A FAMILY LIMITED PARTNERSHIP (FLP) EXAMPLE A FAMILY LIMITED PARTNERSHIP (FLP) VALUATION EXAMPLE A FAMILYBy: LindaLIMITED B. Trugman,PARTNERSHIP CPA/ABV, (FLP) MCBA, VALUATION ASA, MBA EXAMPLE By: Linda B. Trugman, CPA/ABV, MCBA, ASA, MBA By: Linda B. Trugman, CPA/ABV, MCBA, ASA, MBA Family Limited Partnerships (FLPs) have grown in popularity as an estate planning tool and a way to depress transferFamily Limited tax values. Partnerships Business (FLPs) valuation have grownexperts in popularity should be as aware an estate of the planning issues tool involved and a wayin valuing to depress FLP transferFamily Limited tax values. Partnerships Business (FLPs) valuation have grownexperts in popularity should be as aware an estate of the planning issues tool involved and a wayin valuing to depress FLP transferinterests taxand values. how to prepare Business a report valuation that isexperts less likely should to be be challenged aware of by the the issues Internal involved Revenue in Servicevaluing (IRS)FLP or,interests if challenged, and how will to preparemore likely a report be resolved that is less in favor likely ofto thebe challengedtaxpayer. by the Internal Revenue Service (IRS) or,interests if challenged, and how will to preparemore likely a report be resolved that is less in favor likely ofto thebe challengedtaxpayer. by the Internal Revenue Service (IRS) or, if challenged, will more likely be resolved in favor of the taxpayer. Valuation analysts need to do more than focus on what discounts they can use to reduce the value of a FLP Valuation analysts need to do more than focus on what discounts they can use to reduce the value of a FLP Valuationinterest. Theana lystsFLPneed agreement to do more and thanother focus partnership on what documents discounts theymust can be usethoroughly to reduce analyzed the value before of a FLP the valuationinterest. Theanalyst FLPcan agreement begin to andrender other an partnershipopinion of value.documents The finalmust report be thoroughly must at leastanalyzed contain before certain the valuationinterest. Theanalyst FLPcan agreement begin to andrender other an partnershipopinion of value.documents The finalmust report be thoroughly must at leastanalyzed contain before certain the valuationinformation analyst about canthe beginassignment to render- the an nature opinion of ofthe value. interest The being final valued, report must the terms at least of thecontain partnership certain agreement,information aboutand the the financial assignment condition - the of naturethe entity. of the interest being valued, the terms of the partnership agreement,information aboutand the the financial assignment condition- the of naturethe entity. of the interest being valued, the terms of the partnership agreement, and the financial condition of the entity. This discussion is designed as an overview of the FLP valuation process and the items to consider. It is designedThis discussion to help isyou designed prepare asvaluation an overview reports of more the FLeffectivelyP valuation and processperhaps andminimize the items the opportunity to consider. for It the is designedThis discussion to help isyou designed prepare asvaluation an overview reports of more the FLeffectivelyP valuation and processperhaps andminimize the items the opportunity to consider. for It the is designedIRS to challenge to help you your prepare opinion valuation of value. reports This more discussion effectively also and assumes perhaps minimizethat the thereader opportunity has a forbas theic understandingIRS to challenge about your FLPs. opinionPlease of note value. that This FLP isdiscussion being used also as a genericassumes term that in thisthe paper.reader Many has attorneysa basic understandingIRS to challenge about your FLPs. opinionPlease of note value. that This FLP isdiscussion being used also as a genericassumes term that in thisthe paper.reader Many has attorneysa basic areunderstanding currently using about Limited FLPs. Please Liability note Companies that FLP is(LLC), being usedrather as than a generic Limited term Partnerships, in this paper. butMany the attorneys overall structureare currently of the using transaction Limited and Liability the valuation Companies issues (LLC), are therather same. than Limited Partnerships, but the overall structureare currently of the using transaction Limited and Liability the valuation Companies issues (LLC), are therather same. than Limited Partnerships, but the overall structure of the transaction and the valuation issues are the same. WHAT IS A FLP? A FLP is a nontaxable entity that is created and governed by statute and whose partners (bothWHAT general IS A FLP? and limited)A FLP is and a nontaxable assignees entityconsist thatmainly is createdof family and members. governed by statute and whose partners WHAT(both general IS A FLP? and limited)A FLP is and a nontaxable assignees entityconsist that mainly is createdof family and members. governed by statute and whose partners (both general and limited) and assignees consist mainly of family members. Many of the issues that arise in appraising FLPs become legal interpretations of the partnership agreement, Many of the issuesA @ that arise in appraising FLPs become legal interpretations of the partnership agreement, Manyrather ofthan the issuesApure@ thatvaluation arise inissues. appraising Although FLPs asbecome a valuation legal interpretations analyst, it is ofimportant the partnership that we agreement, know and rather than Apure@ valuation issues. Although as a valuationA analyst,@ it is important that we know and understandrather than theApure issues,@ valuation it is imperative issues. Althoughthat we leave as athe valuation Alawyering analyst,@ to the itlawyers. is important If there that is any we doubt know in and the understand the issues,= it is imperative that we leave the Alawyering@ to the lawyers. If there is any doubt in the valuationunderstand analyst the issues,=s mind it regardingis imperative the that nature we of leave the assignment the Alawyering or the@ to terms the lawyers. of the partnership If there is any agreement, doubt in the valuation= analyst=s mind regarding the nature of the assignment or the terms of the partnership agreement, the clientvaluation=s attorney analyst should=s mind be regarding the one theto explain nature ofit tothe the assignment valuation oranalyst, the terms not ofthe the other partnership way around. agreement, the client=s attorney should be the one to explain it to the valuation analyst, not the other way around. client=s attorney should be the one to explain it to the valuation analyst, not the other way around. PENALTIES: Valuation analysts should be warned that applying discounts too enthusiastically c an backfire. PENALTIES: Valuation analysts should be warned that applying discounts too enthusiasticallyA can backfire. SectionPENALTIES 6701: ofValuati the IRCon analysts imposes should civil penalties be warned on thatvaluation applying analysts discounts of $1,000 too enthusiastically for Aaiding and c anabettingbackfire. an Section 6701 of the IRC imposes@ civil penalties on valuation analysts of $1,000 for Aaiding and abetting an understatementSection 6701 of of the tax IRC liability. imposes@ The civil IRS penalties could also on valuationimpose an analysts administrative of $1,000 sanction for Aaiding barring and the abetting valuation an analystunderstatementfrom submitting of tax liability. probative@ The evidence IRS could in future also IRSimpose proceedings. an administrative For these sanction reasons, barring the report the valuation must be analystunderstatementfrom submitting of tax liability. probative@ The evidence IRS could in future also IRSimpose proceedings. an administrative For these sanction reasons, barring the report the valuation must be analystpreparedfrom judiciously submitting and probative every statement evidence bein future carefully IRS documented proceedings. and For presented these reasons, in such the areport way mustthat the be valuationprepared conclusionjudiciously can and beevery replicated statement and beunderstood carefully documentedby those for whom and presented it is intended. in such a way that the valuationprepared conclusionjudiciously can and beevery replicated statement and beunderstood carefully documentedby those for whom and presented it is intended. in such a way that the valuation conclusion can be replicated and understood by those for whom it is intended. The valuation analyst should also be aware of the new appraiser penalty rules that were described in the The valuation analyst should also be aware of the new appraiser penalty rules that were described in the PensionThe valuation Protection analyst Act should of 2006. also Althoughbe aware theseof the penaltiesnew appraiser specifically penalty apply rules to that valuations were described for charitable in the contributionPension Protection purposes, Act many of 2006. believe Although that they these will ultimately penalties be specifically extended to apply appraisals to valuations of property for for charitable income contributionPension Protection purposes, Act many of 2006. believe Although that they these will ultimately penalties be specifically extended to apply appraisals to valuations of property for for charitable income andcontribution transfer purposes, tax purposes. many The believe penalties that they fall willinto ultimately two categories, be extended a “gross to appraisals valuation ofmisstatement” property for income and a “substantialand transfer valuation tax purposes. misstatement.”The penalties For more fall into information two categories, about the a Pension“gross valuation Protection misstatement” Act and its affect and on a “substantialand transfer valuation tax purposes. misstatement.”The penalties For more fall into information two categories, about the a Pension“gross valuation Protection misstatement” Act and its affect and on a appraisers,“substantial valuationsee misstatement.”Pension Protection For more informationAct Changes about the PensionValuations Protection for ActTax and itsPurposes affect on (appraisers,http://aicpa.org/pubs/jofa/sep2007/crain.htm see Pension Protection ). Act Changes Valuations for Tax Purposes appraisers,(http://aicpa.org/pubs/jofa/sep2007/crain.htm see Pension Protection ). Act Changes Valuations for Tax Purposes (http://aicpa.org/pubs/jofa/sep2007/crain.htm). STARTING THE ASSIGNMENT: The valuation analyst should obtain a retainer agreement (and a retainer) STARTING THE ASSIGNMENT: The valuation analyst should obtain a retainer agreement (and a retainer) fromSTARTING the client THE whichASSIGNMENT should spell: outThe the valuation precise analyst nature ofshould the assignment obtain a retainer the analyst agreement is going (and to perform. a retainer) In fromorder the to prepareclient which a thorough should analysisspell out andthe precise report, naturethe valuation of the assignmentanalyst need thes the analyst following is going information to perform.: In fromorder the to prepareclient which a thorough should analysisspell out andthe precise report, naturethe valuation of the assignmentanalyst need thes the analyst following is going information to perform.: In order to prepare a thorough analysis and report, the valuation analyst needs the following information: 1. The name of the client, i.e., the person who engaged the valuation analyst. The client is 1. The name of the client, i.e., the person who engaged the valuation analyst. The client is 1. Theresponsible name offorthe identifying client, i.e.,the naturethe person of the who interest engaged to be appraised.the valuation analyst. The client is 2. responsibleThe nature of for the identifying interest being the nature appraised, of the e.g., interest general to be partner appraised. interest, limited partner interest, 2. responsibleThe nature of for the identifying interest being the nature appraised, of the e.g., interest general to be partner appraised. interest, limited partner interest, 2. Thelimited nature liability of the company interest member being appraised, interest, e.g.,assignee general interest. partner It interest,is important limited to note partner that interest, what is limited liability company member interest, assignee interest. It is important to note that what is Florida limited liability company member interest,New Jerseyassignee interest. It is important to note that what is 8751 W. Broward Blvd. • Suite 203 • Plantation, FL 33324 2001 Rte. 46 • Suite 310 • Parsippany, NJ 07054 844-TRUGMANPage1 Page1 O: 954-424-4343 • F: 954-424-1416 O: 973-983-9790 www.trugmanvaluation.comPage1

Florida New Jersey 8751 W. Broward Blvd. • Suite 203 • Plantation, FL 33324 2001 Rte. 46 • Suite 310 • Parsippany, NJ 07054 844-TRUGMAN O: 954-424-4343 • F: 954-424-1416 O: 973-983-9790 www.trugmanvaluation.com - 2 -

beingand appraised employ isees, not aal percentagel offering interestaccount in anying orand all ofpr theofessi assetsonal owned serv byic thees FLPon , but rather an interest in the FLP itself. 3. Thebehal size off theof T&A.interest being valued. Size can be represented by a percentage interest amount, number of units or shares, or even dollar amount. 4. The valuation date, and the purpose for which the valuation is being performed, i.e., whether it is for estate planning (gifting) or estate valuation purposes. 11.5. TheAt standard all times of value. relev Theant retainer hereto, agreement T&A hel shouldd itse providelf out a todefinition the publ of theic ,standard and of value that will be determined in the appraisal. These are defined in the following tax regulations: Estate represeplanning (gifting)nted to - Treasury the Plaint Regulationiffs herein, 25.2512 tha-1 t it was an accounting firm Estate wvaluationhich po(afterssessed death) special - Treasury experti Regulationse an 20.2031d knowledge-1(b) concerning correct Both ofand these l awsectionsful fair define mar theket standard valuati ofons fair marketfor pur valueposesas follows: of the formation and estaThe blishmfair marketent value of (of ESOPs the property so thatbeing anyvalued) such is the vpricealua att iowhichn wo theuld property be in would change hands between a willing buyer and a willing seller, neither being under conforany compulsionmance wtoit buyh al orl Genersell andall bothy Ac havingcept reasonableed Account knowledgeing Prac ofti relevantces, and facts. all applicable laws, including but not limited to, ERISA § 406, 29 WHAT DOCUMENTS ARE NEEDED? U.S.C. § 1106(a). a. The FLP Agreement (or other type of business agreement depending upon the form of the entity), as well as a copy of the Certificate of Formation that has been filed with the state where the entity has been created. If the valuation analyst is not familiar with the statutes of the state of formation 12.(whetherAt limited all times partnership relevant or limited hereto, liability Stephe company)n Jones, it should (her beein obtained.after “J Mostones” of them) was are on line at the various Secretary of State’s websites. 2. A list ofa the lic assetsensed that, c wereertified initiall puby contributedlic account to theant partnership, and a aspar welltner as, documentation shareholder of any assets that were contributed after the formation of the FLP. 3. Valuationsand/or of real empl estateoy eeand ofother T&A. assets held by the FLP as of the valuation date (for example, market values of marketable securities). If the FLP owns interests in other closely held businesses or partnerships, these interests must be separately appraised before the value of the LP interest can be 13.determined.At all times relevant hereto, Jones held himself out to the public, and 4. Financial statements and/or tax returns for the partnership for a reasonable number of years, or since inception.repr If esentit is a newed partnership,to the Plain thesetiffs will h ernotein exist., that he was an accountant who 5. The general partner=s anticipated policies regarding distributions or a Section 754 election. 6. If the FLPposs is ongoing,essed sapeci historyal ofex distributionspertise and, if any,know madeled gtoe partners. concerning correct and REVENUE RULINGlawfu 59l -60fa:irRevenue marke Rulingt val u59a-t60io nprovidess for basicpurp guidelinesoses of forth appraisinge forma sharestion and of closely held corporations. It is also a valuable guide to appraising FLPs. Every valuation report of a FLP interest should closely followestabl Sectionishment 4 of Revenueof ESOPs Ruling so 59 that-60, whichany su enumeratesch ESOP the v factorsaluati onthe wvaluationould be analyst should consider in his or her valuation. in conformance with all Generally Accepted Accounting Practices, and CHAPTER 14: Chapter 14 of the IRC was enacted in October 1990, and outlines the special valuation rules that must be adallhered appl to whenicabl valuinge law interestss, includ in closelying but held not companies limited and to, partnerships. ERISA §The 4 0basic6, 29premise behind this section is that when valuing business interests that are to be transferred between family members, the valuation analystU.S.C.should § 11 ignore06(a restrictions). that would not exist if the transaction was between unrelated third parties.

This Chapter14. consistsAt all oftime onlys four relevant sections; here threeto, of whichMichae actuallyl Axelrod relate to (hereina family limitedfter partnerships. “Axelrod”) If the partnership does not comply with the provisions of this Chapter, the IRS may determine that the partnership does not exist forwas tax a purposes licensed and, cer valuetified the publ underlyingic ac countassetsant directly and in a calculating partner, theshar applicableeholder gift or estate tax. The provisions of the Agreement should comply with the sections of Chapter 14; however, it is up to the attorney toand/or make sureempl thatoy theee Agreementof T&A. is legally binding, not the valuation analyst’s.

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THINGS15. TO CONSIDERAt all times IN THE rele APPRAISALvant hereto, PROCESS Axelrod: helThed basic hims characteristicself out to the of publ the transferredic, and interest in the FLP, combined with specific provisions in the FLP agreement and under state law, form the foundation for there prvaluationesent edadjustments to the Pl usedain tiinff arrivings here atin ,the th fairat hemarket was value an acof thecount transferredant who interest in the FLP. Some of the factors to be considered in determining appropriate valuation adjustments are: possessed special expertise and knowledge concerning correct and Provisions in thelaw Partnershipful fair mark Agreementet valuations for purposes of the formation and o A provision (term-of-years provision) in the partnership agreement that the partnership shall continue to exist for a definiteestabl termishment-of-years, of EunlessSOPs it isso dissolved that any or liquidatedsuch ESOP prior tovalu thisati date.on would be o No guarantee by the managing general partner or general partners of the return of any partner=s capital contributions,in norconfor any maallocationsnce w iofth profits all Ge orn elossesrally norAccept any distributionsed Account ofing distributable Practic es,cash and (not even enough to cover the annual taxes of the partners). o Approval rightsall a ofp limitedplicable partners laws, required includ foring certain but majornot l imidecisions,ted to, otherwise ERISA limited § 406, partners 29 and assignees are excluded from participation in management. o How the electionU.S.C. of new§ 11 managing06(a). general partners is accomplished. o A provision that distances the limited partners and assignees from the assets of the FLP. o The managing general partner(s)/general partner(s) right to determine distributable cash. Capital call provision obligating partners and assignees. o 17. In November 1993, Fisher and Jones met with Plaintiffs for the o Limitations on the voluntary and involuntary transferability of general partner, limited partner and assignee interests. purposes of presenting Plaintiffs with the benefits of forming an ABC o The presence of rights of first refusal. o A transfereeESOP or assignee. of an interest in the partnership will not become a substituted limited partner unless approved by the consent of all partners. o Whether the managing general partners or general partners are required to make a IRC Section 754 Election. o Limitations18. onOn the or Aright abo@ ofut the De generalcemb epartner,r 7, 1 to99 withdraw3, ABC from by thean partnershipd through prior Pla toin thetiffs expiration, as of its stated term and to provide that, should the general partner exercise his or her power to withdraw early, his or her generalofficer partners of ABC, interest in shall reli becomeance on a limited the adv partnerice interest and re andpresent he or atisheons may of also be subject to damages for breach. o Limitations Gron eenthe right and of Smi a limiteth, dFi partnersher, T&A,and assignee and Jones to withdraw, decided from to the for partnershipm an ES OP.prior to the expiration of its stated term. o Provisions for dissolution of the partnership mirrors the provisions of state law.

Factors20. Not FoundThe inESOP the Partnership was formall Agreementy established on December 23, 1993. o The reputation, integrity and perceived competence of the partnership management/general partner(s). o The number of investors in the partnership. o The22. type of Baseassetsd owned upon by Fi thesher partnership.’s advice, Plaintiffs also retained the services of o Whether or not the assets of the partnership are well diversified. o The amountT&A of financi andal Jones leverage to inherent perform in thea cor partnershiprect and=s capitallawful structure. fair market valuation o The caliber of the information flow from the partnership and the general partner(s). o The currentof and ABC historical for pur amountposes of cash of the actually ESOP. distributed to partners and assignees. o Underlying cash flow coverage of yearly distributions made to partners and assignees. o The size of the interest. o The universe of interest buyers. o The24 Adefault. Jone ruless@ undergave state adv law.ice and provided services to Plaintiffs, both in their

WHAT ABOUT capaMETHODOLOGY?cities as TrusteeWhat iss theof thebest ES approachOP an tod use off icersto value of a ABC.FLP interest? Which methods can and should be used? Section 5 of Revenue Ruling 59-60 states in part:

(a) ... in general, the valuation analyst will accord primary consideration to earnings when 2valuing5. Pstockslaint iofffs companies relied o nwhich the sell ad productsvice of orF iservicessher an tod the Jo public,nes, aconversnd Fisherely, in theand investmentJones or holding were type well of company, aware thathe tvaluation they r elianalysted onmay thei accordr advi the greatestce when weight the to the assets underlying the to be valued. ESOP was formed. In fact, Fisher and Jones represented to the Plaintiffs that if Plaintiffs followed their advice and counsel, the ESOP Page3 - 4 -

(b) Thew valueould ofc onformthe wofit ha closelyall appl heldicabl investmente laws, orinc reallud estateing but holding not company,limited to whether or not family owned, is closely related to the value of the assets underlying the stock. For companiesERISA of§ this406 type, 29 the U.S. valuationC. § analyst1106(a).should determine the fair market values of the assets of the company. Operating expenses of such a company and the cost of liquidating it, if any, merit consideration when appraising the relative values of the stock and the underlying assets. The market values of the underlying assets give due weight to 27.potentialOne earnings purpose and dividends of the of ES theOP particular was to items effectu of propertyate thunderlyinge purchas thee stock, of the capitalized at rates deemed proper by the investing public at the date of appraisal. A current appraisalouts bytandi the investingng ABC public shar esshould of Cl beifford superior Mor tori sthe (her retrospectiveeinafter “M opinionorris” ),of aan co- individual. For these reasons, adjusted net worth should be accorded greater weight in individual.foun Forder these of reasons, ABC, w adjustedho persona net wortllyh shouldand alonbe accordedg with greatervarious weight fam inily valuing the stock of a closely held investment or real estate holding company, whether or not family owned,members than any, at of the that other time, customary owned yardsticks appro ofx appraisal,imately such 47% as ( earningsforty-s andeven dividend paying capacity. percent) of ABC’s shares. This would seem to imply that some type of asset-based approach would be the most appropriate if, indeed, the only approach to appraising a FLP interest. Whereas an asset-based approach might be a frequently used approach to valuing such an interest, it is by no means the only one. Often an income approach may be used as28. well. TheAnothe approachr pur to bepose used of may the be ESOPdetermined was by theto reunderlyingstructur assetse AB ofC’s the coFLPrp oror whetherate or not there is a history of distributions to the partners and how extensive and consistent the distributions were. Depending on thedeb assetst, where held byby the the partnership, ESOP would, a market for approach practical could purpose also be utilized.s, assum Dependinge said on the circumstances of the case, more than one method may be appropriate. debt to take advantage of certain tax benefits. In Estate of Etta H. Weinberg, et al. V. Commissioner (TC Memo 2000-51), the Court accepted both an income approach and an asset-based approach to determine the value of decedent=s in a limited partnership that owned and operated an apartment complex. The Court found that the taxpayer=s use of the net31 asset. Jonevalue methods and underT&A the w assetere -basedretain approached to p waserfo warrantedrm a c sinceorre cthet fapropertyir mar wouldket retain most of its inherent value regardless of rental income production. Furthermore, The Court found that the most of its inherentvalu valueation regardless of ABC soof rentalthat theincome ESOP production. did not Furthermore, unlawfully The pay Court mor founde tha thatn the capitalization of the three-year average of distributions under the income approach was also appropriate. The findings of The adeqCourt illustrateuate cons thatide the rareliancetion for on oneMo rrapproachis’ ABC (particularly shares other the asset n-ewbasedly-i approach)ssued for the valuation of FLPs is not always sufficient or relevant. ABC shares pursuant to ERISA § 406, 29 U.S.C. § 1106(a). In deciding on the methodology to apply to the valuation of partnership interests,

When valuation consultants use an asset based approach to value a FLP interest, the 32.restrictionsJon ines the and partnership T&A’s agreement final valu areati oftenon the was sole dated justification Marc forh the 15, amount 1994, of the and discounts. In these cases, the IRS attempts to disregard the restrictions for valuation purposesshoul by demonstratingd have incor thatpor theated terms inforof themati partnershipon av ailagreementable to are them onerous as and of not that comparable to arm=s-length transactions. If the restrictions are disregarded, the IRS then argues date.to invalidate the partnership agreement for valuation purposes, resulting in a significant increase in the value of the limited partnership interest.

