associated with intangibles be

excluded from a property’s assessed value: “[Revenue and Taxation Code] sections 110(e) and 212(c) do not

authorize adding an increment to the value of taxable property to reflect the value of intangible assets and rights necessary to put the taxable property to beneficial or productive use. Instead, those sections indicate that, in valuing taxable property, it is appropriate to assume the presence of the intangible assets and rights which are necessary to put taxable property to beneficial or productive use. For example, a business which owns taxable property may need working capital and other intangible assets in order to productively use its tangible property. Although the presence of the intangible assets is assumed in the valuation of the tangible property, this does not mean that their values are included in that valuation.”

BRIEF HISTORY

49


Mola Development Corp. v. County of Orange (2000) Fourth District appellate court states: “For purposes of its value to California law, the Sweepster opinion is

faulty mainly in this regard: it included the value of a clear intangible in the value of the real property …. The correct approach is actually the opposite, given our Constitution’s mandate to value just the property. * * * But that is the result of the fact that we are only dealing with real property tax valuations. If you buy real property plus an intangible, you are only taxed on the value of the property.”

State Board of Equalization in December (2002) Letter to Assessors (LTA No. 2002/078) Sets forth “Guidelines for the Assessment of Billboard Properties” Requires the exclusion of intangible asset value from the value of

taxable billboard properties. The cost approach is the preferred method for determining assessed

value because it does not capture the value of intangible assets and rights.

BRIEF HISTORY

50


ELK HILLS CASE

51

Elk Hills v. Board of Equalization (August 2013)

Elk Hills Power Plant Kern County, CA Under Construction/ Delivery in 2020 Combined cycle facility

500 megawatts Natural gas-fired

http://www.energy.ca.gov/sitingcases/elkhills/

http://thumbs.dreamstime.com/z/california-map-4827409.jpg

http://www.energy.ca.gov/sitingcases/elkhills/


Tax Payer - Elk Hills Power, LLC In 1999, Elk Hills applied for a permit to construct and operate

a power plant Required to purchase Emission Reduction Credits (ERCs) to

offset emissions Cost of ERCs was $11M The Board of Equalization (BOE) used the cost approach and

the income approach to calculate the unitary value of the plant. In applying the cost approach, the BOE added the estimated

cost of replacing the ERCs. In applying the income approach, the BOE chose not to deduct

the value of the ERCs from the overall value of the plant.

ELK HILLS CASE - CONTINUED

52


Elk Hills challenged the BOE’s valuation. Elk Hills - ERCs are intangible assets, which are exempt

from property taxation under California law. BOE – Tax authority is permitted to “assume the

presence” of the intangible ERCs when valuing the taxable power plant because the ERCs were necessary to put the power plant to beneficial or productive use. ERC value included in power plant’s unit value. ERC intangible not exempt from property taxation

Trial court found for the BOE. The California Court of Appeals affirmed. Elk Hills petitioned for review by the California Supreme Court Cited section 212 and 110 (d)


53


California Supreme Court made 4 observations The value of intangible assets, with certain exceptions,

cannot be taxed directly or subsumed in the value of taxable property.

When valuing taxable property, assessors may assume the presence of intangible assets that are necessary to put the taxable property to beneficial and productive use.

Assuming the presence of intangible assets permits the value of taxable property to be enhanced from salvage value to fair market value.

When a unit value includes the direct valuation of an intangible asset or includes income attributable to enterprise value, those values must be accounted for and removed.


54


California Supreme Court Findings Cost Approach BOE impermissibly included the fair market value of the ERCs

within its unit value calculation Including the fair market value of an intangible asset within

the unit whole amounts to the direct taxation of those assets. BOE impermissibly added the fair market value of the ERCs to

the unit whole as part of its cost approach, and then failed to deduct that value prior to assessment.

Court of Appeal erred in upholding the BOE’s valuation of Elk Hills’s plant under the cost approach.


55


California Supreme Court Findings Income Approach Direct intangible assets, such as goodwill, customer base, and

favorable franchise terms, must be deducted. Indirect intangible assets do not need to be deducted from an

income stream analysis prior to taxation. The ERCs contributed indirectly to the business income stream

because the ERCs enabled the subject property to function and produce income as a power plant.

BOE was not required to deduct the fair market value of the ERCs from the fair market value of the unit, and the Court of Appeal did not err in this regard.


56


The Supreme Court citations (August 2013): Section 212 (c) and Section 110 (d) - The value of intangible

assets cannot be taxed directly or included in the value of taxable property;

Section 100 (e) - When valuing taxable property, assessors may assume the presence of intangible assets that are necessary to put the taxable property to beneficial or productive use; In Use Premise (Going Concern ) v In Exchange (Salvage

Value) Section 110 (f) - When the valuation includes (separable)

intangible asset or includes income attributable to enterprise value (e.g., working capital), those values must be accounted for and removed. Separable v. Inseparable Intangibles


57


This case (May 2014) addresses intangible valuation theory in the assessment of the Ritz Carlton Half Moon Bay Hotel. The question at issue was “how to properly value taxable property, with associated intangible assets, at fair market value.” California Court of Appeals overturned Assessment Appeal Board and Trial Court that agreed with Assessor.