While this rationale has not been proven in tax court, the IRS has used it to successfully 33.negotiateAx withelrod taxpayers served for as an an increase independent in the amount review of ergift of and the estate valu taxesation that pr eparwoulded have otherwise been paid. If the valuation is determined using the income and market approachesby Jone and doess. not rely solely on the restrictions in the partnership agreement, it is approaches and does not rely solely on the restrictions1 in the partnership agreement, it is more difficult for the IRS to dispute the valuation.1

Asset Based34. Approach:On MarObtainch 15, fair 1994, market based value uponof all assets the v andalu atiliabilitieson per onformed the balance by T&A sheet and and apply appropriate discounts (for lack of control and marketability). Jones, and reviewed by Axelrod, and arrangements made by Green

1 th andJay E. S Fishman,mith et.aland., Guide Crain to Business and V Crain,aluations, 10 theth edition two (2000: SPA Practitionerss (Stock Publishing Purcha Company,se Texas), p. 14-11. AgTexas),reements p. 14-11. - added by author for clarification) were closed. The Plaintiffs, as Trustees, participated in the closing of the SPAs in Page4 - 5 -

2 Income Approach: Determine cash flow available to partners, and capitalize or discount as appropriate.2 Apply Income Approach: Determine cash flow available to partners, and capitalize or discount as appropriate. Apply discount for lackreli ofance marketability of the r(noepr discountesentati forons lack of of saicontrold D necessaryefendants as cashthat flowthe capitalizedESOP or discount for lack of marketability (no discount for lack of control necessary as cash flow capitalized or discounted is the amount available to the minority owner, and therefore, the result is a minority value). discounted is thetransac amountti onavailable compor to theted minority with owner, all appl and icabltherefore,e law thes, result inc islud a minoritying but value). not Because of what Section 5 of Revenue Ruling 59-60 says, many analysts do not think that an income Because of whatlimite Sectiond to, 5 ER of ISARevenue § 406, Ruling 29 59 U-.S.C60 says,. § 1106(many analystsa). do not think that an income approach is appropriate when valuing an interest in a FLP. However, a minority owner cannot force the sale of approach is appropriate when valuing an interest in a FLP. However, a minority owner cannot force the sale of the underlying assets of a business, and although the valuation analyst applies a discount for lack of control to the underlying assets of a business, and although the valuation analyst applies a discount for lack of control to account for this (among other factors), does the discount truly account for the inability of the minority owner to account for this (among other factors), does the discount truly account for the inability of the minority owner to obtain the value of the underlying assets? Valuation theory discusses this issue and textbooks state that the obtain39. the valueOn of theSeptember underlying assets? 14, 1998, Valuation Thom theoryas Sack discussess, et this al. issue v. Rob ander textbookst B. Ja ckstateson, that the asset based approach is generally inappropriate when valuing a minority interest unless the holder has the asset based approach is generally inappropriate when valuing a minority interest unless the holder has the right to liquidate the entity or sell off the assets and distribute the proceeds. right to liquidateet the al. entity United or sell Sta offtes the D assetsistrict and Court, distribute W.D.KY,the proceeds. Jackson ville Division, Civil There is generally no plan to sell the assets before an FLP before termination, which is generally at least 20 to There is generallyAct noion plan No. to 3:Wsell theP- assets591-C, before (heranein FLPafter before the termination, “Sacks Com whichplaint is generally” or “Sacks at least 20 to 30 years from the date of inception. Therefore, it seems that if an FLP generates income, this reflects and 30 years from the date of inception. Therefore, it seems that if an FLP generates income, this reflects and actual return to the minority owner, and should be considered in the valuation process. However, if the FLP is actual return tolithetig atiminorityon”) owner,was andfiled should, wit beh considered claims ar inisin the g,valuation in rele process.vant However, part, out if the o FLPf is not distributing the income, the minority owner may be faced with a similar situation as under an asset based not distributing the income, the minority owner may be faced with a similar situation as under an asset based approach – there is income, but the minority owner does not receive the benefit of it. approach – therePlain is income,tiffs’ role but sthe a sminority former owner Trusdoestees not of receive the E theSOP. benefit of it. Another issue in applying an income approach is the amount of income earned. Very often, the investment Another issue in applying an income approach is the amount of income earned. Very often, the investment earnings or net rental income is very low, but the growth in the assets is large. Unless there is a plan to sell earnings or net rental income is very low, but the growth in the assets is large. Unless there is a plan to sell the assets41. at aThe definitive Sacks time inComp the future,laint the alleged return to thatthe minority Plaintif ownerfs v isiolate a lowd level the ofir income fiduciary that does the assets at a definitive time in the future, the return to the minority owner is a low level of income that does not truly reflect the value of the assets. However, the appraiser should still remember that the minority owner not truly reflect the value of the assets. However, the appraiser should still remember that the minority owner cannot force theduti salees of b thye aassets,greein andg totherefore, cause the the assets ESO doP not to have pur aschas muche ABCvalue tost aock minority from owner. cannot force the sale of the assets, and therefore, the assets do not have as much value to a minority owner. Another potentialMo problemrris and that his exists family is the and selection ABC ofat a morediscount than or capitalization the fair m rate,arke especiallyt value, if the Another potential problem that exists is the selection of a discount or capitalization rate, especially if the holdings are marketable securities. Although market-derived rates of return are available, they are usually holdings are marketable securities. Although market-derived rates of return are available, they are usually derived from ownershipcausing offinanc the underlyingial loss assetsto the However, ESOP and the valuation Plainti ffassignments in the Sacks is to value litig anati intereston in derived from ownership of the underlying assets However, the valuation assignment is to value an interest in a holding company, and therefore, adjustments must be made to the market-derived rates to adjust for risk. a holding company,who andwer therefore,e benefic adjustmentsiaries of mustthe EbeSOP. made to the market-derived rates to adjust for risk. Market Approach: Determine valuation multiples by looking for comparable publicly traded interests, The Market Approach: Determine valuation multiples by looking for comparable publicly traded interests, The appropriate multiple could be price to NAV (net asset value), adjusted for the risks associated with your appropriate multiple could be 3price to NAV (net asset value), adjusted for the risks associated with your specific valuation assignment.3 From a practical standpoint, this is generally the same as the asset-based specific valuation assignment. From a practical standpoint, this is generally the same as the asset-based approach.58. After a bench trial lasting over ten trial days, which spanned the approach. period of April 16, 2001 to February 26, 2002, on or about July 30, VALUATION ADJUSTMENTS: Valuation adjustments are supposed to reflect the lack of control inherent in VALUATION ADJUSTMENTS: Valuation adjustments are supposed to reflect the lack of control inherent in limited partnership interests and the lack of marketability any type of closely-held partnership interest endures. limited partnership2002, interests United and Sthetates lack ofD marketabilityistrict Cour anyt J udgtype ofe cJloselyenni-ferheld R partnershiponstadt interestissued endures. a These are two separate issues that usually result in two separate adjustments or discounts. The Courts These are two separate issues that usually result in two separate adjustments or discounts. The Courts recognize the necessity for these discounts, but often disagree with how much of a discount may be allowed. recognize the necessityMemoran for dum,these discounts, Opinion but and often Or disagreeder in withthe howSacks much litig of aation discount which may behe allowed.ld Fair market value is determined by the nature of the interest transferred. Unless the partners agree to admit Fair market valueinter is determinedalia, that by Pl theain naturetiffs ofhad the interestviolated transferred. their duti Unlesses as the Trus partnerstee agree of the to admit the transferred interest as a partner, it is an Aassignee interest.@ Therefore, the hypothetical willing buyer the transferred interest as a partner, it is an Aassignee interest.@ Therefore, the hypothetical willing buyer would consider as significant whether or not the other partners would admit him or her as a partner with all the would considerESOP as significant. How wheevtherer, ator notthat the ti otherme Judg partnerse Ron wouldsta admitdt di himd not or her dec aside a partner whether with all the rights that go with being a partner. rights that go withthe being ESO a partner.P had sustained any monetary loss as a r esult, and An assignee interest has only an economic interest in the partnership. That is, he or she has a right to receive An assignee interest has only an economic interest in the partnership. That is, he or she has a right to receive distributions, ifa any,ppoandint etod distributions a Specia lon M liquidation.aster to d Anet eassigneermine dinterestamage hass, fewerif an rightsy. than a limited distributions, if any, and to distributions on liquidation. An assignee interest has fewer rights than a limited partner. partner.

2 2 Sources of rates of return include The Wall Street Journal, Ibbotson Associates, National Association of Real 60. OnSources Januar of ratesy 26,of return 2004, include the The SpeciWall Streetal JournalMast, erIbbotson in the Associates, Sacks National litigati Associationon issued of Real Estate Investment Trusts (NAREIT). Estate Investment Trusts (NAREIT). 3 an Opinion which estimated that the damages sustained to the ESOP 3 Sources for comparable (guideline) data are Closed End Mutual Funds (The Wall Street Journal, Morningstar) Sources for comparable (guideline) data are Closed End Mutual Funds (The Wall Street Journal, Morningstar) and Partnership Spectrum published by Partnership Profiles, Inc.). weandrePartnership appro ximSpectrumatepublishedly 9.9 mby Partnershipillion do Profiles,llars, Inc.).plus interest and attorneys fees. Page5 - 6 -

AccordinA limited partner,g to th likee Order a minority of shareholder,the United doesSta tesnot haveDist rithect abilityCourt, to AWgeteste at@ thern partnership District of assets, Arkansa eithers, to manage them or dispose of them. A limited partner may have little or no say in partnership management Jacissues.ksonv And,ille like Di vais minorityion, dat shareholder,ed December a limited 1, 2004, partner and does sig notned control by the distributions. Honorabl eThese Jenni arefer all B. prerogatives of management or, in the case of the limited partnership, the general partner, or the general Rpartneronsta whodt i nhas th beene ma designatedtter of Thom as theas managing Sacks, epartner.t al. v. Robert Jackson et al., Civil Action No. 97-123-C. The hypothetical willing buyer most likely would not pay liquidation price (pro rata of the underlying assets) for a limited partner or assignee interest in a limited partnership. What a willing buyer would pay would be something less than liquidation value in order to receive a return on his or her investment. This is the basis for valuationOn adjustments July 29, or 2002, discounts. this court found the defendants liable for breach of fiduciary duty in their roles as trustees of an employee stock ownership plan The analyst must read the partnership agreement carefully to determine what the rights and duties of both types of (“partnersESOP are.”) in The viol votingation rights of ER of ISAthe limited § 406,29 partners U. S.Cshould. § be 1106. determined. Sacks These v. Jack areson. the types of things thatThe will courcontributet determined to the size ofthat the discountin the for case lack of control. such a breach, ‘loss will be measured as the difference between what the ESOP paid for the ABC stock Discount for Lack of Control: The types of assets owned by the partnership must be considered when and its fair market value at4 the time of transaction, plus interest.’ Id. at 881. finding a(footnot starting pointe omi fortted) this discount.. Although a FLP could hold almost any type of asset, most FLPs own either marketable securities, real estate, or some combination of both.

AMarketable Special Masecuritiesster w: asA logical appoi referencented to r evpointiew when the revaluingports such and atest FLPimony is a closedof sev-enderal investment valuation company. It is best to use closed-end investment companies (mutual funds) that hold publicly traded profsecuritiesessi onthatal ares, similarMr. Jon to thees sbecuritieseing o neheld o byf tthehe m.FLP, Th suche asCou domesticrt adop ,ted th foreigne Sp stocks,ecial M specialityaster’s funds, corporate bonds, municipal bonds, or government bonds. There are many other types of funds. findings and commented “Having found the special master’s final report, with its Typically, these funds trade at discounts to their net asset values (NAVs). Statistical efforts to determine a suppdefinitivelem explanationent to be forth orouthesegh discounts and well have reaso failedned to reveal, the a court reason w forill theado discounts.pt the spe In cialany event,mast er’sthe discounts (and premiums) observed in the marketplace serve as a proxy for the lack of control discount. The findireasonng thats in they the serveir enti asre aty proxy.” is that holders of closed end funds have the same lack of control over the underlying assets that a limited partner in a FLP has. It is presumed that these discounts represent the market=s decrease in value for not having access to the assets, and not having any control over them. The Court’s Order, citing the Special Master’s report was extremely critical of the T&A Whether the valuation analyst adjusts these discounts before applying them to his or her FLP interest is a requestionport. ofF specificinding sfacts we andre t circumstanceshat the conc oflu yoursion particulars were valuation.“not cre Ifd youible bel” aievend thattha thet “ tinteresthe va lyouuati areon appraising has less control, then you might increase the discount, and vice versa. Another issue relates to the methodssimilarities ofw theere portfolios. applied The impr valuationoperly analyst in hismight repor believet SM thatR hisat or7,19. her portfolio” Whil woulde dis tradecus atsi an higgher the or lower discount. Whatever position the valuation analyst takes, the discussion should include all the “discounreasoning tedbehind futu there adjustments. earnings” method, The Court noted “The special master found Jones’ 1 tesThisti discountmony that only su pertainsch an to adj theust issuement of lack w asof control.unnec essIt hasar nothingy not crtoedi do withble. marketability SMR at 16 factors..” The perceived riskiness of any individual security in the FLP=s portfolio will be reflected in the market value of that security. Any adjustments the analyst might be tempted to make because the partnership interest is not as Weasilye ar tradede not as goin a shareg to inre aiterclosedate -tendhe Coumutualrt’s fund or theshould Spec be avoided.ial Maste Thatr’s isfindi a differentngs in discount.this report by analTherey zareing several the Or factorsder or that the might Spec beial considered Master’ ins makingreport. adjustments However ,to our the indstartingependent point for analthe discountysis o f for lack of control. Remember that adjustments should be reasonable and reflect the facts of the particular theFLP T&Ainterests. report indicates that there were substantially more problems than were pointed outo Professionalin the earlier management litigation.: Many We FLPswill higdo nothli ghaveht these professional probl management,ems as we whileproceed closed in-end thi sfunds repor do.t. This would drive the discount higher.

4 The analyst might not need a discount for lack of control if he or she utilizes an income approach and the benefit stream is already on a minority basis. 1 The adjustment had to do with the subtraction of debt from the value to determine the of ABC. Page6 - 7 -

CloearRegulationly, Mr.: Closed Jones’-end opifundsnio arens regulated were by di thesc arSEC;ded the asFLP l investoracking enjoys credi nobil suchity ,protection. validity and o Diversification and size: The FLP portfolio may not have the same level of diversification as a closed-end reasonafund. ble Oneness can .look In ata specializedfootnote fundson pag whiche 7 invest of the in one Or derindustry, The as aC comparison.ourt stated FLPs: are often very tiny compared to closed-end funds. This might increase the discount. o Investment objective: A FLP portfolio may reflect no defined investment policy or objectives. This may be a lack of professional management. o QualityWit: hSpeculative regard to versus Jones investment’ testimony grade., t heRecall, cour however,t in its li thatabi lithety securityopinio=ns marketexpress priceed should its reflectown the concernsmarket=s opinion ab outas to theits overall cred quality.ibility Avoid of Jonedoubles’ counting testimo in ny,the discount. including his o Performancedownpla: Ify itheng FLPof t hasime been res tinra existenceints, his for te as while,timo nitsy total con returncern mighting t hbee comparedexistenc withe o thaf at of various similar closed-end funds. lower draft valuation, the vagueness of his testimony, and his inability to o Average maturity: For fixed income portfolios, average maturity of the bonds will affect their market values.recall Again, wheth thiser factor eviden shouldce be of addressed prelimina inry the ca pricelculation of the securitys was co. ntained in the files.

However, recent court cases have frowned on adjustments to the lack of control discount because they cannot be supported. Recent decisions have used an average or median discount of the selected funds. Valuation analysts often use the median discount because it eliminates outliers from the data. However, if you have already eliminated the outliers, you may be overcompensating by using the median of a smaller group of funds. Therefore, be consistent with the data that is used.

Real Estate: Very often, a FLP will hold one or more pieces of real property. These might range from the family home to vacation property, vacant land, a farm, or some income producing real property, such as apartments, retail, or office space. The analyst should review these assets carefully in order to determine the nature of each, as this will affect the selection of discounts.

A starting point for determining lack of control discounts for FLPs owning real estate would be real estate limited partnerships (RELPs). These partnerships have been in existence for a number of years and a body of data has been accumulated on many aspects of them. A fairly liquid secondary market for RELPs exists. It is nowhere near as liquid as a stock exchange, but enough transactions take place, that there is good data on the discounts at which these securities trade to their NAVs. Recently they have begun extensive reporting on a secondary market for non-publicly traded real estate investment trusts (REITs).

Data on this market has been gathered by Partnership Profiles, Inc. since 1990. Partnership Profiles issues a bi-monthly publication entitled Direct Investment Spectrum which offers general commentary about the secondary market for RELPs and REITs. Operating data for five years are provided where available, including information on cost of properties owned, percentage leverage, gross revenues, net income, cash flow, working capital, and a history of distributions to partners.

This data can be accessed through their Minority Interest database at www.partnershipprofiles.com. An annual subscription can be purchased for unlimited searching of their data.

The following factors can influence the price of a RELP in the secondary market.

1. The type of real estate assets owned by the partnership. 2. The amount of financial leverage inherent in the partnership=s . 3. Underlying cash flow coverage of yearly distributions made to partners. 4. The caliber of the information flow from the partnership and the general partner. 5. Whether or not the assets of the partnership are well diversified. 6. The reputation, integrity, and perceived competence of the management/general partner. 7. Liquidity factors such as: how often a partnership interest trades, the number of investors in the partnership, the time period until liquidation, the universe of interest buyers, whether the partnership is publicly or privately syndicated, and the presence of rights of first refusal.

Whether or not a FLP has a history of making distributions is an important consideration in determining the discount. Generally, partnerships which make distributions trade at smaller discounts to their NAVs, all other

Page7 - 8 - things being equal. The amount of debt is importantOPI asNIO well.NS If the appraisal FLP has no debt, it should be compared to partnerships that have little or no debt as well.

Consider as many comparable partnerships from this study as possible. Courts have maintained that more comparables are better than fewer, and certainly better than only one.

InDiscount our opi fornio Lackn, T&A,of Marketability Steven J: Anones additional and Mi adjustmentchael Ax is elroftenod made (her toeafter account col forlec theti factvely that referr thereed to is no secondary market for FLP interests, nor is one ever likely to develop. These interests lack marketability; asthat T is,&A, they Mr. cannot Jones be liquidatedor Mr. Axelrod) or converted have to cabreachesh quickly.d the If irone duty owns to sharesrender of vaarious publicly services traded in corporation, one may call a broker, sell the shares and have the cash proceeds within a few business days. aNot manner so with FLP that interests, is consi andste thisnt wis ittheh the basis st forandar the discountd of car fore lackreq uirof marketabilityed of professi or DLOM.onal accountants andIn addition advis toor thes ilackn the of ar endersecondarying marketof valu forati FLPon interests,services certain to A BCprovisions and theare oftenABC written ESO intoP. FLP agreements restricting the transfer of interests, especially to individuals or entities outside the family circle. These restrictions create an additional lack of marketability factor. Some of them are:

In1. ouWithr osomepinion exceptions,, the valu a generalation partner,servic limitedes per partnerformed or an by assignee T&A formay ABC not transfer and allthe or anyABC part ESOof P violhisated or heracc interestounti ngwithout and the v alupriorati writtenon s consenttandar ofds. the Igeneraln our partners,opinion, w hichRule consent 201 mayof the be given Amer or ican withheld at the discretion of the general partners. Ins2. tiAtute transferee of C ofer antified interest Publ in aic FLP Acc shallountant only bes’ entitled (AIC toPA) the rightsCod ofe anof assignee Professi unlessonal the Con consentduc oft was all general partners and a majority in interest of the limited partners is given to make the transferee a violsubstituteated as limitedT&A dipartner.d not comply with the following: 3. No partner or assignee shall have the right to withdraw from the FLP prior to its dissolution and liquidation. 4. No partner or assignee may withdraw or reduce his or her capital contribution or capital account without the consent of the general partner. A. Professional Competence. Undertake only those professional Other Provisions servAffectingices Marketability that the member or the member's firm can reasonably expect In addition to provisionsto be co inmplet the Agreemented with prwhichofessi restrictonal transfer, competenc a historye. of little or no dividends or distributions from the FLP to the partners is a factor that affects marketability. A willing buyer might be more inclined toB. ignore Due restrictions Prof eonss transferional ofCa hisre or. herExe interestrcise ind exchangeue pro fforess a ionstreamal carof cashe i nbenefits. the However, little or no distribution history is common with FLPs, which often retain income and gains in order to fulfill the long-termperf investmentormance goals of ofprof the essionpartnership.al services.

Another factorC. thatPl mightanni ngaffect a thend marketability Supervisio of na .FLP A dinterestequa teis lythe plaA754n Election. and @ suThisper isv isane election the that the partnershipperf mightormamakence under of prof IRCessionSectional 754, serv whichices. provides that the partnership may elect to adjust the inside basis of the partnership=s underlying assets. In other words, the partnership can adjust its internal books to show that a new partner paid a higher price for assets that are worth more at the time of the purchaseD. (transfer). Su f fThisicie nelectiont Relev wouldant Datnot affecta. Obtai the existingn suffici partners,ent re levbutant it would data have to aff positiveord a tax consequences forre aasona new partner.ble bas is for conclusions or recommendations in relation to any professional services performed. If there is nothing in the Agreement that addresses the 754 election, it does not mean that the partnership cannot make the election. It still can. However, a willing buyer might wish to have assurance that such an election will be made. This is especially critical if the appraised fair market value of the underlying assets of Inthe adpartnditershipion, T&Ahave increasedfailed to in complvalue overy w theirith originalthe Uni basis.form Since Sta ndarthere dsis considerable of Profes recordsional keeping Appr aisal involved once this election is made, a FLP may be reluctant to make the election. However, the courts seem to Practicebelieve that (USPAa buyer wouldP), an never indu purchasestry standwithoutard making tha suret all that appra a 754isers election are is in guided place, so toalthough follow in many smaller partnership do not and will not make a 754 election, the courts will not necessarily accept this as pa ulegitimateblicatio nreasons of thfore increasing AICPA, thewit discount.h respect to the following:

When valuing a general partner interest, some consideration may be given to an additional marketability factor reflecting the liability exposure assumed by the general partner and that under many states= partnership statutes, a majority of the limited partners may remove a general partner that assigns all of the general partner=s interest in a FLP to a third party. Here, the analyst must read the Partnership Agreement carefully to

Page8 - 9 - determineST underANDARD what circumstances 9 a general partnership may be transferred or whether, after withdrawal of a general partner, that general partner interest becomes a limited partner interest. In this case, the DLOM might be increased. In developing a business or intangible asset appraisal, an appraiser must be A FLP canaw requireare of, additional understa capitalnd, fromand thecor partnersrectly employin order to thos meete operating recogniz expensesed metho andds have and extra capital forproce partnedurerships requirements.that are nece Thisssary type ofto provision produce is nota credible included in ap everypraisal. FLP Agreement, but its presence may warrant an additional lack of marketability factor. Capital calls might require that an interest holder remain liquid in order to meet them, rather than place funds in a higher yielding but less liquid investment.Sta ndaA willingrds buyerRule would 9-1 give this additional liability exposure and potential loss of a more favorable investment rate of interest consideration in determining value and so does the analyst when valuingIn de thevelo interestping ina thebu siFLP.ness or intangible asset appraisal, an appraiser must: Sources of Marketability Discounts: The sources for discounts for lack of marketability for FLP assignments are the same(a) as forbe all aw valuationare of, assignments, understand, restricted and stock cor studiesrectlyand empl pre-IPOoy transacti those ons. recog Theniz valuationed analyst starts withme thesethods studies and and proc thened needsures ttoha addresst are nethec esfactssar andy t ocircumstances produce a of c thered specificible valuation assignment to determine the adjustments to the@benchmark@ discount that will be utilized in the assignment at hand.appraisal;However, the analyst can also use the Quantitative Marketability Discount Model (QMDM) to quantify the methodology. Others use the Mandelbaum5 factors which include the following: (b) not commit a substantial error of omission or commission that 1. Financialsignifican statementtly afanalysisfects an appraisal; 2. Company’s dividend policy 3. Nature of the company, its history, its position in the industry and its economic outlook (c)4. Company’snot rende managementr appraisal services in a careless or negligent manner, such 5. Amountas aof series control ofin transferrederrors that, shares considered individually, may not significantly 6. Restrictions on transferability of stock 7. Holdingaffect period the for re stocksults of an appraisal, but which, when considered in the 8. Company’saggre gatredemptione, wou policyld be misleading. 9. Costs associated with going public Standards Rule 9-2 There are several other lists lists of factors to consider that have been published. The first comes from Guide to Business Valuations (p. 14-34): In developing a business or intangible asset appraisal, an appraiser must obseSome rvofe the the factors followi thatng would specif causeic appraisaan interestl tog uidetradelines: at a low marketability discount includeB

(a1. ) Minimaladeq volatilityuatel iny ithedenti valuefy ofth thee bus underlyinginess assets.enterprise, assets, or equity under 2. Abovecons averageidera expectationstion, define for future the yield. purpose and the intended use of the 3. A provenappr andais al,stabilized consi historyder of the income. elements of the appraisal investigation, 4. Certainty of distributions or expectation of capital appreciation. 5. Limitedcons timeide periodr any on sp restrictionecial limiti of abilityng condi to seltil ons,the interest. and identify the effective date 6. Favorableof the outlook appraisal; for future growth of the entity.

(bFactors) thatdefine would the cause valu ane interest being toco tradensider at aed. higher discount includeB

1. High(i degree) ofif volatilitythe appr in theais valueal conc of theer underlyingns a bu assets.siness enterprise or equity 2. Questionableint abilityerest to s,generate conside a satisfactor any buyry return-sell onag assets.reements, investment letter 3. Inability to generate sufficient earnings for distributions or to support future growth in operations. stock restrictions, restrictive corporate charter or partnership 4. Small size in agrelationreement to other c lauinvestmentsses, an andd any lack ofsi mildiversification.ar features or factors that 5. Involvement inmay industries have or an activities influence viewed on unfavorably value. by the investing public.

5 (ii) if the appraisal concerns assets, the appraiser must consider Mandelbaum v. Commissioner, T.C. Memo 1995-255 (Affd. 91F.3d 124, 3rd Circuit, 1996) whether the assets are: (1) appraised separately; or Page9 (2) appraised as parts of a going concern. - 10 -

The second comes from an article published by Robert E. Moroney entitled AWhy 25% Discount for The second comes(iii) fromif anthe article app raisapublishedl c obync Roberte6rns e E.qu Moroneyity int eentitledrests A inWhy a 25%bus inessDiscount for Nonmarketability in One Valuation, 100% in Another?@6 In Moroney=s article, he points out 11 different factors Nonmarketability in One enterValuation,pris 100%e, consi in Another?der the@ exIntent Moroney to w=shic article,h the he ipointsnterest outs 11 d odifferent or do factors that should be considered in the application of a DLOM. Some of the are very similar to the Mandelbaum factors. They are as follows:not contain elements of ownership control.

1. HighSta dividendndards yield: Rule Companies 9-3 that pay dividends tend to be more marketable than companies that do not. 2. Bright growth prospects: Companies that have bright growth prospects are easier to sell than 2. BrightIn growthdevelo prospects:ping a bu Companiessiness or that intangibhave brightle as growthset appr prospectsaisal re arelat easiering to to an sell eq thanuity companies that do not. This makes them more marketable. 3. Swingint evalue:rest Ifw ait blockh the of abistocklity has to swingcaus value,e liquid it mayati onbe moreof the marketable enterpr thanise, the an typical appr smallaiser blockmust of stock. invest Thisig ateswing the value pos couldsib iliincludty theat a premium. the bus ineThisss can ente be emphasizedrprise may where hav ae 2 a percenthigher interest value exists in withliquida two tion49 percent than interests.for contin Theued 2 percent operation interest as can a going be worth conce quite arn bit to either 49 percent interest if it will give that interest control of the company. bit toabse eithernt 49 con percenttrary interestprovisions if it will of give law that of ainterest compet controlent ofjurisdiction. the company. If liquidation is 4. Restrictions on transfer: Restrictions on transfer make the stock less marketable due to the difficultythe iinndi sellingcate dthem. basis of valuation, any real estate or personal property to be 5. Buyli-sellquid agreements:ated must Buybe- sellvalu agreementsed under thecan goappr eitheropr iatway.e s Thetandar agreementd. can create a market for the stock, making it more marketable, or the agreement can restrict the sale making it less marketable. lessSta marketable.ndards Rule 9-4 6. Stock=s quality grade: The better the quality of the stock, the more marketable it will be. This can be evidenced by comparing the subject company to others for supporting strengths and weaknesses.In developing a business or intangible asset appraisal, an appraiser must 7. Controllinobsergv shareholdere the follow=s honesty:ing speci Thefic integrity apprais ofal the g uidcontrollingelines shareholderwhen app licancabl makee: a big difference regarding the ability to sell a partial interest in a company. If the controlling shareholder tends to deal with the other shareholders honestly, the other interests in that shareholder(a) consid tends toer dealall approp with theriate other valuation shareholders met honestly,hods and the proced other intures.erests in that company tend to be more marketable. 8. Controlling shareholder=s friendliness: Similar to the shareholder=s honesty, the manner in which he or(b she) dealscolle withct anothersd an canalyze make re thelevan stockt d moreata regamarketable.rding: 9. Prospects for(i) the corporation:the natu Ifre a andcorpora historytion has of good the prospectsbusiness; for the future, it will generally be more marketable. be more marketable.(ii) financial and economic conditions affecting the business 10. Prospects for the industry: A company that is in an industry with good prospects will also generally be more marketable.enterprise, its industry, and the general economy; 11. Mood of the (iinvestingii) past public: resul Whents, the cu investingrrent oper publicati ions,s bullish, and they future are more prospec readilyts willing of the to make an investment.busi Thisness can increaseenterpri these; marketability. (iv) past sales of capital stock or other ownership interests in the However use of any of these “lists,” is a benchmarking technique which the courts have been frowning on. They want thebusi valuationness ente analystrp ritose explain being why appr the aisstudiesed; are relevant to the particular valuation subject.(v) sales of similar businesses or capital stock of publicly held similar businesses; One additional source of data are two databases that include specific restricted stock and pre-IPO One additional source(vi) ofpr dataices, are tertwoms databases and co thatndi includetions affspecificecting restricted past stock sales and of pre simil-IPOar transactions. Resold by Business Valuation Resources and located at www.bvmarketdata.com, they are available by subscription.busin Theyess are: assets;

a. StaFMVnda Restrictedrds Rule Stock 9-5 Study: This database currently contains 475 total transactions; including 205 transactions in Manufacturing, 138 transactions in Business Services, 45 transactions in Finance, Insurance and Real Estate, and 25 transactions in Transportation, Intransactions developin ing Finance, a busi nessInsurance or i ntangand Realibl eEstate, asset and appr 25 transactionsaisal, an a inppr Transportation,aiser must; Communications, Electric, Gas and Sanitary services b. Valuation Advisors Lack of Marketability Discount Study (pre-IPO): As of July 2007, this (a)databaseselect contained and 3 e,547mp transactionsloy one or andmore over app 1,470roach companieses tha datingt app lyfrom to 1995the specifto 2006.ic No breakdownappraisal of data assignme by SIC Codents. was provided.

(b) consider and reconcile the indications of value resulting from the 6 various approaches to arrive at the value conclusion. Taxes, May 1977.

Page10 - 11 -

OtherSTAND PotentialAR AdjustmentsD 10 : There are several other adjustments that may be included in determining a final value. Some of these adjustments may apply to the value of the underlying assets, rather than to the value of a FLP interest. In some cases, these are factors that are considered in the quantification of DLOM, ratherIn than repor beingti includedng the asre asul separatets of discount. a business or intangible asset appraisal an appraiser must communicate each analysis, opinion, and conclusion in a 1. Fractionalmanne interestr that isadju nostmentt misl: Theead fairing. market value of an undivided ownership interest in real property is worth something less than the percentage of ownership multiplied by the fair market value of the real property as a whole. Fractional interest adjustments should not be limited to undivided interests in real property,Standa butrds should Rule be 10-1 considered any time a fractional interest is held in any type of property. 2. Portfolio Adjustment: The basis for a portfolio adjustment is a FLP with a non-diversified portfolio of marketableEach wri settencurities. or or al business or intangible asset appraisal report must: 3. Restricted Securities Adjustment: Restricted securities are those that are acquired from an issuer in a transaction exempt from registration requirements of federal and state securities laws (known as Aprivate placements(a) cl@ear). Therely and are acc alsour resateltrictionsy se imposedt forth the by the appr SEC.ais onal resales in a manner of these restricted that wil securities.l not Several Courtbe casesmisle haveadin upheldg. additional discounts to account for restricted securities, but if the price of the security already reflects such a discount, it should not be taken twice. 4. Blockage Adjustment: This adjustment accounts for the depressive effect of suddenly placing a large block(b) of stockcontorain real suestatefficonien thet imarketnformati. on to enable the intended user(s) to 5. Adjustmentunder for Builtsta-Innd Capital it. Any Gains spec Taxific: Under limiti theng willing condi buyertions-willing conc sellerernin test,g adjustmentinformati onmay be made for theshoul fact dthat be the noted. underlying assets may now have a market value greater than book value and that there may be a built-in capital gain with respect to those assets. If so, a willing buyer might become responsible for capital gains tax when the assets were sold. A hypothetical willing buyer would take this into(c )considerationclearly when and evaluating accuratel a FLPy di interest.sclos e This any issue ex istr aoralsodina relatedry to a thess umptiSectionon 754 th election.at directly affects the appraisal and indicate its impact on value. THE REPORT: One useful way to present a report is to set it following the eight factors of Revenue Ruling 59- 60. Remember, the ultimate Auser@ of your report is the Internal Revenue Service. By laying out your report in the order of the eight factors, you are showing the service that you are considering each of the factors that they haveSta ndalaid outrds in Ruletheir ruling. 10-2 In addition, you should include sections relating to capitalization and discount rates, if appropriate, as well as discounts and premiums.

The AICPA’sEach wStatementritten busi on nessStandards or intang for Valuationible asset Services apprstatesais theal refollowing:port must comply with the following specific reporting guidelines: 51. The detailed report is structured to provide sufficient information to permit intended users (a)to understandidentify the and data, des reasoning,cribe theand analysesbusiness underlying enterpr theis valuatione, asset analysts or =seq conclusionuity bei ng of value. A detailed report should include, as applicable, the following sections titled using wordingappr similarais ined. content to that shown:

(b)$ Letterstate of transmittal the purpose and intended use of the appraisal. $ Table of contents $ Introduction (c)$ Sourcesdefine of information the value to be estimated. $ Analysis of the subject entity and related nonfinancial information (d)$ Financialset forth statement/information the effective dateanaly sisof the appraisal and the date of the report. $ Valuation approaches and methods considered $ Valuation approaches and methods used (e)$ Valuationdesc adjustmentsribe the extent of the appraisal process employed. $ Nonoperating assets, nonoperating liabilities, and excess or deficient operating assets (if any) (f)$ Representationset forth of al thel assvaluationumpti analystons and limiting conditions that affect the $ Reconciliationanalyses, of estimatesopinions, and and conclusion conclusio of valuens. $ Qualifications of the valuation analyst (g)$ Appendicesset forth and exhibits the information considered, the appraisal procedures followed, and the reasoning that supports the analyses, opinions and conclusions. Page11 - 12 -

The valuation(h) analystset for shouldth an alsoy addi considertional following informati theon Internal that mayRevenue be aServiceppropr=siat Adequatee to show Disclosure Rules as laid outcompl in Regulatioiance nw Sectionith, or cl301.6501.early identiEssentially,fy and theex plaInternalin per Revenuemitted Servicedepart uris estelling the valuation analystfrom,that to t Ahepass req muster,uirements@ we must of presentStanda ard fully 9. supported and documented report. This is not substantially different from the AICPA=s Standard, or USPAP....do your work and report it.

Do not have(I) theset reader forth of the the report rati haveonal toe guess for the about valu yourati methodology,on methods discounts, and pr orocedu conclusions.res For example, you docons not wantidere to dstate...the and employ studiesed. indicate 25 to 45 percent, therefore, we selected 35 percent. This is not supported. There are numerous court cases which disallow discounts, strictly because the valuation analyst did something similar to this. You should select a benchmark discount and then adjust it based on specific items that you discussed in detail in your report.

EachCONCLUSION of these: Inpr conclusion,ovisions wI wouldill be likeaddr to emphasizeessed in detthe importanceail within ofour our r roleepor ast. valuators. We believe it is important that the valuation analyst not cross the line from being an independent valuation analyst to being an advocate of bigger and bigger discounts. This can happen, especially if a client requests that we review a partnership document with an eye to adding restrictions and provisions that might increase the discounts. But for the negligence of T&A, Mr. Jones and Mr. Axelrod, the plaintiffs have suffered Although advising an attorney on the provisions of the agreement is really outside of the scope of the valuation significananalyst’s assignment,t econom tichis damdoes ages.not excuse Judge valuation Ronst analystadts ffromounbeingd tha awaret the ofA theBC law, ES especiallyOP overpaid state $8,139,laws regarding116 for limited the s tocpartnerships,k, based andon alimited valuati liabilityon at companies. $26.31 mi llKeyion . questions In addit ionto review, preju withdgmentthe partnership=s attorney might include: interest was also added to this amount. 1. What restrictions in the partnership documents are more restrictive than state law? 2. What is the state law? Get a copy of the state=s limited partnership act and read it thoroughly. 3. Does a limited partner have a right of withdrawal from the partnership and on what basis?

These issues can impact the valuation opinion. It is important for the analyst to remember that his or her assignment is the determinationBA of fairSI marketS FOR value. OUR This OPINImeans theONS consideration of both a hypothetical willing buyer, as well as a hypothetical willing seller. Your final opinion of value must be reasonable. Remember, the buyer might buy for that low a price, but as an independent analyst, you must also ask yourself the question, if I was the seller, would I sell that low?

The remainder of this paper includes sections of some of Trugman Valuation Associates, Inc.’s LLC reports Inwhich orde provider for examples Trugma ofn some Valu ationof the things Associate discusseds, Inc. in this to paper. form our opinions in this matter, numerExampleous 1: dTheocuments Agreement were reviewed. In addition, Gary R. Trugman CPA/ABV, MCBA,

ASA,FORMATION MVS, OF pr THincE ipaLLCl :inSmith char Investmentge of LLCthis II, e ang Delawareagement, Limited att Liabilityend eCompanyd the (deposASmith@ orition AThe of LLC Stev@), wasen Jonesformed inon accordance January with 24, the 25, Delaware 27 and Limited 28, 2005. Liability TheAct ( AdocumentThe Act@) on sNovember review ed29, in2004. this matThe terCertificate include of thFormatione follo wing:of The LLC was filed with the Secretary of State of Delaware on November 29, 2004, and The Company Agreement (AThe Agreement@) was signed on the same day.

1.PURPOSSecoE OF TndHE LAmendedLC: Smith was Compl formed toain investt and in real Peti estate,tion stocks, for Dec bonds,lar atipartnershipon of Rinterests,ights iandn the other matte securitiesr of and financRobeial instruments.rt B. Jackson The LLC and can Milalsoton engage D. Thomin any otherpson lawful, Jr. purposev. Goldb thaterg is approved and Sim by psonits Management, P.S.C. Committee.and Steven A. Crain and John J. Fox and Sherry P. Crain and Prison Systems, Ltd. and Tennet Axelrod & Bressler, P.S.C. and Michael Axelrod and Stephen Jones TERM OinF T WHEashi LLC: ngTheton term C ofir cuiThet LLC Cour shallt, continueDivision indefinitely 1, Jac unlessksonv itsil le,existence Arkans is terminatedas, Case sooner Number pursuant 12- to 123456. Section 8 of The Agreement. 2.VOTING:Val Exceptuati ason otherwise repor tprovided of ABC in The Jai Agreement,l Compan wherevery, Inc. The as Agreement of November requires approval30, 1993 of the as members, prepar theed affirmativeby vote Tenn of moreet & than Axelrod, 50 percent P.S of .C.the aggregate(TA 159 of -all TA percentages 218). held by members is required to approve a

Page12 - 13 -

3.matter. OnlLettey percentagesr of Mar heldch 15,by members 1994 fromin their Tennetcapacity as & members, Axelrod, not Pmerely.S.C assignees. to Boar or dtransferees of Dire ctocan bers voted.and Trustees of ABC Jail Company, Inc., updating the valuation of ABC Jail Company, Inc. to March 15, 1994 (TA 155).

= 4.OWNERSMemorHIP INTEanREduSTSm A N frDom CAP SITAteL vCeO NJTRonIBesUTI OdNatS: edUpon D formation,ecembe ther 1members, 1993 ownership regar diinterestsng A inBC The J LLCail were distributedCompa asny follows:, Inc .’s establishment of an employee stock ownership plan (TA 676 - TA 694).

5. A representation letter dated March 7, 1994 to Tennet & Axelrod, P.S.C. referencing the valuation of ABC Jail Company, Inc., Inc. (no specific valuation report indicated) signed by J. Clifford Morris, Milton Thompson and Robert B. Jackson on March 10, 1994.

6. Valuation Report Checklist from the workpapers of Tennet & Axelrod, P.S.C. relating to the valuation as of November 30, 1993 dated March 7, 1994 (TA 485 - TA 489).

7. Report of the Special Master in the matter of Thomas Sacks, et al. v. Robert Jackson, et al. in the United States District Court, Western District of Arkansas at Jacksonville Division, Civil Action: 6:97:CV-123-C.

8. Amended Special Master report in the matter of Thomas Sacks, et al. v. Robert Jackson, et al. in the United States District Court, Western District of Arkansas at Jacksonville Division, Civil Action: 6:97:CV-123-C.

9. Memorandum Opinion and Order in the matter Thomas Sacks, et al. v. Robert Jackson, et al. in the United States District Court, Western District of Arkansas at Jacksonville Division, Civil Action: 97-123, signed by the Honorable Jennifer B. Ronstadt on July 29, 2002.

10. Order in the matter of Thomas Sacks, et al. v. Robert Jackson, et al. in the United States District Court, Western District of Arkansas at Jacksonville Division, Civil Action: 97-123, signed by the Honorable Jennifer B. Ronstadt on December 1, 2004.

11. Correspondence dated April 26, 1996 from Stephen D. Jones to Steve Crain (GS 106-0900).

12. Deposition transcript of Stephen D. Jones in the matter of Thomas Sacks, et al. v. Robert Jackson, et al. in the United States District Court, Weston District of Arkansas at Jacksonville Division, Civil Action: 3:WS-667-C dated February 25, 2000.

Page13 - 14 -

13. Deposition transcript of Stephen PDe.r cJeontnagees in the mattCearp oitafl Thomas Sacks, et al. v. Robert Jackson,P a etrtn eal.r in th e UnIintteedre sSt tates DistCriocntt riCbuotiounrst , Western District of Arkansas at Jacksonville Division, Civil Action: 3:WS-667-C dated March 23, 2000.

Louis Smith 49.00% $ 14. Trial transcript,Louis D Smithay I I, in th e matter o49.00%f Thomas Sacks and $Ferm an Hou ston v. Robert E. Jackson and Milton Thompson, in the United490.00 States District Court, Western DistrDorisict of Smith Arkans as at Jacksonv51.00%ille Di vision, Case 510.00 Number 3:97-CV-1234 from April 17, 2001, testimo ny of Stephen Jone s. Totals 100.00% $ 15. Trial transcript, Day VIII, in the matter of Thomas Sacks1 ,0and00.0 0F erman Houston v. Robert E. Jackson and Milton Thompson, in the United States District Court,

Western District of Arkansas at Jacksonville Division, Case Number 3:97-CV-1234 No memberfrom is requiredJuly 18, to make2001, additional testim capitalony ofcontributions. Stephen Subsequen Jones. t to the formation of The LLC, the members transferred various marketable securities into The LLC. Each member transferred an amount proportionate to his/her 1membership6. Tri ainterest,l transc so rithept, member Day’ sI Xpercentage, in the interestsmatte rremained of Thomas the same. Sacks and Ferman Houston v. On DecemberRob er31,t E.2005 Ja, Dorisckson Smith and sold M 49ilton percent Thom of herpson interest, in to the Smith U nitInvestmented States LLC atD fairistr marketict C ourvaluet, establishedW estby aer valuationn Distr asic tof of the Ar samekans date.as atOn J Januaryacksonv 31, il2006,le Di vLouisision Smith, C asesold hisNumber 49 percent 3:97 interest-CV- to1234 Smith Investmentfrom LLC Octat fairobe marketr 9, value 200 establish1, testimoed by nya valuation of Step ashen of the Jone same s.date. At the valuation date, ownership is as follows: 17. Copies of the proposed regulations of the Department of Labor, Pension Welfare

Benefits Administration, 29CFR Part 2510 faxed from Steve Crain to Stephen Jones (TA 490 - TA 501). Percentage Members Interest 18. An engagement letter between Tennet & A xelrod, P.S.C. a nd ABC Jail Company, Inc. regarding theDoris poss Smithibi lity of forming an employee s2.00%tock o w nership plan, dated November 30, 1993Smith an Investmentd signed LLC on December 13, 1993.98.00%

19. A presentation forTo tABCal Jail Company, Inc. about the100.00% employee stock ownership plan, dated December 6, 1993 as faxed from Steve Crain to Stephen Jones (TA 695 ALLOCATIONS- TA 70 OF7). PROFITS AND LOSSES: Profits and losses shall be allocated to the members in accordance with his or her percentage interest in Smith, after giving special effect to the special allocations set forth in Sections 5.3 and 5.4 of The Agreement, which are regulatory and curative. Regulatory allocations arise out of the income tax regulations, 20.and curativeVar allocationsious resear are madech mater to offsetial thes rega effectrd of intheg regulatoryvaluation allocations. of stock for an ESOP (some of which appears to be from Tax Management, Inc.) (TA 708 - TA 715). DISTRIBUTIONS: Cash flow and net capital proceeds may be distributed to the interest holders at the discretion of the Management Committee, but no distributions may be made if they impair the reasonable working capital needed for 2conducting1. Ha Thend LLCwrit=s tebusinessn note ands affairs. from TDistributions,ennet & when Axe made,lrod, will P .Sbe .Cin accordance.’s workp withap eeachrs r interestegard holdering = as percentageme interesteting onin S Novembmith. An Ainterester 30, holder1993@ is(TA any 75person0 - TAwho 75holds2). an interest, whether as a member or an unadmitted assignee.

22.MANAGEMENTDeposition: The management transcript of of Smith theis tevestedstimo in any Management of Steph Committeeen Jone designateds in the bym theatte membersr Robe ofrt The v. LLC. TheJackson initial number, et al.of managers v. Green on andthe Management Smith, P.S Committee.C., et al. will, beW ashione unlessngton the C membersircuit C provideourt, Diotherwise.vision The initialOne, manager Cas wille Nbeumber Anthony 12-F. Jones123456. In the dated event thatJanua Anthonyry 24, F. Jones 2005.is unable to serve as manager, Janet A. Jones will automatically assume the role of successor manager.