HALF MOON BAY CASE

58

58


Assessor Enrolled Value: Sales Price: $124,350,000 Personal Property: $7,370,000 Taxable Real Estate Value: $116,980,000

Assessor Valuation: Market Value: $129,700,000 Personal Property: $7,340,000 Real Estate: $122,360,000 Enrolled at (within 5% of appraisal): $116,980,000

Property Owner Valuation: Market Value (Purchase Price): $124,350,000 Less Personal Property: $8,000,000 Subtotal: $116,350,000 Less Taxable Real Estate: $99,500,000 Intangible Assets (goodwill and 3 others): $16,850,000

HALF MOON BAY CASE - CONTINUED

59

59


The Assessor valuation deducted the management fee and the franchise fee in Income Approach which was assumed to address intangible value. (Management Fee Method).

The Assessor attempted to discredit Assessor’s Handbook (Sec. 502) which requires removal of intangible values in property assessments.

Assessor relied on California Assessors’ Association’s position paper 99-003 rejecting the Assessors’ Handbook. The California Assessors’ Association does not agree with the Assessor’s Handbook.


60

60


Taxpayer expert testified that intangible value is a residual. Taxpayer expert testified that the Management Fee Method

does not capture all intangible values. Specifically did not address: 1. Hotel work force in place: $1,000,000 2. Leasehold interest in a parking lot: $200,000 3. Agreement with golf course operator: $1,500,000 4. Goodwill: $14,150,000 Total: $16,850,000

Court ruled that method used by Assessor violated law as it did not remove all intangible items.

Interestingly, ruling did not require assessor to recalculate goodwill, just workforce, parking leasehold and golf course agreement.


61

61


Why are cap rates higher for lodging than for traditional commercial real estate? An hypothesis is that the cap rate includes a return on intangible items.

We can look at rates from PwC National Real Estate Investor Survey for 2nd Quarter 2014 (Korpacz):

Reasonable rate is 7.75% for our subject full service hotel and 6.50% for other asset types.

Note that a management fee is already deducted when the hotel cap rate is derived.

INTANGIBLE VALUE - LODGING PROPERTIES

62

62

Asset Type Overall Rate

Full Service Hotel 7.73%

Regional Mall 6.60%

Power Center 6.65%

CBD Office 6.30%

Suburban Office 6.75%


We will need to know the required return for the intangible business operations.

We can find the business cap rate from a business valuation resource. Operating hotel companies trade at 6 to 7 multiples of pre-debt EBITDA or cap rates of 14% to 16%. We will use 15%.

With rates estimated, we can allocate percentage of value allocated to each component based on iteration of weighted rate.


63

63

Weighted Cap Rate: Market Iterated ProofReal Estate Rate: 6.50% times 85.3% = 5.54%Business Rate: 15.00% times 14.7% = 2.21%Going Concern Rate: 7.75% times 100.0% = 7.75%


The property value can be allocated between real estate and intangible value.

The property was valued as a going concern for $20 million. Based on estimated rate of 7.75%, the NOI can be calculated:


64

64

Value Conclusion and Net Income:Hotel Going Concern Valued at: $20,000,000Cap Rate Used: 7.75%Indicated NOI / EBIDTA: $1,550,000

Allocation:Hotel Real Estate: $20,000,000 times 85.3% $17,058,820Intangible Value: $20,000,000 times 14.7% $2,941,180Going Concern Value: times 100.0% $20,000,000


If the NOI is $1.55 million, we can prove the allocation by capitalizing the income from each component.

One method of determining intangible value is the management fee which was deducted. The calculation below is based on a 20% net profit and 3% Mgt. expense.

Does deduction of $279,000 in management fees account for $2,941,180 of intangible asset value and $441,177 in net revenue to intangible assets?


65

65

Proof: Value Times Rate NOINet Income to Real Estate: $17,058,820 times 6.5% $1,108,823Net Income to Intangible Assets: $2,941,180 times 15.0% $441,177Total Net Income: $20,000,000 times $1,550,000

Management Fees:Indicated NOI / EBIDTA: $1,550,000 20%Expenses including Management: $7,750,002 80%Total Gross Income: $9,300,002 100%Management Fees: $279,000 3%


In most taxing jurisdictions, the values of intangible items must be excluded from assessed values of real property.

Even though intangible items may exist, they may not add value to a going concern.

If there are intangible items of value, there are numerous methods available to extract the value of intangible assets.

CONCLUSIONS

66


QUESTIONS?

CONCLUSIONS

67

iaao 2014 intangible presentation - final

Documents