23.A managerDepo maysition be removed tran scriptfrom the of Management the testi mCommitteeony of forStep any henreason, Jone or fors noin reasonthe m andatte at rany Robe time,rt by v. a vote of the members. If there are multiple managers, each manager shall have one vote, and the Management CommitteeJackson shall act, byet theal. afv.firmative Green vote and of Sm a majorityith, P.S. of theC., members et al., Wof ashithe Managementngton Cir cuiCommittee.t Cour t, Division One, Case Number 12-123456 dated January 25, 2005. Page14 - 15 - The Management Committee has the authority to manage, control, administer, and operate the business and affairs of 24.The ManagementLLC.Depo However,sition Committee the tran Managementscript has the of authorityCommittee the te tostimo manage,is not permittedny control, of Step to administer, dohen the followingJo andne soperate withoutin the the the m business approvalatter Robe and of members affairsrt v. of holdingThe LLC. moreJackson However, than 50, theet percent al.Management v. ofGreen the percentages Committee and Sm ith,heldis not P.S by permitted members:.C., et to al. do, theWashi followingngton without Circui thet approval Court, ofDi membersvision holding more than 50 percent of the percentages held by members: One,1. CasAdmite N a umbernew member, 12-123456 dated January 27, 2005. 2.1. MakeAdmit loansa new or member, guarantee loans of any manager or affiliate of a manager, and, 25. Depo3.2. sitionEnterMake tranintoloans ascript borrowingor guarantee of onthe behalfloans testimo of Theanyn managerLLC,y o fwhich S tepor whenaffiliatehen added Joneof a tomanager,s all in other the and,indebtedness, matter Robe will exceedrt v. 3. $10,000.Enter into a borrowing on behalf of The LLC, which when added to all other indebtedness, will exceed Jackson$10,000., et al. v. Green and Smith, P.S.C., et al., Washington Circuit Court, Division The ManagementOne, Cas Committeee Number may take 12- any123456 action, exceptdated those Janua describedry 28, above, 2005. without a meeting of the members, as longThe Managementas such action Committee is approved may by take the anyunanimous action, except written those consent described of the Management above, without Committee. a meeting of the members, as long as such action is approved by the unanimous written consent of the Management Committee. 26.TRANSFERFinan RESTRICTIONScial results: ofSection Prison 7.1(a) Systems, of The Agreement Ltd. f ordefines the thethird following quarter six conditions1993 (TA which 4 - must TA be18 met). beforeTRANSFER a transfer RESTRICTIONS of any member: Section interest 7.1(a) can ofbe The made: Agreement defines the following six conditions which must be met 27.before a Iltransferlegibl eof wanyor memberkpape rinterest indicati canng be mar made:ket price of Prison Systems, Ltd. from March 2, 1. The transfer will not require registration under any federal or state securities laws. 1992.1. 4 (TAThe 19). transfereetransfer will agrees not require in writing registration to be bound under by any the federa termsl ofor Thestate Agreement. securities laws. 3.2. The transfertransferee will agrees not result in writing in termination to be bound of The by LLCthe terms under of Internal The Agreement. Revenue Code Section 708. 28. Prospe4.3. ctusThe followingtransfer of Esmo will information notr Corr resultection is in delivered terminational Servi to Tofhe ces,The LLC LLC In byc. undereither (TA Internalthe 54 transferor - TA Revenue 11 or2). the Code transferee: Section 708. 4. Thea. followingTransferee information=s taxpayer is delivered identification to The number,LLC by either and the transferor or the transferee: a.b. Transferee=s initialtaxpayer tax identificationbasis in the transferred number, and interest. 29. Res5. earTheb.ch matertransferorTransfereeial sor faxthe= sedtransferee initial fro taxm mustbasisSmit payinh theBarney a transfer transferred to fee Stephe tointerest. The LLCn Jtoones cover onall re Masonablearch 7, expenses 1994 re5.gardininTheg connection th transferore Esm with oror the inthe ittransferee iatransactionl public must ifof required payferin a g.transfer by the feeManagement to The LLC Committee. to cover all re asonable expenses 6. Thein connection transferor with complies the transaction with the provision if required of byThe the Agreement Management concerning Committee. rights of first refusal. 6. The transferor complies with the provision of The Agreement concerning rights of first refusal. 30.Only if theTw aboveo pag conditionse summar are satisfiedy of fina cannci a transferal hig takehlig place.hts of The Pri onlyson transfers Syste thatms, do Ltd. not havefor toth satisfye peri theseod conditionsOnly if theend aboveareed Apermitted conditionsDecemb transfers areer satisfied31,@ as1993 described can anda transfer 199in Section take2 (TA place. 7.2. 116 TheThese - onlyTA involve 117transfers). transfers that do between not have members,to satisfy these their spouse,conditions children, are Apermitted or any company transfers or@ asentity described owned byin Sectiona member. 7.2. These involve transfers between members, their spouse, children, or any company or entity owned by a member. 31.For all butInfpermittedormati ontransfers, abou Thet ABLLCC and Jai otherl Compan interest holdersy, I nc.retain entia righttled of firstABC refusal. - A That P is,ubl prioric/Pr to offeringivate hisFor orall her butPartn interestpermittedership to atransfers, third (TA party 11The in8 otherLLC - TA and than 15 other a3). permitted interest transfer, holders retainhe or she a right must of firstfirst offerrefusal. the interestThat is, toprior The to LLC offering and tohis other or her interest interest holders. to a third The party offer in isother good than for a30 permitted days. As transfer, provided he in or Section she must 603 first of The offer Act, the a interest member to shall The notLLC have and theto other right itonterest resign holders. prior to dissolutionThe offer is and good winding for 30 days.up of The As providedLLC. The in transferee Section 603 may of becomeThe Act, a a substituted member shall member not have and 32.havethe right full Correspon tomembership resign prior ridentoghts dissolutionce if Section from and Steph301(b) winding anden up D.704(a) of Jone The of LLC. Thes to TheAct Gary havetransferee Harper been maysatisfied. at become AB C Jaila substituted Compan membery, Inc. and have fulldat membershiped July ri12,ghts 19if Section94 (T A301(b) 154 and). 704(a) of The Act have been satisfied. DISSOLUTION AND LIQUIDATION: Any liquidation of The LLC must be approved by a vote of all of the interest holders. DISSOLUTIONAll liquidations mustAND LIQUIDATIONbe made in cash.: Any If liquidationThe LLC is of dissolved, The LLC mustthe Ma benagement approved Committeeby a vote of mustall of thewind interest up The holders. LLC=s 33.affairs.All liquidations SmithFax =transms mustassets be ittal willmade be form indistributed cash. with If Theconfirst LLCftoirmatio creditors, is dissolved,n dathented theto interestAprilManagement 22, holders 19 Committee97 according (TA 156must to their -wind T Apositive up 157 The ).capital LLC=s accounts,affairs. Smith and= sthen assets to interest will be holdersdistributed according first to tocreditors, their percentages. then to interest holders according to their positive capital accounts, and then to interest holders according to their percentages. 34. Business valuation processing instructions (TA 158). Example 2: Valuation Calculations Section – Marketable Securities Example 2: Valuation Calculations Section – Marketable Securities 35. Cover letter dated DecemberVALUATION 17, 1993 CALCULATIONS from Milton Thompson to Stephen Jones transmitting requested informaVALUATIONtion from CALCULATIONS the company (TA 220). As mentioned earlier, the three approaches to valuation considered in any appraisal are: As mentioned earlier, the three approaches to valuation considered in any appraisal are: 36. Balance Sheet of ABC 1.Jail CompanThe Markety, Inc. Approach, as of October 31, 1993 with building and land at appraised values1.2. (TA 221TheThe Asset-Market TA Based222 Approach,). Approach, and 2.3. TheThe AssetIncome Based Approach. Approach, and 3. The Income Approach. 37Each. of theseBalan methodsce Sh waseet previouslyof ABC described.Jail Company, Inc. as of October 31, 1993 (TA 223 - TA Each of these224). methods was previously described. THE MARKET APPROACH THE MARKET APPROACH 38The. marketInc approachome St wasatem noten usedt of for AB thisC appraisal Jail Com becausepany ,we In werec. as unable of Oc toto locateber publicly31, 19 traded93 (TA or privately 225 - TA held Thecompanies market231 approachthat). would was have not been used usefulfor this inappraisal making becausecomparisons we were with unable The Company. to locate publicly In the traded previous or privately section, held we companiesdiscussed the that search would for have closed been end useful mutual in funds mak whoseing comparisons shares were with actively The Company.traded on a publicIn the exchange.previous section, The search we discusseddid not reveal the searchenough for useful closed guideline end mutual companies funds whose or transactions shares were to makeactively thi tradeds approach on a publicapplicable. exchange. The search 39.did not revealAudi enoughted fin anciusefulal guideline statements companies of A orBC transactions Jail Company to make, thiInc.s approach for December applicable. 31, 1992 and 1991 as audited by We Do Numbers, CPAs (TA 232 - TA 243). Page15 Page15 - 16 - ASSET BASED APPROACH ASSET BASED APPROACH 40. Audited financial statementsASSET of ABC BASED Jail APPROACH Company, Inc. for December 31, 1991 and ADJUSTED BOOK VALUE METHOD ADJUSTED199 BOOK0 as VALUEaudited METHOD by We Do Numbers, CPAs (TA 244 - TA 253). ADJUSTED BOOK VALUE METHOD Revenue Ruling 59-60 states, AThe value of the stock of a closely-held investment or real estate holding company, Revenue Ruling 59-60 states, AThe value of the stock of a closely-held investment or real estate holding company, whether or not family owned, is closely related to the value of the assets underlying the stock.@ Therefore, the asset Revenuewhether41. orAudi Ruling not tedfamily 59 -fin60 owned, ancistates,al is Asta Thecloselytements value related of the ofto stock ABCthe value of Ja a ilcloselyof Ctheompanyassets-held investment underlying, Inc. for orthe D real ecemberstock. estate@ Therefore, holding 31, 1990 company,the asset as based approach, specifically the adjusted book value method was applied to value an assignee interest in The LLC. whetherbased approach, oraud notited family specifically b yowned, We Dothe is closely adjustedNum relatedbers, book CPAstovalue the methodvalue (TA of 254was the applied assets- TA 23).underlyingto value an the assignee stock.@ interestTherefore, in The the LLC.asset based approach, specifically the adjusted book value method was applied to value an assignee interest in The LLC. It has previously been determined that the adjusted book value of The LLC is $19,886,117. This reflects the value of The It has previously been determined that the adjusted book value of The LLC is $19,886,117. This reflects the value of The LLC on a control, marketable basis. LLCIt42. has on previously aAudi control,ted been marketable fin determinedancial basis. sta thattements the adjusted of ABC book value Jail ofC ompanyThe LLC is, $19,886,117. Inc. for FebrThisuar reflectsy 28, the 1990 value ofan Thed LLC on a198 control,9 as marketable audited basis. by We Do Numbers, CPAs (TA 264 - TA 277). We were retained to determine the value of a 1 percent interest in The LLC on a minority, non-marketable basis. In We were retained to determine the value of a 1 percent interest in The LLC on a minority, non-marketable basis. In order to derive this value, we must apply a lack of control or minority discount, as well as a discount for lack of orderWe were to deriveretained this to value,determine we mustthe value apply of aa lack1 percent of control interest or minoriin Thety LLC discount, on a minority, as well nonas a-marketable discount for basis. lack ofIn marketability. These discounts are discussed in the APremiums and Discounts@ section of this report. marketability.order43. to Audiderive Theseted this fin value,discountsanci weal aremuststa discussedtements apply a inlack of the ABCof APremiums control Jail orC and ompanyminori Discountsty discount,, Inc.@ section for as F wellofebr this asuar report. a ydiscount 28, 1989 for lack an dof marketability.198 These8 as audiscountsdited areby discussedWe Do Numin the bers,APremiums CPAs and (TDiscountsA 278@ -section TA 290 of this). report. Applying these discounts results in the following calculation of value: Applying these discounts results in the following calculation of value: Applying these discounts results in the following calculation of value: 44. Form 1120S, U.S. Income Tax Return for an S Corporation for ABC Jail Company, Total $ 19,886,117 Inc.Total for Enterprise1993 (TA Value 292 - TA 329). $ 19,886,117 Less:Total EnterpriseDiscount for Value Lack of Control (5%) $ 19,886,(994,306)117 Less: Discount for Lack of Control (5%) (994,306) Minority,Less: Discount Marketable for Lack Value of Control (5%) $ 18,891,811(994,306) 45. FormMinority, 1120 MarketableS, U.S. I nValuecome Tax Return for an S Corpora$tion for A18,891,811BC Jail Co mpany, Less:Minority, Discount Marketable for Lack Value of Marketability (30%) $ (5,667,543)18,891,811 Inc.Less: for 199Discount2 (TA for Lack330 of- TMarketabilityA 372). (30%) (5,667,543) Minority,Less: Discount Non-Marketable for Lack of Value Marketability (30%) $ (5,667,543)13,224,268 Minority, Non-Marketable Value $ 13,224,268 CalculatedMinority, Non Interest-Marketable Value $ x 13,224,268 1% 46. FormCalculated 1120S Interest, U.S. Income Tax Return for an S Corporation forx A B C J a 1%il Company, Calculated Interest x 1% Inc.Va forlue 199 of a 11% (TA Member 373 Interest- TA 376) (all attached schedules$ are not includ132,243ed). Value of a 1% Member Interest $ 132,243 RoundedValue of a 1% Member Interest $ 132,000132,243 Rounded $ 132,000 47. FormRounded 1120S, U.S. Income Tax Return for an S Corpora$tion for ABC132,000 Jail Co mpany, Inc. for 1990 (TA 377 - TA 380) (all attached schedules are not included). THE INCOME APPROACH THE INCOME APPROACH 48. Form 1120S, U.S. Income TTHEax RINCOMEeturn APPROACHfor an S Corporation for ABC Jail Company, As stated earlier, the income approach is accomplished by either capitalizing a single period income stream or by As stated earlier, the income approach is accomplished by either capitalizing a single period income stream or by discountingInc. a seriesfor 198 of income9 (TA streams381 - TbasedA 386 on )a ( multiall atta-periodched forecast. sched It hasules previously are not been includ determineded). that the discountingAs stated earlier, a series the of income income approach streams basedis accomplished on a multi- periodby either forecast. capitalizing It has a previously single period been income determined stream that or theby earnings and dividend paying capacity cannot be quantified at this time. Therefore, the income approach could not be earningsdiscounting and a dividendseries of paying income capacity streams cannot based be on quantified a multi-period at this forecast. time. Therefore, It has previously the income been approach determined could that not the be utilized. utilized.earnings49. Miscellaneoand dividend payingus Sche capacitydule cannots K-1, be quantifiedForm 11 at20S this time. for 199 Therefore,2 (TA the 387 income - T Aapproach 392). could not be utilized. CONCLUSION CONCLUSION 50. Hand written notes from the TeCONCLUSIONnnet & Axelrod, P.S.C. workpapers (TA 394 - TA To test the reasonableness of the conclusion of value, the valuation analyst performed a return on investment analysis. To test the395 reasonableness). of the conclusion of value, the valuation analyst performed a return on investment analysis. As previously discussed, Jones=s portfolio is currently generating a return of approximately 2.6 percent without AsTo testpreviously the reasonableness discussed, Jones of the= sconclusion portfolio ofis valuecurrently, the valuationgenerating analyst a returnperformed of approximately a return on investment2.6 percent analysis. without considering capital gains and losses; this equates to dividend and interest income on an annual basis of approximately Asconsidering previously capital discussed, gains and Jones losses;=s portfolio this equates is currently to dividend generating and interest a returnincome of onapproximately an annual basis 2.6 ofpercent approximately without $509,209. However, according to the brokerage statement, interest and dividends should amount to approximately $509,209.considering51. Stoc However,capitalk P gainsur accordingchas ande losses; Ag to rethe thisement brokerage equates by to statement,and dividend betw andinteresteen interest andABC incomedividends Jail on Compan anshould annual amounty basis, Inc. toof approximatelyEmployee $811,000, which is an income return of about 4.0 percent. $811,000,$509,209.Stoc which However,k isO anw ner accordingincomeship return Plto anthe of and brokerageabout Trus 4.0 percent.tstatement, and ABC interest Jail Compan and dividendsy, Inc should. as amountof Dec toember approximately 1993 $811,000, which is an income return of about 4.0 percent. If a willing(no buyer da paidte) $132,000(TA 396 for - a T 1A percent 422). interest, he/she would receive a return of approximately 6.1 percent on an If a willing buyer paid $132,000 for a 1 percent interest, he/she would receive a return of approximately 6.1 percent on an annual basis, if it is assumed that annual income is approximately $811,000 per year. annualIf a willing basis, buyer if it paid is assumed $132,000 that for annuala 1 percent income interest, is approximately he/she would $811,000 receive a per return year. of approximately 6.1 percent on an annual52. basis,Han ifd it wisri assumedtten notes that annualfrom theincome Tennet is approximately & Axelrod, $811,000 P.S.C per. fil year.e relating to consulting and The valuation analyst located alternative rates of return in Ibbotson Associates= Stocks Bonds Bills & Inflation - Valuation The valuation analyst located alternative rates of return in Ibbotson Associates= Stocks Bonds Bills & Inflation - Valuation Edition 2006non(SBBI). comp Thisete dataagreeme is presentednt of in Cli theff following Morris table:(TA 424). EditionThe valuation 2006 (SBBI). analyst locatedThis data alternative is presented rates in of the return following in Ibbotson table: Associates= Stocks Bonds Bills & Inflation - Valuation Edition 2006 (SBBI). This data is presented in the following table: Income Returns Capital Total 53. Consulting and Non-CompetitioIncomen Agre Returnsement by andCapital between ABC JaTotalil Company, Appreciation Return Inc. and J. Clifford Morris datedIncome January Returns 1, 1994Appreciation (TACapital 425 - TA 429).ReturnTotal Appreciation Return Large Company Stocks 4.2% 7.8% 12.3% Large Company Stocks 4.2% 7.8% 12.3% 54. MidLargeEmplo-Cap Company Stocksyment Stocks Agreement by and be4.1%4.2%tween ABC Jai9.8%7.8%l Company, Inc.14.2%12.3% and Milton Mid-Cap Stocks 4.1% 9.8% 14.2% MidT-homCap Stockspson as of January 1, 1994 (TA4.1% 431 - TA 436).9.8% 14.2%

Page16 Page16 - 17 - Low-Cap Stocks 3.7% 11.7% 15.7% Low-Cap Stocks 3.7% 11.7% 15.7% 55. LowMicroEm-Cap-Capploymen S Stockstocks t Agreement by and betw3.7%2.6%een ABC Jail 11.7%16.1%Company, Inc. and15.7%18.8% J. Clifford Micro-Cap Stocks 2.6% 16.1% 18.8% MicroLongMorris--TermCap asStocks Corporate of Janu Bondsary 1, 1994 (TA 4372.6%N/A - TA 442). 16.1%N/A 18.8%6.2% Long-Term Corporate Bonds N/A N/A 6.2% Long-Term CorporateGovernment Bonds Bonds 5.2%N/A 0.4%N/A 6.2%5.8% Long-Term Government Bonds 5.2% 0.4% 5.8% LongTreasury-Term Bills Government Bonds 5.2%N/A 0.4%N/A 5.8%3.8% 56. TreasuryEmploymen Bills t Agreement by and beN/Atween ABC JailN/A Company, Inc.3.8% and Robert TreasuryN/A = not Billsprovided. N/A N/A 3.8% N/AJackson = not provided. as of January 1, 1994 (TA 443 - TA 448). N/A = not provided. The return on investment of 6.1 percent calculated on the previous page consists only of income returns. What is not 57The. returnVa onri ouinvestments hand of w 6.1ritt enpercent wor cakpalculatedpers on from the previousTenne tpage & Ax consistselrod, only P.S. ofC income.’s files returns. (TA 44What9 - is TA not Theincluded return in onthe investment data provided of 6.1 by Ibbotsonpercent ca Associateslculated on are the the previous returns page on municipal consists bonds. only of Researchincome returns. for the firstWhat quarter is not includedThe return in onthe investment data provided of 6.1 by Ibbotsonpercent ca Associateslculated on are the the previous returns page on municipal consists bonds. only of Researchincome returns. for7 the firstWhat quarter is not includedof 2006 indicates454 in the). data that provided total returns by Ibbotson for 10 yearAssociates single- staarete the municipal returns onbonds municipal were justbonds. over Research 4 percent. for7 Anotherthe first quartersource of 2006 indicates that total returns for 10 year single-state municipal bonds were just over 48 percent.7 Another source ofindicates 2006 indicates that 20 year that statetotal returnsand local for bonds 10 year on single a national-state basis municipal are returning bonds were 4.44 just percent. over 48 percent.However,7 Anotheranother source indicates that 20 year state and local bonds on a national basis are returning 4.44 percent.8 However, another source indicates that AAA20 year Insured state Municipal and local Bondsbonds onon aa nationalnational basisbasis areare returnin returningg 3.95, 4.44 4.30percent. and8 4.33 However, percent another for 10, source20 and 58.30indicates year bonds,Cor thatre AAA respectively.spond Insuredence Municipal9 This dated range Bonds M ofar returns onch a national11, reflects 1994 basis total betw are returns, returnineen but theg as 3.95, Bankcan 4.30 be seenof and Ja above,4.33cksonv percent mostil leof for theand 10, return 20 The and on 30indicates year bonds, that AAA respectively. Insured Municipal9 This range Bonds of returns on a national reflects basis total are returns, returnin butg as 3.95, can 4.30 be seen and above,4.33 percent most of for the 10, return 20 and on bonds isABC an income Jail return.Comp9any, Inc. and the ABC ESOP (TA 468 - TA 478). 30bonds year is bonds, an income respectively. return. This range of returns reflects total returns, but as can be seen above, most of the return on bonds is an income return. Return on investment is derived from a combination of annual returns (distributions of income) and growth in the entity. 59.Return onTrans investmentmittal is derivedletter wfromith a c combinationorrespond ofence annual dated returns Ma(distributionsrch 8, 1994 of income) from and Steph growthen in the Jones entity. ReturnHowever, on aninvestment investor inis Jonesderived may from not a receivecombination an annual of annu return,al returns as the (distributions Management of Committee income) and does growth not have in the to entity. make cashHowever, distributions,to an J investorames and inC to Jones. Fdate,er ramay it nhas notat not. thereceive Instead, Ba ann k annualan o investorf Jack return, sonvin asJones theille, Managementwou prldov lookidi forng Committee growth an o pinin the doesion portfolio, notof thehave as vto he/shealu makee cashHowever, distributions, an investor and in to Jones date, may it has not not. receive Instead, an annualan investor return, in asJones the Managementwould look for Committee growth in the does portfolio, not have as to he/she make cashwould distributions, receiveof the an ABappreciated andC toJai date,l Companamount it has not. at they Instead,, timeInc. The stanock LLCinvestor tois terminated. be in Jones acquir wou Sinceedld look bythe life thefor ofgrowth ESOP The LLC in the. is perpetual,portfolio, as this he/she event canwould be receive many years an appreciated in the future. amount at the time The LLC is terminated. Since the life of The LLC is perpetual, this event canwould be receive many years an appreciated in the future. amount at the time The LLC is terminated. Since the life of The LLC is perpetual, this event can be many years in the future. 60.From theFax table tr onansmi the previousttal sh page,eet ita isnd clear accoun that ont the wor 30kpape percentrs (approximately) under cov erof thedated portfolio Mar thatch is 14,not invested 1994 Fromin cash the ortable bonds, on the the previous growth page, (capital it is clearappreciation) that on the has 30 percenthistorically (approximately) exceeded 5.9 of the percent. portfolio Although that is not the invested asset Fromin cash the to ortable Stebonds, onphe the the nprevious Jongrowthes page, (capitalfrom it is Cha clearappreciation)rles that onT. the Mitche has 30 percenthistoricallyll C om(approximately) panexceededy (TA 5.9 of48 the percent.1 portfolio- TA 48Although that4). is not the invested asset inclassifications cash or bonds, provided the ingrowth SBBI do(capital not include appreciation) all of the assethas historicallyclasses contained exceeded in the 5.9 Jones percent. portfolio, Although it can bethe used asset as aclassifications guide to show provided the range in SBBI of growth do not that include equity all portfolios of the asset have classes shown contained over the inlong the term. Jones portfolio, it can be used as aclassifications guide to show provided the range in SBBI of growth do not that include equity all portfolios of the asset have classes shown contained over the inlong the term. Jones portfolio, it can be used as 61.a guide toAn show en thegagemen range of growtht lett ethatr bequityetween portfolios Te nnehavet shown & Axelr over od,the long P.S.C. term. and the ABC Jail A buyer of an interest in Jones has alternatives. He or she can take the $132,000 investment and purchase an equity A buyer ofCo anm interestpany, in Inc. Jones dat hased alternatives. December He or6, she 1993 can takereg theardin $132,000g the investmentvaluation and of purchase the common an equity Aportfolio buyer ofthat an would interest generate in Jones a totalhas alternatives.long-term return He orbetween she can 12 take and the 18 $132,000percent. Thisinvestment investment and couldpurchase be generated an equity fromportfolio a portfolio equitythat would of in marketable generate ABC as a securities, totalof Nov long-em termandber thereturn investor30 between, 199 would3 12(TA haveand 503 18 liquidity. percent. - TA 504 This). investment could be generated fromportfolio a portfolio that would of marketable generate a securities, total long- termand thereturn investor between would 12 haveand 18 liquidity. percent. This investment could be generated from a portfolio of marketable securities, and the investor would have liquidity. 62.However,ABC the hypothetical Jail Comp sellerany, of thisInc. interest ESO wiPll sumnot walkma awayry (TA from 50 his8 investment - TA 51 0).unless he or she also receives a However,return on his the investment. hypothetical So, seller if the of value this interest derived wi isll too not low walk (in away other from words, his theinvestment buyer requires unless a he 12 or to she 18 percentalso receives return), a However,return on his the investment. hypothetical So, seller if the of value this interest derived wi isll too not low walk (in away other from words, his theinvestment buyer requires unless a he 12 or to she 18 percentalso receives return), a returnthere would on his beinvestment. no enticement So, if forthe avalue seller derived to consummate is too low (ina de otheral. Therefore, words, the the buyer willing requires buyer a and 12 to seller 18 percent would lookreturn), for 63.returnsthere would thatResea wouldbe norch meetenticement ma bothterial of for their afrom seller investment CCH to consummate -criteria. Standa a derdal. F Therefore,ederal Tax the willingRepor buyerter andregarding seller would intere look stfor returnsthere would that wouldbe no meetenticement both of for their a seller investment to consummate criteria. a deal. Therefore, the willing buyer and seller would look for returns thaton wouldcertain meet loan boths of used their investment to acquire criteria. employees’ securities (TA 522 - TA 535). This analysis considers both the buyer and seller and supports the value concluded under the asset based approach.This analysis Therefore, considers the both value theof buyer a 1 percent and seller interest and supports in Jones theas ofvalue March concluded 31, 2006 under is $132,000. the asset based approach.This analysis Therefore, considers the both value theof buyer a 1 percent and seller interest and supports in Jones theas ofvalue March concluded 31, 2006 under is $132,000. the asset based 64.approach.Miscellaneo Therefore, theus value workpaof a 1pers percent from interest Tenn in Joneset & Axelrod,as of March P.S. 31, 2006C.’s isfiles $132,000. (TA 536 - TA 538). Example 3 – Valuation Calculations Section – Real Estate Example 3 – Valuation Calculations Section – Real Estate 65.ExampleCov 3 –erValuation letter dated Calculations March 7,SectionVALUATION 1994 –fromReal CALCULATIONS Paul Estate E. Donough to James C. Ferran at the VALUATION CALCULATIONS Bank of Jacksonville regardingVALUATION real estat CALCULATIONSe appraisals (TA 539). As mentioned earlier, the three approaches to valuation considered in any appraisal are: As mentioned earlier, the three approaches to valuation considered in any appraisal are: As mentioned earlier, the three approaches to valuation considered in any appraisal are: 66. Correspondence dat1.ed MarchThe Market4, 199 Approach,4 from Charles A. Brown, Jr. to James C. 1. The Market Approach, Ferran, Jr. at the Bank1.2. of JacThekson MarketAssetvill eApproach, A rpproach,egardi andng real estate appraisals (TA 540 - TA 3.2. The IncomeAsset Approach, Approach. and 552). 3.2. The IncomeAsset Approach, Approach. and 3. The Income Approach. Each of these methods was previously described. Each of these methods was previously described. 67.Each of theseMiscellaneo methods wasus wpreviouslyorkpapers described. from Tennet & Axelrod, P.S.C.’s files (TA 553 - TA 554).

7 7 AMuni Outlook,@ Municipal Market Advisors (January 2006). 68. A7 summaAMuniry Outlook, of ABC@ Municipal facility Market ope Advisorsration (Januarys (TA 2006).555 - TA 556). AMuni Outlook,@ Municipal Market Advisors (January 2006). 8 8 Federal Reserve Statistical Release . 69. Cor8 respondFederalence Reserve dated Statistical Janua Releasery .to Stephen Jones Federal Reserve Statistical Release . regarding9 a preliminary offer to purchase the business of ABC Jail Company, Inc. 9 http://www.fmsbonds.com/yields.html. (TA9 557http://www.fmsbonds.com/yields.html.). http://www.fmsbonds.com/yields.html.

Page17 Page17 Page17 - 18 -

70. Proposal to recapitalize ABCTHE Jail MARKET Comp APPROACHany, Inc. (TA 558).

The market approach was not used for this appraisal because the valuation analyst was unable to locate publicly traded or71. privatelyW heldorkpape companiesrs reg thatar dinwouldg ABChave been revenue/c useful inost making from comparisons the period withs 1 The991 LLC. through 1996, both actual and projected (TA 559 - TA 572).

72. Correspondence dated December 10, 1993 from Stephen Jones to Milton Roberts relating to additional items needed to complete the valuation (TA 573 - TA 574).

73. Schedule of officers’ compensation from 1989 through 1992 (TA 575).

74. Article entitled “Are ‘Doing Well’ and ‘Doing Good’ Contradictory Goals of Privatization?” (TA 576 - TA 586).

75. Depreciation report for ABC Jail Company, Inc. (TA 587 - TA 595).

76. A partial contract relating to facilities in Arkansas (TA 596 - TA 634).

77. A memorandum of understanding with the Department of Correction from the State of Florida dated November 9, 1993 (TA 635 - TA 637).

78. A copy of Florida Legislation (TA 638 - TA 640).

79. Correspondence from Robert Studebaker of Mahoney & Company, P.C. to Stephen Jones regarding the ESOP valuation of privately operated prisons (TA 641 - TA 645).

80. Hand written notes from the workpapers of Tennet & Axelrod, P.S.C. (TA 646 - TA 651).

81. A blank valuation information request form (TA 652 - TA 657).

82. Life insurance cost summary for ESOP plan (TA 658 - TA 660).

83. Newspaper articles regarding prisons (TA 661 - TA 672).

84. Agenda for November 30, 1993 ESOP meeting (TA 675).

85. Workpaper contents from Tennet & Axelrod, P.S.C. files dated June 30, 1994 (TA 753 - TA 862).

86. Valuation workpapers from Tennet & Axelrod, P.S.C. files dated December 31, 1994 (TA 863 - TA 1016).

87. Valuation report of ABC as of December 31, 1994 (TA 865 - TA 920).

Page18 - 19 -

THE ASSET APPROACH 88. Valuation report checklist dateTHEd ASSETJune 21APPROACH, 1995 (TA 1017 - TA 1021). ADJUSTED BOOK VALUE METHOD ADJUSTED BOOK VALUE METHOD ADJUSTED89. Mis BOOKcellan VALUEeous METHODworkpapers relating to 1995 and 1996 valuations (TA 1022 - TA Revenue Ruling 59-60 states, AThe value of the stock of a closely-held investment or real estate holding company, Revenue Ruling 59-60 states, AThe value of the stock of a closely-held investment or real estate holding company, Revenuewhether or126 Ruling not9). family 59-60 owned, states, is A Theclosely value related of the to stock the value of a closelyof the assets-held investment underlying orthe real stock. estate@ Therefore, holding company,the asset whether or not family owned, is closely related to the value of the assets underlying the stock.@ Therefore, the asset whetapproach,her or specifically not family owned,the adjusted is closely book related value method to the value was appliedof the assets to value underlying the member the interestsstock.@ Therefore, in The LLC. the asset approach, specifically the adjusted book value method was applied to value the member interests in The LLC. approach,90. W specificallyorkpape thers ofadjusted Tennet book & value Axelr methodod, P was.S.C applied. relati tong value to the member ABC f orinterestsecas tin eng Theag LLC.ement It has previously been determined that the adjusted book value of The LLC is $4,870,692. This reflects the value of The It has previously been determined that the adjusted book value of The LLC is $4,870,692. This reflects the value of The LLCIt has on previously af control,rom 1 been 994marketable determine to 200 basis.3d that(TA the 127 adjusted0 - TA book 13 value49). of The LLC is $4,870,692. This reflects the value of The LLC on a control, marketable basis. The valuation analyst was retained to determine the values of a 13.96 percent member interest and a 3.4577 percent The91. valuationMisc analystellaneowasus retained work pato determinepers from the Tevaluesnn etof a& 13.96 Axel percentrod, P.memberS.C.’ sinterest files and(TA a 3.45771410 percent- TA memberThe valuation interest analyst in Thewas LLC retained on a minority, to determine non-marketable the values basis. of a 13.96 In order percent to derive member this value, interest we and must a apply3.4577 a discount percent member interest in The LLC on a minority, non-marketable basis. In order to derive this value, we must apply a discount formember lack of interest147 control,2). in asThe well LLC as ona discount a minority, for non lack-marketable of marketability. basis. These In order discounts to derive are this discussed value, we in must the applyAPremiums a discount and for lack of control, as well as a discount for lack of marketability. These discounts are discussed in the APremiums and Discountsfor lack of @control,section as of wellthis reasport. a discount for lack of marketability. These discounts are discussed in the APremiums and Discounts@ section of this report. Discounts92. Pr@ sectionintout of o thisf the report. schedules from the ValuSource computer system relating to the Applying these discounts results in the following computation of values: Applying Novembethese discountsr 30, results 1993 in thevaluatio followingn computation(TA 1464 of- TAvalues: 1561). 13.96% 3.4577% 93. Valuation report as of November 30, 1993 by Tennet13.96% & Axelrod, P3.4577%.S.C. (TA 1563 - Net Asset Value $ 4,870,692 TNetA 162Asset3). Value $ 4,870,692 Less: Discount for Lack of Control (19%) (925,483) Less: Discount for Lack of Control (19%) (925,483) 94. FiLess:nanci Discountal sta fortement Lack of pr Controloces si(19%)ng instructions for the year(925,483) ended December 31, 1995 Minority, Marketable Value $ 3,945,479 wMinority,ith fina Marketablencial sta Valuetements for the ABC Jail Com$pany,3,945,479 Inc.’s E SOP (TA 1626 - TA Less: Discount for Lack of Marketability (27%) (1,065,279) 163Less:4). Discount for Lack of Marketability (27%) (1,065,279) Minority, Non-Marketable Value $ 2,880,200 95. AMinority, check Nonlist -forMarketable financ iValueal reporting regarding define$ d con2,880,200tribution retirement plans (TA Interest to Be Valued 13.96% 3.4577% 163Interest5 - toTA Be 16 Valued41). 13.96% 3.4577% Value of Interest $ 402,076 $ 99,589 Value of Interest $ 402,076 $ 99,589 96. OtherValue of Tennet Interest & Axelrod, P.S.C. workpapers rel$ating to402,076 servic es$ performed99,589 for the Rounded $ 402,000 $ 100,000 ABCRounded ESOP (TA 1642 - TA 8799). $ 402,000 $ 100,000

THE INCOME APPROACH THE INCOME APPROACH AsIn ordestatedr earlier,to add theress income the approachvarious isis accomplishedsues in the by T either&A repo capitalizingrts, as a wsingleell as period the incomecondu streamct of thisor by As stated earlier, the income approach is accomplished by either capitalizing a single period income stream or by discountingAs stated earlier, a series the of income income approachstreams based is accomplished on a multi-period by either forecast. capitalizing a single period income stream or by discountingassignment a series that of a incomere probl streamsemati basedc, w eon w ail multil cite-period the forecast.page r eference, where possible, based In previous sections of this report, the valuation analyst discussed earning and dividend paying capacity. An estimate of In previous sections of this report, the valuation analyst discussed earning and dividend paying capacity. An estimate of earningInon previous the capacity bat sectionses andsta of mpdividend this onreport, eapaying thech valuation pagcapacitye. analystwas calculateddiscussed based earning on theand historic dividend information paying capacity. and the An terms estimate of the of earning capacity and dividend paying capacity was calculated based on the historic information and the terms of the leases.earning capacityThis information and dividend will be paying used capacityin a discounted was calculated future benef basedits onmethod the historic to calculate information a value and under the terms the income of the leases. This information will be used in a discounted future benefits method to calculate a value under the income approach.leases. This information will be used in a discounted future benefits method to calculate a value under the income approach. First and foremost, the lack of qualifications of the appraiser must be noted. In our opinion, DISCOUNTED FUTURE BENEFITS METHOD DISCOUNTED FUTURE BENEFITS METHOD TheT&A discounted and Messrs. future benefits Jones method and Ax is elrodone of thelacke mostd theoreticallythe requisite correct skil methodsls, knowl of appraisal.edge an It dis credepremisedntials on the The discounted future benefits method is one of the most theoretically correct methods of appraisal. It is premised on the conceptThe discounted that value future is based benefits on methodthe present is one value of the of mostall future theoretically benefits correctthat flow methods to an owner of appraisal. of a property. It is premised These onfuture the concept that value is based on the present value of all future benefits that flow to an owner of a property. These future benefitsconceptthat dem canthatonst consistvaluerate is of based procurrentf essionon income the pralesent distributions, com valuepet ofence allappreciation future requir benefitsed in the to that property,per flowfor mto or anthe a ownercombination valua of tiaon property. of p both.ortion These The of formula their future benefits can consist of current income distributions, appreciation in the property, or a combination of both. The formula forbenefits the discounted can consist future of current benefits income method distributions, is as follows: appreciation in the property, or a combination of both. The formula forengagem the discountedent. futureAccording benefits tomethod the T&is asAfollows: report (TA 173): n=t n=t   Bn + TVt  Bn n + TVt t n=1 (1 + i)n (1 + i)t n=1 (1 + i)n (1 + i)t

Page19 Page19 Where - 20 - Where Where B = Forecasted benefit stream. Where Bn = ForecastedYear inQU which ALIFbenefit the ICbenefit stream.ATION streamS OFis achieved. APPRAISER Bni = YearRequiredForecasted in which rate benefit theof return. benefit stream. stream is achieved. BiTVn = RequiredForecastedTerminalYear in which value,rate benefit theof which return. benefit stream. is the stream estimated is achieved. value of the benefit stream after the forecast period. SincetTVni founding= YearTerminalRequired in ofin1980, whichstabilization. value,rate theTennetof which return. benefit is &the stream Ax estimatedelr isod, achieved. valuePSC of has the benefit performed stream after numer the forecastous period. vtiTValuations= of cloYearRequiredTerminals eofly stabilization. value,rateheld of which return.entities. is the estimatedA signif valueicant of n theum benefitber of str eamvalua aftertions the forecast are period. pertTV formed= in ourYearTerminal Jaof stabilization.ck value,sonv whichille andis the Lexestimatedington, value Ar ofkans the benefitas, off striceames after for thecli entsforecast period. The formulat appears= much Yearmore ofcomplicated stabilization. than it is. In essence, this valuation method requires a forecast to be made Theof future formula thrbenefits, ougappearshout going much the out more rfareg complicatedenoughion. Va intolua thanthetion future it is.opi In niountil essence,ns an havassumed thise valuationbeen stabilization re methodnder occursed requires for for a a forecastthevar propertyiety to be beingmade Theofappraised. future formula ofbenefits, pappearsurpo goingses much includinout more far complicatedenoughg me intorgers thanthe a futureitnd is. aIn untilcquisitions, essence, an assumed this valuation em stployeeabilization method stock occurs requires ownership for a forecastthe property to be beingmade ofappraised.The future formula planbenefits, appearss, ma going muchrital out moredissolution far complicatedenough intos and thanthe estatfuture it is. In euntil essence, an and giftassumed this ta valuationx purpostabilization methodses. occurs requires for a forecastthe property to be beingmade appraised.Theof future earnings benefits, for 2006 going reflect out thefar entireenough year. into The the LLCfuture provided until an a compiledassumed incomestabilization statement occurs for for the the period property ended being June The30,appraised. 2006. earnings By forannualizing 2006 reflect the thenet entireincome year. figure, The net LLC income provided at August a compiled 28, 2006 income is approximately statement for the$55,804. period endedForecasted June The30,net income2006. earningsOur By for forannualizing clientsthe 2006 entire reflect includ year the theisnet e$79,020. entireincomeother year. busine figure,Therefore, The net LLCss incomeearnings prof providedession at for August a thecompiledals, remainder 28, individ 2006 income ofisua 2005approximately statementls, isan $23,216,d cforlos the$55,804. eland periody heldnet cash endedForecasted flow June for 30,nettheThe income2006.remainder earningsen By forti tforannualizing itheofe 2006sthe entire r year ereflectp year r theise s$56,216. theisenet n$79,020. entiretincomeing myear. figure,Therefore,a n They dnet LLC iincomeearningsffe providedren att fort August a y thecompiledpe remainders 28, o 2006 incomef i nofisd 2005approximately ustatementst risie $23,216,s. forIn the$55,804.d andu periods tnetries cash endedForecasted flow June for netthe30, income2006.remainder By for annualizing theof the entire year year theis $56,216. isnet $79,020. income figure,Therefore, net incomeearnings at for August the remainder 28, 2006 ofis 2005approximately is $23,216, $55,804. and net cash Forecasted flow for theOncenet incomeremainder thereprese benefits for theof the entirestreamnte yeard year ishas include$56,216. is been $79,020. forecast, pTherefore,ro fthees sselectionio earningsnal of pfor ara properthect icremaindere discounts, fin of arate2005nc becomesia isl $23,216, ins necessary.tit andutio netns, cash Since flow the for Oncebenefitthe remainder the streammanufactur benefits ofbeing the stream estimatedyearing ishas $56,216.and beenwill dis not forecast, troccuributi untilon the some concerselection timens, ofin thea retai proper future,l ind discount theust futureries, rate benefits and becomes v mustariou necessary. bes discounted other Since to their the Oncebenefitpresent the stream values.serv benefits icebeing In streaminduthis estimated instance,stries. has beenwill a notdiscount forecast, occur rateuntil the of some selection 21 percent time ofin theahas proper future, been discount dtheeemed future rateapplicable benefits becomes must (see necessary. besection discounted of thisSince to report their the benefitpresententitledOnce the stream "Discountvalues. benefits being In and streamthis estimated Capitalization instance, has beenwill a notdiscount forecast,Rates"). occur rateuntil theThis of some selection 21results percent time in ofin a the ahasvalue proper future, been estimate discount dtheeemed future of RealCo.rateapplicable benefits becomesas must (seefollows: necessary. besection discounted of thisSince to report their the presententitledbenefit stream "Discountvalues. being In and this estimated Capitalization instance, will a notdiscount Rates"). occur rateuntil This of some 21results percent time in in a the hasvalue future, been estimate dtheeemed future of RealCo.applicable benefitsas must (seefollows: besection discounted of this to report their entitledpresent "Discountvalues.Sever alIn and thisTen Capitalization instance,net & a discount Ax Rates").elrod rate This per of 21resultssonne percent inl a hav hasvalue beene estimate complet deemed of edRealCo.applicable varasiou (seefollows:s csectionourPresentses of this report entitled "Discountconcer ninandg Capitalization the valuati Rates").ons ofThis clos resultsely in hela valued bus estimateiness ofes RealCo. 21%andas pr follows:ofessiValuePresentonal of Present practices. In addition to this technicalForecasted training, wePresent 21% have substantiValueFutureal of ForecastedNet PresentValue21% ValuePresentFutureNet of experience witYearh respect to the buying aForecastedCashnd Net se Flowlling of buPresentFactorsValue21%sinesses thCashroValueFutureuNetgh Flow of years of workiYearng with our clients. This cForecastedCashombNet Flowination prPresentFactorsoValuevides us witCashhFuture theNet Flow 2006 Year $ Cash Flow56,216 Factors0.9843 $ Cash Flow55,334 combination of technical training and practicNetal experienValuece of dealing wNetith 20072006 Year $ Cash288,191 Flow56,216 Factors0.88010.9843 $ Cash Flow253,63855,334 2006 "willing buyers and sellers" and the ability$ to value56,216 businesses.0.9843 $ 55,334 20082007 334,730288,191 0.72740.8801 243,469253,638 20072006 $ 288,19156,216 0.88010.9843 $ 253,63855,334 20092008 380,949334,730 0.60110.7274 228,997243,469 20082007 Tennet & Axelrod, PSC personnel have qualifie334,730288,191d and test0.72740.8801ified as expert243,469253,638 TV2009 2,179,876380,949 0.6011 1,310,373228,997 20092008 380,949334,730 0.60110.7274 228,997243,469 TV witnesses in numerous courts. Additionally, 2,179,876they have assist0.6011ed many large1,310,373 Minority,TV2009 leg Marketableal and Value accounting firms throughout the2,179,876 380,949 country with 0.6011 their v$ aluation1,310,3732,091,811228,997 Minority,TV experi Marketableence. Value Our reports are prepared in ac2,179,876cordance wit0.6011h standar$ ds as1,310,3732,091,811 Less:Minority, Discount Marketable for Lack Value of Marketability (27%) $ 2,091,811(564,789) promulgated by the American Institute of Certified Public Accountants. Less:Minority, Discount Marketable for Lack Value of Marketability (27%) $ 2,091,811(564,789) Minority,Less: DiscountBiographica Non-Marketable for Lackl andof Value Marketability qualification (27%)s information on our individual profession$ als is1,527,022(564,789) Minority,Less: Discountav Nonailabl-Marketable fore Lackupon of Value Marketabilityrequest. (27%) $ 1,527,022(564,789) Minority, Non-Marketable Value $ 1,527,022 Minority, Non-Marketable Value 13.96% 3.4577%$ 1,527,022 13.96% 3.4577% At the time of the acceptance of this engagement,13.96% it is our belief3.4577% that none of the Minority, Non-Marketable Value $ 1,527,022 $ 1,527,022 13.96% 3.4577% personnel, Minority,and par Nonticu-Marketablelarly the Valuepartner in charge$ of the1,527,022 engag ement,$ Stev1,527,022en Jones, had InterestMinority, to Non be -ValuedMarketable Value x$ 1,527,02213.96% x$ 1,527,0223.4577% any credentMinority,Interestials in to Non businebe -ValuedMarketabless valua Valuetion. When quex$ stione1,527,02213d.96% about x $his qualif1,527,0223.4577%ications at his ValueInterest of to Interest be Valued x$ 213,17213.96% x$ 3.4577%52,800 deposition, InterestValueMr. Jo of tones Interest be Valuedresponded as follows (Januax$ ry 24,213,17213 2005,.96% begx$ inning3.4577% 52,800at page 22, line RoundedValue of Interest $ 213,000213,172 $ 53,00052,800 18): RoundedValue of Interest $ 213,000213,172 $ 53,00052,800 Rounded $ 213,000 $ 53,000 In this instance,Rounded the is calculated by growing the$ last year's213,000 forecasted$ benefit stream53,000 by a stabilized Ingrowth this instance,rate. The the result terminal is then value capitalized is calculated and discounted by growing to the its lastpresent year's value. forecasted Once again,benefit this stream appears by a tostabilized be very growthcomplicated,In this instance,rate.Q. butThe itthe Oka resultis consistentterminaly is. thenNow value withca, pitalizedon theis calculatedthe Gordon andtime Growthdiscounted by – growingat Modelthe to tithe useditsme lastpresent yin ou year'sthe tooksecuritiesvalue. forecasted on Once thimarket. s again,benefit ass The igthis stream nmentbenefit appears bystream t oa tostabilized be used very in complicated,Inthegrowth this calculation instance,rate. butThe of itthe v resulttheisalu consistentterminal terminale is ABC then value valuewithca Japitalized theisil is calculatedC Gordontheompany andstabil Growthdiscounted byized, growing wbenefit Modelere to they usedstreamitsou lastpresent ain year'stheexpectedcer securitiesvalue.tif forecastedie d to Onceb be market.usi achieved again,nessbenefit The this appr stream benefitby appearsTheais by streamLLCer a tostabilized after be used very the in thegrowthcomplicated,forecast calculation rate. period. butThe of Theit designat resulttheis consistent stabilized terminal is thened streamvaluewithca bpitalizedy the theis is Gordonthe capitalized In andstabilstitute Growthdiscountedized into ofbenefit Model theBusine tofuture, usedstreamits presentss andin theexpectedAppra then securitiesvalue. reducedisers? to Once be market. toachieved again,its value The this benefit byat appearstheThe appraisal streamLLC to after be used date. very the in complicated,theforecast calculation period. but of Theit theis consistent stabilized terminal streamvaluewith the is is Gordonthe capitalized stabil Growthized into benefit Model the future, usedstream andin theexpected then securities reduced to be market. toachieved its value The benefit byat theThe appraisal streamLLC after used date. the in forecast period. The stabilized stream is capitalized into the future, and then reduced to its value at the appraisal date. the calculation of the terminal value is the stabilized benefit stream expected to be achieved by The LLCPage after 20the forecast period. The stabilized stream is capitalized into the future, and then reduced to its value at the appraisalPage date.20 Page20 Page20 - 21 - (Discount rates, capitalization rates and a discussion of growth rates can be found in the report section entitled "Discount (Discount rates, capitalization rates and a discussion of growth rates can be found in the report section entitled "Discount and Capitalization Rates"). (Discountand CapitalizationA. rates, capitalizationNo. Rates"). rates and a discussion of growth rates can be found in the report section entitled "Discount and Capitalization Rates"). CONCLUSION OF VALUE CONCLUSION OF VALUE Q. At the time you took CONCLUSIONon the valu atiOFon VALUE assignment of ABC, were you Several methods were used to derive values in this appraisal. They were as follows: Several methods werean ac usedcredi to deriveted s valuesenior in appr this appraisal.aiser des Theyignated were as by follows: the American Society Several methods wereof Appra used toisers? derive values in this appraisal. They were as follows: 13.96% 3.4577% 13.96% 3.4577% Asset Approach 13.96% 3.4577% A. No.Asset Approach Asset ApproachAdjusted Book Value $ 402,000 $ Adjusted Book Value $ 402,000 $ 100,000 Adjusted Book Value $ 402,000 100,000$ Q. At the time you took on the valuation assignmen100,000t for ABC Jail Income Approach CompanIncome Approachy, Inc., were you a certified valuation analyst designated by IncomeDiscounted Approach Future Earnings 213,000 53,000 the NationaDiscountedl Association Future Earnings of Certified Valu213,000ation Analysts?53,000 Discounted Future Earnings 213,000 53,000 In a minority valuation, the minority owner cannot force the sale of the underlying assets to obtain the value of the real In a minority valuation, the minority owner cannot force the sale of the underlying assets to obtain the value of the real estate. However,A. No.the value of the assets cannot be ignored. estate.In a minority However, valuation, the value the minority of the assets owner cannot cannot be force ignored. the sale of the underlying assets to obtain the value of the real estate. However, the value of the assets cannot be ignored. The income approach is the most theoretically correct method of valuing a property as it considers the earnings and cash The incomeQ approachAt is the the most time theoretically you too correctk on method the v ofal valuinguation a property assignm as itent considers for ABCthe earnings Jail and cash flow being generated from the property. However, in this case the rents charged for the 275 Route 46 property are below flowThe incomebeing generated approach from is the the most property. theoretically However, correct in this method case ofthe valuing rents charged a property for as the it 275considers Route the46 propertyearnings are and below cash market and do notCo supportmpa theny, value Inc. of, dtheid real you estate. hold However,a degre ite more fro mclosely any reflects univer thesit valuey or toco alle minorityge owner flowmarket being and generated do not support from the the property. value of the However, real estate. in this However, case the rentsit more charged closely for reflects the 275 the Route value 46 to property a minority are ownerbelow because it reflects monies available to the minority owner who cannot force the sale of the underlying real estate. becausemarket and it reflects do notin supportmonies valua availablethetion value scien toof theces? minorityreal estate. owner However, who cannot it more force closely the sale reflects of the the unde valuerlying to a realminority estate. owner because it reflects monies available to the minority owner who cannot force the sale of the underlying real estate. Based on the facts and circumstances of the appraisal, the valuation analyst put more weight on the asset approach but Based on the facts and circumstances of the appraisal, the valuation analyst put more weight on the asset approach but did not ignoreA. theNo. fact that the minority owner cannot force the sale of the assets and his/her return is based on the didBased not on ignore the facts the factand thatcircumstances the minority of ownerthe appraisal, cannot theforce valuation the sale analyst of the putassets more and weight his/her on thereturn asset is basedapproach on tbuthe income and cash flow derived by The LLC. Therefore, the value of a 13.96 percent interest in RealCo. Industrial III, LLC incomedid not ignoreand cash the flow fact derived that the by minority The LLC. owner Therefore, cannot the force value the of sale a 13.96 of the percent assets interest and his/her in RealCo. returnIndustrial is based III,on LLC the is deemed to be $355,000, and the value of a 3.4577 percent interest is deemed to be $88,000. isincome deemed and to cash be $355,000, flow derived and by the The value LLC. of Therefore, a 3.4577 thepercent value interest of a 13.96 is deemed percent tointerest be $88,000. in RealCo. Industrial III, LLC NotTois deemed test onl they toreasonablenessdi bed M$355,000,r. Jones and of notthe the op havalueinionve of ofany a value,3.4577 credenti the percent valuationals interest in analyst bus is inedeemedperformedss v toalu be aati $88,000.returnon, onhe investment did not belanalysis.ong To test the reasonableness of the opinion of value, the valuation analyst performed a return10 on investment analysis. FromTo test 2002 the reasonablenessthrough 2005, average of the opdistributionsinion of value, were the approximately valuation analyst $138,700.performed A 13.96 a return10 percent on investment owner would analysis. have From 2002 through 2005, average distributions were approximately $138,700. A 13.9610 percent owner would have tFromToo atestn 2002y the ap reasonablenessthroughpraisa 2005,l org aaverage nofiza thet io opdistributionsninions a tof th value,e weretim thee approximately o valuationf this va analystlu $138,700.atioperformedn. H A=is 13.96 t ae sreturntimpercento onny investment wa owners a swould fanalysis.oll ohavews received $19,363 per year. Based on a purchase price of $355,000, the investor=s annual10 rate of return would be 5.5 Fromreceived 2002 $19,363 through per 2005, year. average Based ondistributions a purchase were price approximately of $355,000, $138,700.the investor A=s 13.96 annual percentrate of return owner would would be have 5.5 percent. However, this is strictly an income return and does not consider growth. (Janupercent.receivedary $19,363However, 24, 20 per this05, year. is beginningstrictly Based an on income a on purchase pareturnge price and24, does ofline $355,00 not 12 consider):0, the investor growth.=s annual rate of return would be 5.5 percent. However, this is strictly an income return and does not consider growth. In a later section of this report, rates of return on various real estate investments are discussed. These are summarized In a later section of this report, rates of return on various real estate investments are discussed. These are summarized below: below:In a later section of this report, rates of return on various real estate investments are discussed. These are summarized below: Q. Now, at the time you took on the valuation assignment of ABC, did Average Median youReal hav Estatee any credentials that qualifiedAverage you specificalMedianly in the field of Real Estate 11 Average Median busiRealnessClosed Estate vEndalu Fundsation?11 9.5% 12.0% Closed End Funds11 9.5% 12.0% RealClosed Estate End Funds 9.5% 12.0% Publicly-Traded Real Estate11 PubliclyClosed-Traded End Funds Real Estate 9.5% 12.0% A. No specLimitedific Partnerships credenti als(2005), no. 19.8% 19.1% PubliclyLimited-Traded Partnerships Real Estate (2005) 19.8% 19.1% Limited Partnerships (2005) 19.8% 19.1% In addition, Ibbotson Associates reports the following returns for other types of investments: In addition,Q. IbbotsonAt Associates the time reports you the to followingok on returns the aforssig othernment types of investmen to valuets: ABC, what In addition, Ibbotson Associates reports the following returns for other types of investments: professiLarge Companyonal bus Stocksiness valuation organizations did you 12.3%belong to? Large Company Stocks 12.3% LargeMid-Cap Company Stocks Stocks 12.3%14.2% Mid-Cap Stocks 14.2% A. At MidLowthe-- CapCaptime, StocksStocks I don't -- I don't recall in '93 what, if any, w14.2%15.7%e belonged to Low-Cap Stocks 15.7% LowMicro-Cap-Cap Stocks Stocks 15.7%18.8% at tMicrohat -pCapoin Stockst in time. 18.8% MicroLong--TermCap Stocks Corporate Bonds 18.8%6.2% Long-Term Corporate Bonds 6.2% Q. SittiLongng -herTerme Corporatetoday, y Bondsou can't think of any organizations y6.2%ou belonged 10 to in 1993? 10 Although the example is based on the 13.96 percent interest, had the value of the 3.4577 percent interest been used, Although the example is based on the 13.96 percent interest, had the value of the 3.4577 percent interest been used, 10 the results would have been the same. theAlthough results the would example have is been based the on same. the 13.96 percent interest, had the value of the 3.4577 percent interest been used, A. Notthe results from would a v havealu atibeenon the s same.tandpoint. 11 11 Many of these are relatively new funds, and do not have a long-term record of returns on investment. 11 Many of these are relatively new funds, and do not have a long-term record of returns on investment. Many of these are relatively new funds, and do not have a long-term record of returns on investment. Page21 Page21 Page21 Long-Term Government Bonds - 22 - 5.8% Long-Term Government Bonds 5.8% LongTreasury-Term Bills Government Bonds 5.8%3.8% Q. OkaTreasuryLongy. -DiTermd Bills y Governmentou belong Bonds, in 1993, upon taking this assignment3.8%5.8% to value Treasury Bills 3.8% ABCTreasurySource: in 199 Stock Bills3, beBondslong Bills to & the Inflation Institu - Valuationte of Busine Edition 2006ss Appra: 28. isers?3.8% Source: Stock Bonds Bills & Inflation - Valuation Edition 2006: 28. Source: Stock Bonds Bills & Inflation - Valuation Edition 2006: 28. What this data showsSource: is that an Stock investor Bonds has Bills alternatives & Inflation and - Valuation different alternativesEdition 2006 pay: 28. different levels of returns. The Whatminimum thisA. returndata shows indicatedNo. is that above an investoris a riskless has investmentalternatives in and Treasury different Bills alternatives yielding 3.8 pay percent. different A longlevels-term of returns. government The What this data shows is that an investor has alternatives and different alternatives pay different levels of returns. The minimumbond, which return must indicated be held above for 20 isyears a riskless in order investment for an investor in Treasury to receive Bills yielding the full return3.8 percent. yields Aalmost long- term50 percent government more minimumWhat this returndata shows indicated is that above an investoris a riskless has investmentalternatives in and Treasury different Bills alternatives yielding 3.8 pay percent. different A longlevels-term of returns. government The bthanond, a which three mustmonth be investment. held for 20 yearsThis is in another order for indication an investor that to an receive investor the expectsfull return a higheryields almostrate of 50return percent when more the bminimumond, whichQ. return must indicatedUpo be heldn takabove for ing20 isyears ona riskless tinhis order vinvestmentalu forati anon investor in as Treasurysi gtonment receive Bills yielding ithen 1993, full return3.8 percent.did yields you Aalmost belonglong- term50 percent to government more thaninvestment a three is monthlong-term. investment. An investor This also is another expects indicationa higher rate that of an return investor when expects the investment a higher is rate considered of return to when be more the thanbond, a which three mustmonth be investment. held for 20 yearsThis is in another order for indication an investor that to an receive investor the expectsfull return a higheryields almostrate of 50return percent when more the investmentrisky. is longthe-term. Ame An investorrican Socie also expectsty of aAppra higher isers?rate of return when the investment is considered to be more investmentthan a three is monthlong-term. investment. An investor This also is another expects indicationa higher rate that of an return investor when expects the investment a higher is rate considered of return to when be more the risky. risky.investment is long-term. An investor also expects a higher rate of return when the investment is considered to be more risky.Based onA. the alternativeNo. rates of return, a return of 5 percent for an investment in RealCo. is at the low end of the range. BasedThis is on to bethe expected alternativebecause rates of it return, does not a return include of growth5 percent and for there an investment is no diversification in RealCo. in isthe at portfolio,the low end which of the increases range. Based on the alternative rates of return, a return of 5 percent for an investment in RealCo. is at the low end of the range. theThis level is to of be risk. expected To obtainbecause a higher it does rate not of include return, growth a willing and buyer there wouldis no diversification want to pay lessin the for portfolio, the investment which increases (higher BasedThis is on to bethe expected alternativebecause rates of it return, does not a return include of growth5 percent and for there an investment is no diversification in RealCo. in isthe at portfolio,the low end which of the increases range. thediscounts), level of butrisk. a willingTo obtain seller a wouldhigher most rate likelyof return, not be a willing tobuyer sell itwould for considerably want to pay less. less However, for the investment the value derived(higher theThis level is to Q.of be risk. expected UpoTo obtainbecausen tak a highering it does on rate not t hisof include return, as sigrowth ag willingnment and buyer there in wouldis 1993, no diversification want di dto pay you lessin belthe for ongportfolio, the investment to whichthe increases (higher discounts),is within the but range a willing of other seller investments, would most and likely therefore not be willing the value to sell derived it for considerably is considered less. to be However, reasonable. the value derived discounts),the level of butrisk. a willingNationTo obtain selleral a Associatwouldhigher most rateion likelyof return, of not Certifie be a willingd tobuyerValu sell itationwould for considerably wantAnalysts? to pay less. less However, for the investment the value derived(higher is within the range of other investments, and therefore the value derived is considered to be reasonable. isdiscounts), within the but range a willing of other seller investments, would most and likely therefore not be willing the value to sell derived it for considerably is considered less. to be However, reasonable. the value derived is within the range of other investments,DISCOUNT and therefore AND CAPITALIZATION the value derived is RATES considered to be reasonable. A. No. DISCOUNT AND CAPITALIZATION RATES DISCOUNT AND CAPITALIZATION RATES DISCOUNT AND CAPITALIZATION RATES Section 6 of Revenue Ruling 59-60 states: WSectionhen 6q ofuest Revenionueed Ruling abou 59t -bus60 states:iness valuation education, Mr. Jones was unable to provide Section 6 of Revenue Ruling 59-60 states: Section 6In of the Reven applicationue Ruling of 59 certain-60 states: fundamental valuation factors, such as earnings and dividends, it is any informaInnecessary the tionapplication to a capitalizebou oft thecertain the coursesaverage fundamental or currentthat valuation he results had atfactors, takensome suchappropriate to getas earnings edu rate.cate A anddeterminationd dividends,in this off ield.it the is His In the application of certain fundamental valuation factors, such as earnings and dividends, it is necessaryproper capitalization to capitalize rate the presents average one or current of the resultsmost difficult at some problems appropriate in valuation. rate. A determination of the necessaryIn the application to capitalize of certain the average fundamental or current valuation results atfactors, some suchappropriate as earnings rate. A anddetermination dividends, of it the is responseproper was capitalization (January rate 24, presents 2005, one beginning of the most at difficult page problems 25, line in 13valuation.): propernecessary capitalization to capitalize rate the presents average one or current of the resultsmost difficult at some problems appropriate in valuation. rate. A determination of the proper capitalization rate presents one of the most difficult problems in valuation. In the text of Revenue Ruling 68-609, capitalization rates of 15 to 20 percent were mentioned as an example. Many Invaluation the textQ. analysts of RevenueNoware underRuling, at the 68 -misconception 609,time capitalization you to thatok ratesthe on capitalization ofth 15is toas 20si gpercent ratenment must were stayto mentionedv withinalue thisABC as range. an, wexample. hat In reality, Many the In the text of Revenue Ruling 68-609, capitalization rates of 15 to 20 percent were mentioned as an example. Many valuationcapitalization analysts rate mustare under be consistent the misconception with the rate that of return the capitalization currently needed rate must to attract stay capital within tothis the range. type of Ininvestment reality, the in valuationIn the text analysts of Revenuebareus inunderRulingess the 68va -misconceptionlu609,at iocapitalizationn cou rsthate s ratesthe h acapitalization dof yo15 uto a20tt epercent ratende mustd ,were if stay a nmentioned y?within this as range. an example. In reality, Many the capitalizationquestion. rate must be consistent with the rate of return currently needed to attract capital to the type of investment in valuationcapitalization analysts rate mustare under be consistent the misconception with the rate that of return the capitalization currently needed rate must to attract stay capital within tothis the range. type of Ininvestment reality, the in question. question.capitalization rate must be consistent with the rate of return currently needed to attract capital to the type of investment in question.There areA. variousOh, methods we of-- determiningyes, I had discount attended and somecapitalization that wrates.ere Usingsponso the rebuildd by up methodeither ofthe determining theseThere ratesare various results methods in the following: of determining discount and capitalization rates. Using the build up method of determining There are variousArkansa methods ofs determining Society of discount CPAs and and capitalization/or the AICPA. rates. Using And the prob build upably method others. of determining theseThere ratesare various results methods in the following: of determining discount and capitalization rates. Using the build up method of determining these rates resultsI indon the't following: recall the -- 1 theseAppraisal rates results Date Longin the- Termfollowing: Treasury Yield 5.01 1 AppraisalReal Estate Date Risk Long Premium-Term Treasury Bond Yield 5.011 Appraisal Date Long-Term Treasury Bond Yield 5.011 AppraisalReal Q.Estate Date RiskNee Long Premiumd- Termyou Treasuryto list t Bondhem Yield for me, Mr. Jones. I need the2 year you took 5.01 Real1994 Estate-2005 Risk Publicly Premium Held LP Return 18.60 2 Real1994 Estate-2005 Riskbusi Publicly Premiumness Held v aluLP Returnation courses that you attended18.60 prior23 to November 1994-2005 PubliclyGovernment Held Bond LP Return Income Return - 18.605.88 1994-20051993. Publicly Held LP Return 18.6032 1994-2005 Government Bond Income Return - 5.883 = 12.72 Average1994- Market2005 Government Return Bond Income Return - 5.883 Average1994- Market2005 Government Return Bond Income Return - 5.88 = 12.72 Average Market Return = 12.724 AverageAdjustmentsA. Market forI donOther Return't Riskknow Factors if we have those records still at the -- in ou=+ r files at the 12.723.00 4 Adjustments for Other Risk Factors =+ 20.733.004 AdjustmentsDiscount Rate forof forOtherfice. Net Risk CashI can Factors Flow check. + 3.004 DiscountAdjustments Rate for forOther Net Risk Cash Factors Flow =+ 20.733.00 Discount Rate for Net Cash Flow = 20.73 Discount Rate for Net Cash Flow = 20.73 CAPITALIZATIONQ. Is ther RATESe anything in your work papers that would show you that? CAPITALIZATION RATES CAPITALIZATION RATES DiscountCAPITALIZATIONA. RateNo. for Net RATES Cash Flow 20.70 Discount Rate for Net Cash Flow 20.70 DiscountGrowth Rate Rate for Net Cash Flow - 20.703.00 GrowthDiscount Rate Rate for Net Cash Flow - 20.703.00 GrowthCapitalizationQ. Rate Now Rate, foryou Net m Cashentione Flowd the Arkansas Society of CPAs. -= Do you recall 17.703.00 CapitalizationGrowth Rate Rate for Net Cash Flow =- 17.703.00 RoundedCapitalizationany Ratebody for Net fro Cashm theFlow Arkansas Society of CPAs who put= on such a 18.0017.70 = RoundedCapitalization Rate for Net Cash Flow = 18.0017.70 Rounded course? = 18.00 1. RoundedFederal Reserve, Market Yield on U.S. Treasury Securities at 20-year constant maturity= as of August18.00 28, 2006 1. Federal. at 20-year constant maturity as of August 28, 2006 1. Federal Reserve, Market Yield on U.S. Treasury Securities at 20-year constant maturity as of August 28, 2006 . 1. . at 20-year constant maturity as of August 28, 2006 . Page22 Page22 Page22 - 23 - 2. 2006 Rate of Return Study, Partnership Profiles, Inc. The expected return for publicly-held limited partnerships 2. A.2006traded Rate inW the ofell Returninformal, mos Study tsecondary of thei, Partnershipr cour marketses Profiles, for are,1994 Inc. I'lthroughl Thesay expected 2005.national return cour forses publicly dev-heldelo pedlimited by partnerships traded int hthee AinformalICPA secondary that th markete vari forou 1994s st throughate so 2005.cieties contract with to have 3. Long-Terminstructo Governmentrs come Bonds: down Income and Return givs,e theStocks courses. Bonds Bills & Inflation - Valuation Edition 2006 3. YearbookLong-Term. TheGovernment average incomeBonds: returnsIncome for Return 1994s, through Stocks 2005. Bonds Bills & Inflation - Valuation Edition 2006 Yearbook. The average income returns for 1994 through 2005. 4. Valuation analyst=s judgment based on the analysis discussed throughout the report. Dur4. ing thatValuation time analyst frame,=s judgment there w basedere a on limi theted analysis number discussed of cour throughoutses that the w report.ere s ponsored by the A capitalization rate has been derived from a discount rate, which has been calculated above. The components of the AICdiscountA capitalizationPA, ratean dinclude rate in has turn, a beensafe th ratederivede statwhich frome indicates CPA a discount societ the rate, facties whichthat of any fhasered investor been li calculatedmite wouldd receive, ed above.ucat ationaThe a barecomponentsl courses minimum, of inthean equivalentdiscount rate rate include for a safe a safeinvestment. rate which In this indicates particular the instance, fact that Un anyited investor States Treasurywould receive, Bonds areat a used bare as minimum, an indication an busiofequivalent a safeness rate. rate valu forati a safeon. investment. The Arkans In thisas particular Society instance, of CP UnAsited onl Statesy off Treasuryered one Bonds cour arese used dur asing an indication 1992 of a safe rate. andA real no estate cour riskses premium during is added1993. to theOn safe September rate which represents 3, 1992, the an premium AICP Athat c ourinvestorsse w receiveas off iner theed secondary by the marketA real estate for real risk estate premium limited is addedpartnerships to the safe over rate investors which inrepresents long-term the government premium that bonds. investors Since receive publicly in- thetraded secondary limited Arpartnershipsmarketkans foras real areSoci estate consideredety limited of partnershipsto CP beAs more enti risky overtled by investors theDev investor,elo in lopinng a-g termhigher Your government rate Bus of returnine bonds.ss is required Val Sinceuati publicly overon the Sk-traded periodills: limited 1994 An throughpartnerships 2005. are considered to be more risky by the investor, a higher rate of return is required over the period 1994 Engthroughage 2005.ment Approach. Unless there were other courses that Mr. Jones took, which he An adjustment has also been made for other risk factors specific to the valuation subject. This additional level of risk is couladdedAn adjustmentd tonot reflect doc has theument, also size beenof thehis made entity educ for in atiothercomparisonon risk dur factorsing to the thi specific limiteds time topartnerships, theframe valuation was the subject. almoslack of Thisdiversificationt non additionalexistent. (basedlevel of on risk the is numberadded to of reflect holdings) the size and ofthe the lack entity of professional in comparison management. to the limited In partnerships, addition, one the of Thelack LLC of diversification=s properties is(based vacant on as the of numberthe valuation of holdings) date and and although the lack the of propertyprofessional manager management. is confident In aboutadditi on,the oneability of toThe obtain LLC =as newproperties tenant, is this vacant increases as of the valuationriskiness ofdate The and LLC although=s ability the to generateproperty manager the forecasted is confident cash flow.about Also, the ability RealC too. obtain=s historic a new earnings tenant, andthis increasescash flow Onethehave riskiness beenmor eerratic. ofitem The Fori LLCs w these=ors abilityth reasons, no toti nggenerate investorsregar thedin wouldforecastedg the expect qual cash aific greater flow.ations Also,rate ofof RealC returnthe o.appr on=s historic anais investmenter earnings. T&A in andRealCo.indi cashcat thanesflow inhave a publicly been erratic.-traded Forlimited these partnership. reasons, investors Therefore, would 3 percent expect has a greater been added rate of to return the discount on an investment rate to reflect in thisRealCo. additionalthan “Oinlevel aur publicly ofrepor risk.-tradedts are limited prepar partnership.ed in acc Therefore,ordance 3 percent with sta hasndar been dsadded as topr theomulg discountated rate byto reflect the Amer this additionalican level of risk. InsSummingtitute allof of Certheseti fieditems results Publi cin the Acc derivationountant ofs.” a discount This rate. statement The mathematical is not formulaonly falsto distinguishe, but wbetweenhen aSumming discount all rate of theseand a itemscapitalization results in rate the is derivation the subtraction of a discount of the presentrate. The value mathematical of long-term formula sustainable to distinguish growth betweenfrom the quediscounta discountstioned rate. rate and abTheout apresent capitalization it, Mrvalue. J ofrateones, the is thelong onc subtraction-terme sustainable again of the, demons present growth valuehastrated been of long hisincluded-term lack sustainable at ofa rate know ofgrowth 3led percent gfrome of thefor RealCo.discount. rate. This rateThe haspresent been value determined of the basedlong-term on ansustainable estimated growthincrease has at beenthe approximate included at ratea rate of inflation.of 3 percent for busiRealCo.ness. This valu rateati hason. been Hi determineds deposi tibasedon te onsti anmony estimated incl udedincrease the at the fo lloapproximatewing (J anuarrate of inflation.y 24, 2005, beginninExample g4 –atPremiums page 42, & line Discounts 9): – Marketable Securities Example 4 – Premiums & Discounts – Marketable Securities PREMIUMS AND DISCOUNTS PREMIUMS AND DISCOUNTS VALUATION PREMIUMS AND DISCOUNTS IN GENERAL Q. Okay. NowVALUATION, continu PREMIUMSing with Ex ANDhib DISCOUNTSit 307 on thINe GENERAL page of qualifications The final value reachedof ap inpraisal the appraisal -- appraiser, of a closely pa-heldge business 173, last interest paragraph may be more, do or you less see than wherethe value that was Thecalc ulatedfinal value using reached theyou various havin the methodse appraisal written of ofappraisal a"our closely r thatepor-held are businessts available. are interest pr Theepar type maye dand be i nsizemore ac of orcor the less dancediscount(s) than the w value orith premium(s) that was calcwill varyulated depending using the on various the starting methods point. of appraisal The starting that point are available. will depend The on type which and methods size of theof valuation discount(s) were or usedpremium(s) during willthe varyappraisal depending as wellstan on as thedard other starting sfactors, as point.prom such Theulgated as starting the sources by point the of will Aminformation dependerican on used whichInstitute to methodsderive of multiples Certifie of valuation ord discount Pu wereblic used rates, during and thenormalization appraisal as adjustments.wellAcc asountant other factors,s." suchDo y asou the s eesources that? of information used to derive multiples or discount rates, and normalization adjustments. / LACK OF CONTROL DISCOUNT A. Yes, sir. CONTROL PREMIUM / LACK OF CONTROL DISCOUNT The pro rata value of a controlling interest in a limited liability company is said to be worth more than the value of a Theminority pro Q.interest,rata value dueT ellof to a themecontrolling prerogatives -- w hatinterest of I'd control in aska limited that you follow liability to the docompany controlling here is isinterest.said w toould be An worth investoryou more list will than generally tho these value pay m ofore a minority interest, due to the prerogatives of control that follow the controlling interest. An investor will generally pay more (a premium) for thesta rightsndar thadst arefor considered me? to be part of the controlling interest. Valuation professionals recognize (athese premium) prerogatives for the of rights control, tha tand are they considered continue to to be hold part true of today.the controlling These rights interest. are consideredValuation professionals in assessing therecognize size of thesea control prerogatives premium. of They control, include: and they continue to hold true today. These rights are considered in assessing the size of a controlA. premium.Off They the include: top of my head, I'm not for sure I can quote them verbatim, but 1. Appoint theor change standar operationalds that management. are outlined in the code of conduct that state 1.2. AppoinAppointt or change operationalmembers of management. the board of directors. 2.3. AppointDetermine exor changemanagementercise members due compensation car ofe, the that board yandou of perquisites. directors.obviously not take on engagements that 3.4. DetermineSet operationalyou're management and not strategic qualif compensation policyied and to and do,change perquisites. an thed t coursehat y ofou the f ollowbusiness. all the necessary 4. Set operational and strategic policy and change the course of the business. 5. Acquire,g lease,uideli ornes liquidate of the business Amer asicsets,an Inincludingstitute plant, in pr property,eparing and your equipment. report. 6.5. SelectAcquire, suppliers, lease, or vendors, liquidate and business subcontractors assets, including with whom plant, to doproperty, business and and equipment. award contracts. 6. Select suppliers, vendors, and subcontractors with whom to do business and award contracts.

Page23 Page23 7. Negotiate and consummate .- 24 - 8.7. Liquidate,Negotiate anddissolve, consummate sell out, mergersor recapitalize and acquisitions. the company. 9.7.8. SellNegotiateLiquidate, or acquire anddissolve, consummatetreasury sell shares.out, mergersor recapitalize and acquisitions. the company. The7. AICNegotiatePA did and not consummate have speci mergersfic standar and acquisitions.ds that related to business valuation assignments 10.8.9. RegisterLiquidate,Sell or acquire the dissolve, company treasury sell=s shares.out,equity or securitiesrecapitalize for the an company. initial or secondary . 8. Liquidate, dissolve, sell out, or recapitalize the company. 11.9.10. RegisterSell or acquire the company treasury=s shares.debtequity securities securities for for an an initial initial or or secondary secondary public public offering. offering. in 1993.9. Sell H orow acquireever, treasurythe AICP= shares.A had issued Statement on Standards for Consulting Services 11.10.12. RegisterDeclare andthe companypay cash =sand/or equitydebt securitiesstock securities dividends. for for an an initial initial or or secondary secondary public public offering. offering. 10. Register the company=s equity securities for an initial or secondary public offering. 11.13.12. RegisterChangeDeclare andthethe arcompanypayticles cash of =sand/orincorporation debt securitiesstock dividends. or bylaws.for an initial or secondary public offering. No.11. 1 thatRegister referenc the companyed Rule=s debt 201 securities of the AICfor anPA initial Code or secondary of Profes publicsional offering. Conduct. Furthermore, 12.13.14. DeclareChangeSet one= sandthe own arpay ticlescompensation cash of and/orincorporation (and stock perquisites) dividends. or bylaws. and the compensation (and perquisites) of related-party 12. Declare and pay cash and/or stock dividends. 13.14. employees.ChangeSet one= sthe own ar ticlescompensation of incorporation (and perquisites) or bylaws. and the compensation (and perquisites) of related-party at t13.hat Changetime, = the ar AICticlesPA of incorporationhad publis orhed bylaws. Practice Aid 93-3, Conducting A Valuation of a 15.14. Selectemployees.Set one joint=s own ventures compensation and enter (and into perquisites) joint venture and and the partnership compensation agreements. (and perquisites) of related-party 14. Set one=s own compensation (and perquisites) and the compensation (and perquisites) of related-party 16.15. Decideemployees.Select joint what ventures products and and/or enter se intorvices joint to ventureoffer and and how partnership to price those agreements. products/services. Closelyemployees. Held Business, which stated the following: 17.15.16. DecideSelect joint what ventures marketsproducts and and and/or enter locations se intorvices jointto serve,to ventureoffer to and enter and how partnershipinto, to priceand tothose agreements.discontinue products/services. serving. 15. Select joint ventures and enter into joint venture and partnership agreements. 18.16.17. Decide whichwhat productsmarkets customer and and/or categories locations services to to market serve,to offer to and enterand how which into, to priceandnot to tothose marketdiscontinue products/services. to. serving. 16. Decide what products and/or services to offer and how to price those products/services. 19.17.18. EnterDecide into whatwhich inbound markets customer and and outboundcategories locations licen toto marketseserve, or sharing to enterand agreementswhich into, andnot toto regarding marketdiscontinue to. intellectual serving. properties. 18.19.17. DecideEnter into whichwhat inbound markets customer and and outboundcategories locations licen to to 12market seserve, or sharing to enterand agreementswhich into, andnot toto regarding marketdiscontinue to. intellectual serving. properties. 20. Block any or all of the above actions.12 19.20.18. EnterBlockDecide13/115 intoany which BUinboundor all customerSIN of theandESS above outboundcategories VALU actions. licenATION to marketse or EDsharing to UCand ATIONagreementswhich not to regardingmarket to. intellectual properties. 20.19. BlockEnter intoany inboundor all of theand above outbound actions. licen12se or sharing agreements regarding intellectual properties. A control20. Blockpremium any isor the all ofopposite the above of a actions. lack of 12control discount. The control premium is used to determine the control 20. Block any or all of the above actions. valueA control of a .01premium closely -Inheld is the pe business rfoppositeormin whe ofg nabusin itslack freely ofess control traded valua discount. minoritytion value The engageme controlhas been premium nts,determined. p isra usedctitione This to determine is rsgenerally are the the control case A control premium is the opposite of a lack of control discount. The control premium is used to determine the control whenAvalue control ofthe a advpremium valuationcloselyised-held is analyst ttheo business deteoppositeusesrmi wheinformation ofne na itslack w freelyhether of from control traded the the publicdiscount. minority compet stock value The marketency controlhas beenas pr premiumtheov determined. startingision is sused point o Thisf to of rul determine theise generally valuation. 201, the the control case whenvalueA control ofthe a premium valuationclosely-held isanalyst the business oppositeuses wheinformation of na itslack freely of from control traded the publicdiscount. minority stock value The market controlhas beenas premiumthe determined. starting is used point This to of determine theis generally valuation. the the control case value of a closely-held business when its freely traded minority value has been determined. This is generally the case whenIn this thecase,Gener valuation a 1 percental analyst Standa limitedusesrd liability sinformation of thecompany AI fromCPA membe the publicCor interest,de stock of Prdoesmarketofessi not as constitute onalthe starting C onduca controlling pointt, of ar the interest.e valuation.met. Control of when the valuation analyst uses information from the public stock market as the starting point of the valuation. theIn this day case,-toAlth-day a o 1management upercentgh acc limitedou ofn taJones liabilitynts isha company heldve bya ththe membeo Managementroughr interest, und eCommittee rstdoesan notdin constitute ofg Theof f inanciLLC. a controlling Thisal sta committeetements interest. has Control exclusive of authorityInthe this day case,-to and-day a power 1management percent to manage, limited of Jones liability operateis company held and by control the membe Management ther businessinterest, Committee does of The not LLC constitute of Thewithout LLC. a the controlling This consent committee interest. of any has member Control exclusive orof In this case,and a 1related percent limitedmatters, liability the companyy also neemembed tor interest, be prof doesicient not constitutein the area a controlling of app interest.raisals Control of assignee.authoritythe day-to and - dayTherefore, power management to a manage,discount of Jones operatefor lackis held ofand control by control the Managementis appropriatethe business Committee for of this The appraisal. LLC of Thewithout LLC. the This consent committee of any has member exclusive or authorityassignee.the day-to toand - dayTherefore, c ompetentpower management to a manage,discountly ofco Jonesmplet operatefor lackis eheld ofandan control by engcontrol the agManagementis appropriatetheement. business UsualCommittee for of this Thely appraisal. ,LLC beingof Thewithout LLC. pr oficithe This consentent committee req ofuir any eshas member exclusive or authority and power to manage, operate and control the business of The LLC without the consent of any member or Aassignee. lack of controlan Therefore, in- discountdepth a discountknow is a reductionled forg lacke inof ofthe f controlina controlnce, is value appropriateeconomic of the appraisal fors, this and appraisal. subject secur thatity is anal intendedysis to a reflectnd an the fact that assignee. Therefore, a discount for lack of control is appropriate for this appraisal. Aa minoritylack of controlund ownererstan discount cannotding control is a ofreduction theapp dailyraisal in activities the controlprinciples or valuepolicy of andecisions thed appraisalme thoof ands. subjectenterprise, that thus is intended reducing to itsreflect value. the The fact sizethat Aofa minority lackthe ofdiscount control owner willdiscount cannot depend control is a on reduction the dailysize in ofactivities the the control interest or valuepolicy being of decisions the appraised, appraisal of an the subjectenterprise, amount that thus ofis intendedcontrol, reducing the to itsreflect owner's value. the abilityThe fact sizethat to A lack of control discount is a reduction in the control value of the appraisal subject that is intended to reflect the fact that liquidateaof minority the discount t heowner company, will cannot depend and control otheron the factors dailysize ofactivitiesprovided the interest or in policythe being previous decisions appraised, list. of an the enterprise, amount thusof control, reducing the its owner's value. abilityThe size to ofliquidatea minority the discount .02t heowner company, will cannot Independ o and controlrd e otheronr forthe factors dailysizethe ofactivitiesprovidedpr theact interestit ionor in policytheer being previousto decisions obtai appraised, list.n of the an the enterprise, co amountmpetenc thusof control, yreducing req theuir its edowner's value. to abilityThe size to of the discount will depend on the size of the interest being appraised, the amount of control, the owner's ability to liquidateDiscounts the for company, lack of control and othercan be factors mathematically provided in determined the previous using list. control premiums that are measured in the public liquidate accthe company,ept a bus andine otherss vfactorsaluati providedon eng agin theement, previous appr list.opriate education is required. market.Discounts Data for lack on control of control premiums can be ismathematically generally not availabledetermined for usingclosely control-held businesses,premiums that so arethe measuredvaluation analyst in the publicoften usesDiscountsmarket. transactions DataCourses for lack on control fromof control spo the premiumsnsore public can be stockd ismathematically b generallyy market the to AInot actCPA, availabledetermined as a gauge th fore usingclosely Amregardingerican control-held the businesses,premiums Soamountciety ofthat sopremiumof arethe Appra measuredvaluation paidisers in analyst transactionsin the publicoften Discounts for lack of control can be mathematically determined using control premiums that are measured in the public involvingusesmarket. transactions Data(Abuyouts.SA) on ,control from andThis the premiumsdata The public is Ins trackedstock istitu generally markette by ofseveral to not Busi act available sources.asness a gauge for Appr The closely regarding mostais-heer widelyld sthe businesses, I amountnc. used (IBA) isof soMergerpremium wtheil valuationlstat pr paid ovReview inide analysttransactions, whichoften is market. Data on control premiums is generally not available for closely-held businesses, so the valuation analyst often usesinvolvingpublished transactions . annually from byThis FactSet the data public isMergerstat trackedstock market by and several tohas act reflected sources.as a gauge implied The regarding most discounts widely the amountranging used is offrom Mergerpremium 19.0stat to paid 30.8Review in percenttransactions, which from is uses transactionspractition fromer thes w publicith the stock mini marketmum to acteduca as a gaugetion neces regardingsar they toamount perform of premium ther epaid types in transactions involving1980published to 2004. buyouts. annually byThis FactSet data isMergerstat tracked by and several has reflected sources. implied The most discounts widely ranging used is from Merger 19.0stat to 30.8Review percent, which from is involving1980published to 2004. ofbuyouts. annually eng ag byThisements FactSet data isMergerstat. tracked Sel f-stby and severaludy has reflected co sources.urses implied Thema most ydiscounts h widelyelp rangingre usedinfor is from ceMerger 19.0a stat ltoev 30.8Reviewel ofpercent, which from is published annually by FactSet Mergerstat and has reflected implied discounts ranging from 19.0 to 30.8 percent from This1980 datato 2004.know is for ledtransactionsge; ho weverof large, operating they ar companiese usually in i thensuffici publicent marketplace, as the and sole is methodnot releva ntof to a limited 1980 to 2004. liabilityThis data companyeduca is for transactions tithaton. invests ofin largea portfolio operating of marketable companies securities. in the public marketplace, and is not relevant to a limited liabilityThis data company is for transactions that invests ofin largea portfolio operating of marketable companies securities. in the public marketplace, and is not relevant to a limited This data is for transactions of large operating companies in the public marketplace, and is not relevant to a limited Thereliability are company many factors that invests that might in a portfolio impact theof marketable degree of control securities. a partial (minority) owner has over the operations of a Thereliability are company many factors that invests that might in a portfolio impact theof marketable degree of control securities. a partial (minority) owner has over the operations of a company.A statement Whenever that the control repor elementst is in ac arecor notdance available wit toh the standar ownershipds printerestomulg beingated valued, by the the AICvaluePA is reduced was accordingly.company.There are manyWhenever Table factors 2 the(written that control might for elements corporations, impact theare degreenot yet available applicable of control to the to a limitedownershippartial (minority)liability interest companies) owner being has valued, summarizes over the the value operations some is reduced of ofthe a There are many factors that might impact the degree of control a partial (minority) owner has over the operations of a factorsaccordingly.company. that Whenever tend Table to influence2 the(written control the for elements valuecorporations, of minority are not yet availableshares applicable relati to the tove limitedownershipto control liability shares:interest companies) being valued, summarizes the value some is reduced of the factorsaccordingly.company.T&A’s that att Whenever tend empt Table to influence2 t theo(written ccontrolopy the for aelements valuecorporations, po rtofion minority are ofnot yet availabletheshares applicable cer relati totificat the tove limitedownershiptoion control thliabilityat shares:interest is companies) req beinguired valued, summarizes by the the value appr some is reducedais of althe factorsaccordingly. that tend Table to influence2 (written the for valuecorporations, of minority yet shares applicable relati tove limitedto control liability shares: companies) summarizes some of the factors that tend to influence the value of minority sharesTABLE relati 2ve to control shares: factorsorgani thatzati tendons, to influence as well the as value the of minorityUniform shares TABLE Stan relatidard 2ve tos control of Profe shares:ssiona13 l Appraisal Practice FACTORS AFFECTING THE DEGREE OF CONTROL13 FACTORS AFFECTINGTABLE THE DEGREE 2 OF CONTROL (USPAP), which appeared in most of the valuation treatises that 13were published at that FACTORS AFFECTINGTABLE THE DEGREE 2 OF CONTROL FACTORS AFFECTING THE DEGREE OF CONTROL13 Factors That May Increase A Minority Interest Discount or Control Premium time. FactorsUSPAP That w Mayas alsIncreaseo addr A Minorityessed Interestin the DiscountAICPA orP Controlractice Premium Aid 93-3, where it stated: Factors ThatThe Maypresence Increase of nonvoting A Minority stock. Interest Discount or Control Premium Factors That May Increase A Minority Interest Discount or Control Premium  AnThe extreme presence lack of ofnonvoting consideration stock. for the interests of minority shareholders on the part  AnThe extreme presence lack of ofnonvoting consideration stock. for the interests of minority shareholders on the part .06  Standards 1 through 8 of USPAP, which are broad standards, must be  AnThe extreme presence lack of ofnonvoting consideration stock. for the interests of minority shareholders on the part 12adher Aned extreme to when lack an of apprconsiderationaisal is for per theformed interests for of minority a federa sharehlly rolderselated onth t ra thensac part tion 12 Pratt, Shannon P., Robert F. Reilly, and Robert P. Schweihs. Valuing a Business, 4 Edition (New York: McGraw- involvingPratt, r ealShannon es P.,tate Robert and F. Reilly, other and Robert tang iblP. Schweihs.e prop eValuingrty. a Business The Pr, 4eambleth Edition (New and York: McGraw- 12 Hill, 2000), pp. 365-366. th 12 Pratt,Hill, 2000), Shannon pp. 365P., Robert-366. F. Reilly, and Robert P. Schweihs. Valuing a Business, 4th Edition (New York: McGraw- Standards 9 and 10 of USPAP provide specific guidelines for devtheloping and 13 Pratt,Hill, 2000), Shannon pp. 365P., Robert-366. F. Reilly, and Robert P. Schweihs. Valuing a Business, 4 Edition (New York: McGraw- 13reportingGHill,uide 2000), bus to Businessine pp. ss365 Valuationsv-366.aluations., Practitioners Pro Publishingfessional Company, valu Inc.,ers 2001, reco p. 8-mme19, 803.16.nd that Guide to Business Valuations, Practitioners Publishing Company, Inc., 2001, p. 8-19, 803.16. 13 13 Guide to Business Valuations, Practitioners Publishing Company, Inc., 2001, p. 8-19, 803.16. Guide to Business Valuations, Practitioners Publishing Company, Inc., 2001, p. 8-19, 803.16. Page24 Page24 Page24 Page24 - 25 - of the company=s management, board of directors, and/or majority owners. USPAP beof follow the companyed for=s management, all types of board engageme of directors,nts, and/or ev enmajority if they owners. are not Factorsfedera Thatlly May relate Decreased. (Emphasis a Minority Interest added). Discount or Control Premium Factors That May Decrease a Minority Interest Discount or Control Premium  The presence of enough minority interest votes to elect or have meaningful input on As will be poi Thented presenceelecting out i nof onemuch enough or more mor minority directorse det interestail in thr a ougcompanyvoteshout to elect with thi sorcumulative re havepor t,meaningful T&A voting. used input softw on are and  The presenceelecting of one enough or more minority directors votes in to a block company certain with actions cumulative (subject voting. to state statutes attempted toThe pr presenceovand/oride a of articlesbu enoughsiness of minorityincorporation) valuati voteson torepor blockt certain without actions under (subjectstandi to stateng thestatutes princ iples of  The presenceand/or ofarticles state ofstatutes incorporation) granting certain minority stockholder rights. valuation, wThehat presence the correct of state inp statutesuts into granting the valua certaintion minority softw saretockholder programs rights. it was using should Factors That May Increase OR Decrease a Minority Interest Discount or a Control Premium. haveFactors been, That what May t heIncrease outp ORuts Decrease from the a Minority softwar Intereste meant, Discount or orthe a Controlamount Premium. of research and  The distribution of other shares (e.g. two shares when others own 49 shares each are analysis that The w distributionasmore req uirvaluable edof other to thanpr sharesoduce two shares(e.g. a ctwo rewhen dibshares le49 votherswhenaluati others ownon twor eporown shares 49t. shares Meach).r. Jo eachnes, are al most 11 more valuable than two shares when 49 others own two shares each). years later, sat in his deposition and was unable to answer questions about standards with The net asset value of The LLC was used to determine the control value of the entire entity. However, to realize this value,Theany net an certainty. asset investor value would Thisof The need com LLC toes bewas fablerom used to an gainto determineind accessividua to, thel andw controlho liquidate, claim valueed the of to underlyingthe have entire “substan entity.assets ofHowever,tial” The exLLC.perien to Ifrealize membersce this werevalue,in affordedperf an investorormin this g wouldlevel busin of need control,ess to vbealua member abletions. to gaininterests accessWhen might to, he andwell w as liquidate,be worthaske thead proho underlying rataw m sharean yassets ofap Thepraisals of LLC The=s LLC. net he asset Ifw membersould value. However,were afforded this thisis not level the ofcase control, in this member valuation. interests might well be worth a pro rata share of The LLC=s net asset value. However,have to this do is tnoto have the case “substa in this ntialvaluation. experience,” his response was “Fifteen, twenty.” (January The Agreement specifically vests all decision making solely in the Management Committee. The basis for lack of control adjustmentsThe24, Agreement Page for 37, specificallylimited line liability19). vests T companyhis all wdecisionould interests equate making arises solely to substfrom in thea antrange Managementially of lessfactors, thanCommittee. which a finclude:ull yTheear basis of ex forperien lack of controlce adjustments for limited liability company interests arises from a range of factors, which include:  assumingMembers that generally the aver cannotage assicontrolgnment the day takes-to-day 60management hours to orcomplet operatione. of The The Amer LLC. ican Society  Members generally cannot control the dayamount-to-day or timingmanagement of income or operationdistributions of Theto other LLC. members.  of ApMemberspraisers, dogenerally not at have tha cannott specific time control, claims and the on subse a mountthe underlyingquently, or timing assets Theof income of Institu The distributions LLC,te and of Businethey to other usuallyss members. cannot Appra compelisers, the  dissolutionMembers do of not a limited have specific liability claimscompany on orthe the underlying liquidation assets of its ofunderlying The LLC, assets. and they In usually this case, cannot The compel LLC has the a requirdissolutionperpetualed five life.full of a y limitedears liabilityof busi companyness v ora luathe tiliquidationon exper ofien its underlyingce (10,000 assets. wor Ink thishour case,s) toThe ear LLCn hasa a perpetual life.  credentiIt is alusually (in a verydd itiondifficult to for pass membersing to ex removeaminat management.ions and submitting work product for peer  It is usually very difficult for members to amendremove amanagement. limited liability company agreement.  reviewIt ).is usually very difficult for members to amend a limited liability company agreement. The net asset value method develops a freely traded, control value of The LLC=s net assets of $19,886,117 as of March The31, 2006, net asset and valuedoes not, method therefore, develops provide a freely a meaningful traded, control indication value of of value The LLCfor a=s minority net assets interest of $19,886,117 in The LLC. as A ofdiscount March for31, lack2006, of and control does is not, appropriate therefore, here provide because a meaningful an interest indication in The LLCof value represents for a minority an indirect interest ownership in The LLC. interest A discount in the underlyingforMr lack. Jofones controlassets als isheld oappropriate cbyoul Thed LLCnot here members.recal becausel whic an hinterest busine in Thsse vLLCalu representsation tre atian sesindirect he ownership relied on. interest One in the underlyingreason assets for th heldis is bybecaus The LLCe hismembers. workpapers lacked any documentation from these treatises One approach to determining an appropriate discount for lack of control is to compare the interest under appraisal to publishedOneto approachsup pcontrolort to wh determiningpremiumat he d studies.id an in appropriatepe rfTohisrm canin discountg be th accomplishede A forBC lack va luof ausingcontroltion .publications isAn to compareexpe risuche nthec ase interestd Mergerstat appra underise Reviewr appraisalknows, cited to previously.published control premium studies. This can be accomplished using publications such as Mergerstat Review, cited Anotherpreviously.exac methodtly wh aoft estimatingresource thes are appropriate in its refediscountrence for lacklibrary of control. Th isfor isJones espeis ciallyto draw true a parallel in busin betweeness The LLCAnother=s portfolio method and of estimating closed-end the mutual appropriate funds discount(CEFs). for Hundreds lack of control of closed for Jones-end fundsis to draware availablea parallel forbetween numerous The LLCspecializedvalua=s portfoliotion investment b andecau closedse options. the-endre mutualPricesare a paidlimitedfunds for (CEFs) publiclynum. ber -Hundredstraded of auth shares ofors closed in and a CEF-end texts representfunds that are w minority ouldavailable be interests regularlyfor numerous in fully marketablespecialized securities.investment Therefore, options. Pricesif the net paid asset for valuepublicly of -atraded CEF can shares be dete in armined CEF representand compared minority with intereststhe freely -intraded fully marketablepricere ferrof theed fund,securities. to asit can referenc beTherefore, determinede materif the when netial asset ands. underN valueot k what ofnow a CEF conditionsing canwhic be theh dete publ marketrminedicati affords andons compared aw discountere r eliwith (ored the premium) on freely is -antraded to the netprice asset of the value fund, of it acan minority be determined interest. when and under what conditions the market affords a discount (or premium) to the netindicat asset valueion that of a minorityhe prob interest.ably did not consult any of these materials. In fact, if he did consult Unlike open-end mutual funds, CEFs issue a fixed number of shares. Therefore, investors must buy shares from other investors,Unlikethe openm anotter-end theial mutual s,fund he itself. funds,may These havCEFs eCEFs issueavoid mirror a edfixed themak nu motivationsmbering ofmany shares. of buyersof Therefore,the anderr orsellers, investorss in andjudg mustofferement empiricalbuy sharesthat evidence w fromill be other for determinationinvestors, not theof the fund appropriate itself. These magnitude CEFs mirror of the the minority motivations interest of buyersdiscount and to sellers,be applied. and offer empirical evidence for determinationpointed out of thein thiappropriates repor t.magnitude of the minority interest discount to be applied. As previously discussed, the portfolio of Jones consists of a number of different types of investments. The analyst locatedAs previously information discussed, about theCEFs portfolio as of ofMarch Jones 31,consists 2006 in of the a numberApril 3, of2006 different issue typesof Barron of investments.=s. These funds The containanalyst locatedinvestments information that are aboutsimilar CEFs to the as various of March categories 31, 2006 of assets in the ownedApril 3, by 2006 The LLC.issue Sinceof Barron none=s of. theThese funds funds is the contain same asinvestments Baseany ofd the on that specific our are similarrev assetsiew to held ofthe the variousin the T&A portfolio, categories repo thert ofa valuation assetsnd wo ownedrkpap analyst byers, usedThe it LLC. allis of obv Since theious CEFs none th in ofat a the giventh fundsey categorydid is thelittle same as a asproxy any for of thethe maspecificrketplace assets in similar held in investments. the portfolio, Thethe valuationdetails of analystthe discountused informationall of the CEFs in the in variousa given categoriescategory as are a pproxyresentedmore for thethan in Tablesma enterrketplace 3 throughdata in similarint 11o (toa investments.comput save space,er pr Theonlyog detailsrathem details and of the usof discountethe manag first categoryinformationement were as in theincluded).just variousificati oncategories for not are presented in Tables 3 through 11 (to save space, only the details of the first category were included).

Page25 Page25 - 26 -

Cashfulfill ingand theimoneyr obl marketigati fundsons as invest a busi in governmeness valunt bonds.er. Throug Table hout3 presents the d theeposi U.S.ti on,Government Mr. Jones Bond kept Fund Category. stating that he discussed things with management, the directors or the trustees. However, he has little-to-no notes of all of these supposed conversations that took place. The first thing that accountants are taught is the importance of documentation, particularly when the data received is oral versus written. Part of the standard involving Sufficient Relevant Data is not only gathering the information, but also documenting it in the workpapers. T&A failed in this regard.

T&A did little more than rely on a software program to end up with a result that was improper, illogical and unsupported. Although there is nothing in the standards that precludes an appraiser from using a valuation software package, the appraiser must accept responsibility for all tools that are used in the application of the assignment. T&A, Mr. Jones and Mr. Axelrod failed to exercise due professional care by not being familiar with the tool that was relied on in this assignment. Furthermore, they failed to adequately supervise either each other or others while performing this assignment.

Despite Mr. Jones testifying to having substantial experience in valuation, he testified at the original trial that “We were using a package I believe it was just called Bank Source, which is nationally marketed, sold to various practitioners, CPAs other business valuators throughout the country” (July 18, 2001, Page 50, line 24). The actual name of this software package is Valusource and not Bank Source. Mr. Jones was unfamiliar with the computer product that was being used in his everyday practice.

Mr. Jones also testified that he considered this to be state of the art software. However, the software producer suggested that this package was not to be blindly used, and assumed that the practitioner understood enough about business valuation to make the necessary determinations that a software package cannot make for the practitioner. This would include, but not be limited to, the correct methodologies that apply to a particular valuation, the correct inputs to determine discount rates, whether to use a weighted average, a simple average or some other basis to reflect probable future earnings, and

Page26 - 27 -

TABLE 3 more. An experienced practitioner would TABLEalso u 3nderstand the limitations that this, or any, U.S. GOVERNMENT BOND FUND U.S. GOVERNMENT BOND FUND software package has. The practitioner would also test the software to make52 c erWeektain that 52 Week Market Market the mathematical caNamelculations are correct.NAV Mkt Price Prem/Disc Return Name NAV Mkt Price Prem/Disc Return ACM Govt Oppty (AOF) 8.50 7.62 -10.4 +6.3 ACM Govt Oppty (AOF) 8.50 7.62 -10.4 +6.3 ACM Incm (ACG) 8.15 8.08 -0.9 +7.8 ACM Incm (ACG) 8.15 8.08 -0.9 +7.8 T&A wEnhncdGovernmentFdas unaware of a (EGF)major calculation e18.80rror in the di17.96scounted future-4.5 earningsNS method EnhncdGovernmentFd (EGF) 18.80 17.96 -4.5 NS MFS Govt Mkts (MGF) 7.16 6.38 -10.9 +5.1 MFS Govt Mkts (MGF) 7.16 6.38 -10.9 +5.1 (discusMSsed Govt lat Incer (GVT) in this report), blindly printed9.59 every schedul8.62 e that the-10.1 software+4.8 package MS Govt Inc (GVT) 9.59 8.62 -10.1 +4.8 SlBrIfMgt (IMF) 17.79 16.27 -8.5 +8.3 had toSlBrIfMgt offer, ev (IMF)en if inappropriate for the ABC17.79 valuation,16.27 and used ina-ppr8.5 opriate+8.3 valuation WstrnAsst/ClymrUSTrsInfl (WIA) 12.97 11.34 -12.6 +7.6 WstrnAsst/ClymrUSTrsInfl (WIA) 12.97 11.34 -12.6 +7.6 WstAstClymrTips2 (WIW) 13.08 11.50 -12.1 +7.7 methodolWstAstClymrTips2ogies in reachi (WIW)ng its final conclusi13.08on. 11.50 -12.1 +7.7 Mean -8.8 Mean -8.8 Median -10.3 Median -10.3 Another major problem with the T&A assignment is that this firm lacked independence.

GeneralFurther Equitymor e,Funds bec consistause ofof funds the thatval uaprimarilytion iinvestncom inpe domestictence, (U.S.) the equities.lack of Thisind epdataen isde presentednce be inc Tableame 4. General Equity Funds consist of funds that primarily invest in domestic (U.S.) equities. This data is presented in Table 4. Any funds that did not include pricing data have not been presented. Income and funds are presented in Any funds that did not include pricing data have not been presented. Income and preferred stock funds are presented in Tablemore 5. obviousJones owns as several T&A mutualconduct fundsed that se investveral in simuNew Yorkltane municipalous assignmen bonds. In addition,ts, cau itsing owns iat numberto mix of Table 5. Jones owns several mutual funds that invest in New York municipal bonds. In addition, it owns a number of New York municipal bonds outright. These are single state funds, not investments in national bond funds. Table 6 New York municipal bonds outright. These are single state funds, not investments in national bond funds. Table 6 containsassignments the CEFs and that vinvestiolate in pNewroper York appr Stateais Bonds.Corporateal practice. bondsT&A alarelow mosted similar itself to to Investment (1) help Gradeplan thBonde contains the CEFs that invest in New York State Bonds.Corporate bonds are most similar to Investment Grade Bond Funds which are presented in Table 7. Jones owns several funds that invest in high yield bonds. Table 8 contains the Funds which are presented in Table 7. Jones owns several funds that invest in high yield bonds. Table 8 contains the relevantESOP CEFs.transactCEFsion, that (2) invest value in world the equity ESOP funds transa are presentedction, and in Table (3) assist 9. CEFs in that the invest foreca in worldsts incomethat w erefunds relevant CEFs. CEFs that invest in world equity funds are presented in Table 9. CEFs that invest in world income funds are presented in Table 10. Barron=s includes a list of specialized equity CEFs. Included in this category are 16 real are presented in Table 10. Barron=s includes a list of specialized equity CEFs. Included in this category are 16 real estaterequi fundsred b thaty th investe Ba inn kreal of estate Jack and/orsonville equities to d ine mrealo nestatestra tecompanies that ABC and corealu estateld pa yinvestment for the ftrusts.inancin Theseg. estate funds that invest in real estate and/or equities in real estate companies and real estate investment trusts. These are presented in Table 11.Jones owns one fund that invests in national mortgage bond funds. However, the amount is are presented in Table 11.Jones owns one fund that invests in national mortgage bond funds. However, the amount is soThese negligible, thr eethat any assi discountgnments applied bec wouldame have so no inter affecttw onine thed overall that discount. data was inconsistently used so negligible, that any discount applied would have no affect on the overall discount. Utilizingbetween the informationthe assig onnments the previous. Foe pages, exam the pvaluationle, the analyst forecascalculatedt for the a blended Bank or of weighted Jacksonv discountille for has lack Utilizing the information on the previous pages, the valuation analyst calculated a blended or weighted discount for lack of control utilizing the median discounts of the various asset classes. The median was selected as it eliminates the of control utilizing the median discounts of the various asset classes. The median was selected as it eliminates the outliersdiffere fromnt f iguthe redatas inthat it can tha skewn th thee f oresults.recastThe th calculationat was u ofse thed discountin the Disc is presentedounte din FuTableture 12. Earnings outliers from the data that can skew the results. The calculation of the discount is presented in Table 12. method in the valuation report. Furthermore, T&A represented ABC in some of its TABLE 12 TABLE 12 engagements and should havDISCOUNTe represent FOR edLACK th eOF ABC C%ONTROL of ESOP (trustees) in theWeighted valuati on. DISCOUNT FOR LACK OF C%ONTROL of Weighted Portfolio x Discount = Average This is a clear conflict of interest. Portfolio x Discount = Average Cash, Money Market and U.S. Gov't Bond Funds 4.85% 10.3 0.50% Cash, Money Market and U.S. Gov't Bond Funds 4.85% 10.3 0.50% U.S. Common Stocks 17.95% 6.9 1.24% U.S. Common Stocks 17.95% 6.9 1.24% Income & Preferred Stocks 1.83% 8.4 0.15% An undIncomeerly &ing Preferred probl Stocksem that exists throughout the ini1.83%tial T&A report and8.4 updates0.15% is that a Municipal Bonds 66.08% 3.6 2.38% Municipal Bonds 66.08% 3.6 2.38% valuaCorporatetion was Bonds never performed as of the date of the0.45% transaction with7.0 the ESOP,0.03% which is Corporate Bonds 0.45% 7.0 0.03% High Yield Bond Fund 0.63% 3.8 0.02% the mosHigh Yieldt import Bondant Fund date that should have been used0.63% to value the ABC3.8 stock. The0.02% initial World Equity Funds 7.20% 5.9 0.42% World Equity Funds 7.20% 5.9 0.42% U.S. Mortgage Bond Funds 0.00% 9.3 0.00% valuU.S.ation Mortgage date hadBond Fundsan effective date of November 0.00%30, 1993. How9.3ev er, the in0.00%itial and World Income Funds 0.19% 7.0 0.01% World Income Funds 0.19% 7.0 0.01% subsRealequent Estate valuations leading up to the ESOP0.82% transaction 15.50 only utilized 0.13% financial Real Estate 0.82% 15.50 0.13% information through October 31, 1993. Even the Mar100.00%ch 15, 1994 update did not4.89% use any 100.00% 4.89% additional information other than distributions to the shareholderRoundeds. T&A never co5.00%nsidered Rounded 5.00% the impact on the valuation of more than four months of economic and industry changes,

Page27 There are a number of differences between the closed- 28-end - funds and Jones including but not limited to size, management and distributions that could justify a higher discount. However, there is no quantitative methodology to Theresupportnor the are a higher impaca number discount.t on of ABC differencesTherefore, of re movbasedbetweening on themor analysisclosede tha-endn performed, $1. funds5 mi and all iondiscount Jones of cas forincluding lackh from of controlbut t henot ofc limitedompany 5 percent to size, wasas deemedmanagement appropriate. and distributions that could justify a higher discount. However, there is no quantitative methodology to supportdistribu a tihigherons. discount. Therefore, based on the analysis performed, a discount for lack of control of 5 percent was deemed appropriate. DISCOUNT FOR LACK OF MARKETABILITY

A discount for lack of marketability (DLOM)DISCOUNT is used FOR to compensateLACK OF MARKETABILITY for the difficulty of selling shares of stock that are not tradedThe bal on ancea stock of exchange this repor comparedt will withbe sthosepeci thatfical canly bereferenc traded publicly.ed to the If an T&A investor repor ownst. shares in a public company,A discount he for or lack she of can marketability pick up the (DLOM) telephone, is used call ato broker, compensate and generally for the difficulty convert ofthe selling investment shares into of stockcash withinthat are three not tradeddays. That on a is stock not the exchange case with compared an investment with those in a closely that can-held be company traded publicly. or LLC. Therefore,If an investor publicly owns traded shares stocks in a public have company,an element he of or liquidity she can that pick closely up the-held telephone, shares call do nota broker, have. and generally convert the investment into cash within three days.TA 160 That is not the case with an investment in a closely-held company or LLC. Therefore, publicly traded stocks have anThis element is the reason of liquidity that athat DLOM closely will- heldbe applied. shares doIt is not intended have. to reflect the market=s perceived reduction in value for not providing liquidity to the shareholder. This is the reason that a DLOM will be applied. It is intended to reflect the market=s perceived reduction in value for not providingAPag DLOMe TA may liquidity 160 also toisbe the theappropriate shareholder. cover whenpag ethe to shares the v havealuati eitheron legalrepor or tcon thattractual was restrictions issued by placed T&A. upon The them. date This may be the result of restricted stock, buy-sell agreements, bank loan restrictions or other types of contracts that restrict Atheof DLOM thissale ofmayrepor the also shares.t ibes Mappropriate Evenarch when 7, when19 a 94.100 the percent sharesThe r interesthaveepor eithert isis the alegalddr valuation oress coned tractualsubject, to the restrictions a DLOM Boar mayd placed of be D appropriate uponirect them.ors and if This the mayowner be cannot the result change of restricted the restrictions stock, buy on- sellthe stock.agreements, bank loan restrictions or other types of contracts that restrict theTrus saletees of the of shares. ABC, Evenbut T&Awhen aw 100as percentonly re interesttained is bythe valuationABC. Thesubject, eng a DLOMagement may belet appropriateter was w if ittheh ownerThe most cannot commonly change used the sourcesrestrictions of data on the for stock.determining an appropriate level of a DLOM are studies involving restricted stockABC purchases and not or t heinitial tr ustpublicees. offerings. Ther Revenuee were Rulingno chang 77-287es references made tothe theInstitutional engag Investorement Study letter,14 whichand Theaddresses most commonly restricted usedstock sources issues. of Many data studiesfor determining have updated an appropriate this one. level of a DLOM are studies involving restricted stockther efopurchasesre, the or r epinitialor publict sho ulofferings.d not be Revenue addresRulingsed 77 to-287 the references trustees the. The Institutional truste Investores nev Studyer bec,14amwhiche addressesRestricted stockrestricted (or letter stock stock issues. as it Many is sometimes studies havecalled) updated is stock this issued one. by a corporation that is not registered with the Securitiesthe client and e vExchangeen thoug Commissionh they sh (SEC)ould andhav cannote. T&A be readily shoul soldd hav intoe the been public famili market.ar Thewith stock the isESO usuallyP Restrictedissued when stock a corporation(or letter stock is firstas it goingis sometimes public, called)making is an stock acquisition, issued by or a corporationraising capital. that isThe not mainregistered reasonswith that the Securitiescorporationsrules about and issu Exchangeweho restricted it s Commissionhoul stock,d r ratherepr (SEC)esent than andtradable. cannot stock, be readilyare to avoid sold intodilution the ofpublic their market.stock price The with stock an excessiveis usually issuednumber when of shares a corporation available foris firstsale goingat any public,one time making and to an avoid acquisition, the costs or of raisingregistering capital. the securities The main with reasons the SEC. that corporations issue restricted stock, rather than tradable stock, are to avoid dilution of their stock price with an excessive numberThe registration of shares exemption available onfor restrictedsale at any stocks one timeis granted and to under avoid Sectionthe costs 4(2) of ofregistering the 1933 theSecurities securities Act. with The the intent SEC. of SectionAccor din4(2)g is to to the provide repor Asmallt, T&A@ corporations valued ABwithC the as ability of Nov to raiseember capital 30, without 1993. incurring Howev theer costs, in r eachiof a publicng Theoffering. registration Regulation exemption D, a safe on harbor restricted regulation, stocks iswhich granted became under effective Section in 4(2) 1982, of thefalls 1933 under Securities section 4(2) Act. of Thethe code intent and of Sectionprovidesits concl 4(2) uniformityusi is on,to provide in T&A federal A smallinc andlu@ corporationsstateded securitiesinformation with laws the regarding abilityin thi tos privateraise repor capital placementst that without a ssof incurring securities.umed the tha Securities costst an of ESOPa bought public offering.under Regulation Regulation D are D, asubject safe harbor to restrictions, regulation, the which most became important effective being that in 1982, the securities falls under cannot section be resold4(2) of withoutthe code either and 15 registrationprovidestransac uniformitytio undern h athe din Act,tfederalaken or an andpla exemption. statece. securitiesAt NTheov laws emberexemptions regarding 30, for noprivate these such securitiesplacements transac are of granted tisecurities.on to underok Securitiespla Rulece. 144. boughtThat under Regulation D are subject to restrictions, the most important being that the securities cannot be resold without either registrationcausesRule this under 144 v thealuaallows Act,tion the or anlimited to exemption. be resale hyp 15ooft hunregisteredTheetical, exemptions althou securities forgh these itafter isecuritiess a not minimum lab areeled grantedholding as periodunder such. Ruleof two W144. e will years. Resale is limited to the higher of 1 percent of outstanding stock or average weekly volume over reiterateRulea 4 tweekhis 144 poi periodallowsnt asprior the w limitedtoe the rev sale, resaleiew during the of unregistered vanyalu threeation month securities schedu period. afterles There thata m isinimum arno equantity att holdingached limitation period to theafterof two arepor t. 16 years.four year Resale holdin isg limited period. to the higher of 1 percent of outstanding stock or average weekly volume over a 4 week period prior to the sale, during any three month period. There is no quantity limitation after a Therefore,four a holder year holdin of restrictedg period. stock16 must either register their securities with the SEC or qualify for a 144 exemption, in orderThe tosta sellnda theirrd stockof v alueon the, knownpublic market. as fair A holdermarket of restrictedvalue, take stocks can, into however, conside traderation the stockthat inw hicha priva iste Therefore,transaction. a holderHistorically of restricted when traded stock privately,must either the register restricted their stock securities transaction with the was SEC usually or qualify required for toa 144be registered exemption, with in orderthe“know SEC. to nsell orHowever, their kn owstock ablin on 1990,e” the as publicthe of SEC themarket. adoptedvalu Aati holder onRule dat of144a restrictede. which The stock relaxedpur can,pose the however, SECof the filing trade T&A restrictions the r stockepor inton wa asprivatepriva tote transaction. Historically when traded privately, the restricted stock transaction was usually required to be registered with theest ablSEC.is h However, the fair marin 1990,ket thevalu SECe of adopted the ABC Rule st ock144a to which deter relaxedmine thethe SEC “adeq filinguate restrictions conside onra privatetion” to be paid by the ESOP for these shares. At the valuation date, November 30 1993, there 14 was no ESOP.From U siADiscountsng the Involved propose in Purchasesd ESOP of Common transac Stocktion (1966 to - val1969),ue@ Institutional ABC is Investorcircula Studyr log Reportic. The of the Securities and Exchange Commission. H.R. Doc. No. 64, Part 5, 92d Cong., 1st Sess. 1971, pp. 2444-2456. 14 appraiser mustFrom value ADiscounts the comInvolvedpan in Purchasesy as it ex of istsCommon at theStock app (1966raisal - 1969), date@ Institutional to esta Investorblish Study the Report correct of the 15 st SecuritiesKasim L. Alli, and Ph.D. Exchange and Donald Commission J. Thompson,. H.R. Doc. Ph.D. No A.The 64, PartValue 5, of 92d the Cong., Resale 1 LimitationSess. 1971, on Restricted pp. 2444- 2456.Stock: An price to be paiOptiond for Theory the Approach,stock. @AfterAmerican the Society transac of Appraisers:tion, the Valuation valu, Marche may 1991, ch pp.ang 22-e23. as a result of 15 Kasim L. Alli, Ph.D. and Donald J. Thompson, Ph.D. AThe Value of the Resale Limitation on Restricted Stock: An 16 how the transacOptionIbid.tion Theory is c Approach,onsummate@ Americand. Society of Appraisers: Valuation, March 1991, pp. 22-23.

16 Ibid. Page28 Page28 transactions. The rule allows qualified institutional investors- 29 to -trade unregistered securities among themselves without transactions. The rule allows 17qualified institutional investors to trade unregistered securities among themselves without filing registration statements.17 Effective April 1997, the two year holding period was reduced to one year. filingtransactions. registration The statements. rule allows qualifiedEffective institutional April 1997, investors the two to year trade holding unregistered period wassecurities reduced among to one themselves year. without transactions. The rule allows 17qualified institutional investors to trade unregistered securities among themselves without Frfilingtransactions.eq registrationuently The, app statements. rulera allowsisers 17qualified aEffectivere req institutionaluest Apriled 1997, toinvestors theper twoform to year trade so holding meunregistered pr periodeliminar wassecurities reducedy valu among atito oneon themselves cyear.alcula withouttions Thefiling overall registration effect statements.of these regulations17 Effective on restricted April 1997, stock, the twois that year when holding issued, period the corporationwas reduced is tonot one required year. to disclose Thefiling overall registration effect statements.of these regulationsEffective on restricted April 1997, stock, the twois that year when holding issued, period the corporationwas reduced is tonot one required year. to disclose forThea price thoverall eand, pur effect onpose some of these ofoccasions, assi regulationssti evenng a onwhen c lirestrictedent traded, in astock, the deci value issi thaton. of restrictedwhen For issued, ex securitiesample, the corporation is in still thi nots isinsa matternottanc required ofe public ABC to disclose record. was Thea price overall and, effect on some of these occasions, regulations even onwhen restricted traded, stock, the value is that of restrictedwhen issued, securities the corporation is still not isa matternot required of public to disclose record. aTheTable price overall 13 and, is effect aon summary some of these occasions, of regulationsmany ofeven the onwhen more restricted traded,familiar stock, the studies value is that regarding of restrictedwhen issued, restricted securities the stock.corporation is still not isa matternot required of public to disclose record. aTable price 13 and, is aon summary some occasions, of many ofeven the when more traded,familiar the studies value regarding of restricted restricted securities stock. is still not a matter of public record. contTablea priceemplat 13 and, is aon summary ingsome the occasions, of manyimplem ofeven theentat when moreion traded,famili ofar the studies an value ES regarding ofOP. restricted A restricted p securitiesreliminar stock. is stilly notvalu a matteration of public woul drecord. be Table 13 is a summary of many of the more familiar studiesTABLE regarding 13 restricted stock. TABLE 13 requested by management of ABCRESTRICTED to heTABLElp STOCK the 13m STUDIES determine if it would make economic RESTRICTEDTABLE STOCK 13 STUDIES RESTRICTEDTABLE STOCK 13 STUDIES sense. W hat appears to haveRESTRICTED happened STOCK hereYears isSTUDIES thatCovered ABC neededAverage some Discount preliminary Years Covered Average Discount Study in Study (%) Studya Yearsin Covered Study Average Discount(%) numSECbers Overall as Average of Nova ember 30, 1993, and T&A wasYears1966 en Coveredgaged-1969 in DecemberAverage 199325.8 Discount to assist in SEC Overall AverageStudy a 1966in -Study1969 25.8(%) SEC Non-ReportingStudy OTCa Companies a 1966in -Study1969 32.6(%) SEC NOverallonb -Reporting Average OTCa Companies 1966-1969 32.625.8 thiGelmanSECs pr Overallocesb s.Average At the time, the Octa ober 1993 figures19681966 wer-19701969e the most recent figur33.025.8es available. GelmanSEC Nc on-Reporting OTC Companiesa 19681966-19701969 33.032.6i TroutSEC Nc onb -Reporting OTC Companies 19681966-19721969 33.532.6i TroutGelmanbd 1968h-19721970 33.533.0 TMoroneyGelmanhis wasc d confirmed by Mr. Jones in his depositio1968n (Jah-1970nuary 24, 2005, begin35.633.0nini g at page MoroneyTroutc e 1968-1972 33.535.6i MaherTrout e d 19691968h-19731972 33.535.4 56,MaherMoroney line23d ). f 1969h-1973 35.435.6i StandardMoroneye Research Consultantsf 1978-1982 45.035.6i StandardMahere Research Consultants g 19781969-19821973 45.035.4i WillametteMaher Management Associatesf g 19811969-19841973 31.235.4i WillametteStandard Research Managementj Consultants Associatesf 19811978-19841982 31.245.0i SilberStandard Study Researchj Consultants g 19811978-19881982 45.033.8i SilberWillamette Study kManagement Associatesg 1981-19881984 31.233.8i FMVWillamette Study kManagementj Associates 19791981- April-1984 1992 31.223.0 FMVSilber Study StudyQ. j Okay. Thal nk you. What I don't unde19791981rstand- April-1988 1992 -- maybe you can explain23.033.8 FMVSilber Restricted Studyk Stock Studyl 19801981--19881997 22.333.8 FMV StudyRestrictedk Stockit -- w Studyhy mis the valuation as of Nov1979ember1980- April-1997 30th, 1992 '93, when the s22.323.0econd ManagementFMV Study Planning, Inc.ml 19791980- April-1996 1992 27.123.0 ManagementFMV Restricted Planning,n Stock Study Inc. l 19801980--19961997 27.122.3 BruceFMV Restricted Johnsonn Stockparag Studyraphm says, “The information 19801991utiliz--1995ed1997 to perform the valu20.022.3ation BruceManagement Johnson Planning, Inc.mo 19911980-19951996 20.027.1 ColumbiaManagement Financial Planning,n inc Advisorslud Inc.es toax returns and financia1996l st1980-aFebruarytem-1996en 1997ts of ABC Jail Com21.027.1pany, ColumbiaBruce Johnson Financialn Advisorso 19961991-February-1995 1997 21.020.0 ColumbiaBruce Johnson Financial Advisorso May1991 1997-1995-1998 13.020.0 Columbia FinancialInc Advisors. througo h October 31, '93.” C1996anMay -yFebruary ou1997 ex-1998pla 1997in that? 13.021.0 Columbia Financial Advisorso 1996-February 1997 21.0 Columbia Financial Advisorso May 1997-1998 13.0 Notes:Columbia Financial Advisorso May 1997-1998 13.0 Notes:a a A.From ADiscountsWell, they Involved wanted in Purchases us to -of- Common“they” bei Stockng (1966 the -tr1969),ustees,@ Institutional wanted Investor us to Study do Report Notes: From ADiscounts Involved in Purchases of Common Stock (1966-1969),@ Institutionalst Investor Study Report Notes:a of the Securitiesthe valu andati Exchangeon in the Commission latter par. t H.R. of '93 Doc. based No. 64, onPart the 5, 92d informat Cong., 1stionSess. that 1971, the pp. 2444- a ofFrom the ASecuritiesDiscounts and Involved Exchange in Purchases Commission of Common. H.R. Doc. Stock No. (1966 64, Part-1969), 5, 92d@ Institutional Cong., 1 InvestorSess. 1971, Study pp. Report 2444- a From2456. ADiscounts Involved in Purchases of Common Stock (1966-1969),@ Institutionalst Investor Study Report b 2456.of the Securitiescompany and hadExchange avail Commissionable at that. H.R. poi Doc.nt No. in 64, time. Part 5, N 92dow Cong.,, they 1st wSess.oul 1971,d not pp. 2444- b ofFrom the SecuritiesMilton Gelman, and Exchange AAn Economist Commission-Financial. H.R. Analyst Doc. No.=s Approach 64, Part 5, to 92d Valuing Cong., Stock1 Sess. of 1971,a Closely pp. 2444-held- From2456. Milton Gelman, AAn Economist-Financial Analyst=s Approach to Valuing Stock of a Closely-held b 2456.Company,hav@ Journale the fullof Taxation year-e, Junend infor 1972,mati pp. 353on -av354.ailable to us until sometime into bc Company,From Milton@ Journal Gelman, of TaxationAAn Economist, June 1972,-Financial pp. 353Analyst-354.=s Approach to Valuing Stock of a Closely-held c From RobertMilton'94, soGelman,R. Trout,they AAwAnEstimationanted Economist us of the-toFinancial prDiscountoceed Analyst Associated wit=hs Approachthe with informati the to Transfer Valuingon th ofStock atRestricted they of a hadClosely Securities,-held@ FromCompany, Robert@ Journal R. Trout, of TaxationAEstimation, June of the1972, Discount pp. 353 Associated-354. with the Transfer of Restricted Securities,@ c Company,Taxes, June@ Journal 1977, pp.of Taxation 381-385., June 1972, pp. 353-354. cd TaxesFrom Robert, avJuneail 19R.abl77, Trout,e pp.at A381thatEstimation-385. time. of the Discount Associated with the Transfer of Restricted Securities,@ d From Robert E.R. Moroney,Trout, AEstimation AMost Courts of the Overvalue Discount CloselyAssociated-held with Stock, the@ TransferTaxes, March of Restricted 1973, pp. Securities, 144-154.@ e FromTaxes Robert, June 19E. 77,Moroney, pp. 381 A-Most385. Courts Overvalue Closely-held Stock,@ Taxes, March 1973, pp. 144-154. ed TaxesFrom J., June Michael 1977, Maher, pp. 381 ADiscounts-385. for Lack of Marketability for Closely-Held Business Interests,@ Taxes, d From RobertJ. Michael E. Moroney, Maher, ADiscounts AMost Courts for LackOvervalue of Marketability Closely-held for Stock,Closely@ -TaxesHeld Business, March 1973, Interests, pp. 144@ Taxes-154., ed Q.SeptemberFrom RobertWell 1976, E., but Moroney, pp. by 562 M -arA571.Mostch 7,Courts 1994, Overvalue you cer Closelytainly-held had Stock, the@ finTaxesanci, Marchal infor 1973,mati pp.on 144-154. e From RobertJ. Michael E. Moroney, Maher, ADiscounts Most Courts for LackOvervalue of Marketability Closely-held for Stock,Closely-TaxesHeld Business, March 1973, Interests, pp. 144@ Taxes-154., ef September 1976, pp. 562A-571. @ f From AJ.Revenuethr Michaeloug h RulingMaher, Nov 77ember ADiscounts-287 Revisited, 30th for ,Lack 199@ SRC of3, MarketabilityQuarterly did you Reports not for ?Closely, Spring-Held 1983, Business pp. 1-3. Interests,@ Taxes, g FromSeptember ARevenue 1976, Ruling pp. 562 77--571.287 Revisited,@ SRC Quarterly Reports, Spring 1983, pp. 1-3. gf FromSeptember Willamette 1976, Management pp. 562-571. Associates study (unpublished). hf From WillametteARevenue Ruling Management 77-287 AssociatesRevisited,@ studySRC Quarterly (unpublished). Reports, Spring 1983, pp. 1-3. hg AlthoughFrom ARevenue the years Ruling covered 77-287 in Revisited,this study @areSRC likely Quarterly to be 1969Reports-1972,, Spring no specific 1983, pp. years 1-3. were given in the g AlthoughFrom Willamette the years Management covered in Associatesthis study are study likely (unpublished). to be 1969-1972, no specific years were given in the h A.Frompublished WillametteI don't account. know Management if they Associates had prov studyided (unpublished). that to us or not. We -- we had been hI publishedAlthough the account. years covered in this study are likely to be 1969-1972, no specific years were given in the I AlthoughMedian gidiscounts. theve nyears the coveredOctob einr thisnu mstudybe r,are ce likelyrtain toly. be 1969-1972, no specific years were given in the j Medianpublished discounts. account. jI Frompublished William account. L. Silber, ADiscounts on Restricted Stock: The Impact of Illiquidity on Stock Prices,@ Financial I FromMedian William discounts. L. Silber, ADiscounts on Restricted Stock: The Impact of Illiquidity on Stock Prices,@ Financial j MedianAnalysts discounts. Journal, July-August 1991, pp. 60-64. jk Q.AnalystsFrom WilliamW Journalell ,L. I Silber,mean,, July- AugustADiscounts Marc 1991,h 7,on pp. Restricted'94 60 is-64. about Stock:, my The g Impactoodnes of Illiquiditys, three on month Stock Prices,s after@ Financial k FromLance William S. Hall L.and Silber, Timothy ADiscounts C. Polacek, on Restricted AStrategies Stock: for TheObtaining Impact the of IlliquidityLargest Discount, on Stock@ Prices,Estate@ PlanningFinancial, LanceAnalysts S. JournalHall and, July Timothy-August C. 1991,Polacek, pp. A60Strategies-64. for Obtaining the Largest Discount,@ Estate Planning, k AnalystsJanuary/FebruaryOct Journalober, July 1994,31,-August 'pp.93 38. 1991,-D44.id In ypp. ospiteu 60 e -ofv64.e ther a longsk fotimer tperiodhe N covered,ovemb ethisr fi studynan canalyzedial dat onlya, a little k January/FebruaryLance S. Hall and 1994,Timothy pp. C. 38 Polacek,-44. In spite AStrategies of the long for time Obtaining period thecovered, Largest this Discount, study analyzed@ Estate only Planning a little, k overLance 100 S. transactionsHall and Timothy involving C. Polacek, companies AStrategies that were for generally Obtaining not the smallestLargest Discount, capitalizati@ Estateon companies. Planning It, overJanuary/FebruaryLance 100 S.Mr. transactionsHall Jones? and 1994,Timothy involving pp. C. 38 Polacek,- companies44. In spite Strategies that of the were long for generally time Obtaining period not thecovered, smallestLargest this Discount, capitalizati study analyzedEstateon companies. only Planning a little It, supportedJanuary/February the findings 1994, ofpp. the 38 -SEC44. In Institutional spite of the longInvestor time Studyperiod incovered, finding thisthat study the discountanalyzed foronly lack a little of supportedoverJanuary/February 100 transactions the findings 1994, involving ofpp. the 38 - companiesSEC44. In Institutional spite that of the were longInvestor generally time Studyperiod not inthecovered, finding smallest thisthat capitalizati study the discountanalyzedon companies. foronly lack a little of It overmarketability 100 transactions was higher involving for smaller companies capitalization that were companies. generally not the smallest capitalization companies. It l supportedmarketability the was findings higher of for the smaller SEC capitalizationInstitutional Investorcompanies. Study in finding that the discount for lack of l A.supportedEspen RobakI don the and't findings remember Lance of S. theHall, ifSEC AwBringinge Institutionalask Sanityed for toInvestor theMarketability N ovStudyember Disin counts:finding data Athat. New W the Datae endeddiscount Source, upfor@ Valuation lack of supportedEspenmarketability Robak the was and findings higherLance of S.for theHall, smaller SEC ABringing capitalizationInstitutional Sanity to Investorcompanies. Marketability Study Disin counts:finding Athat New the Data discount Source, for@ Valuation lack of l marketabilityStrategies,getti July/August ngwas sohigherme 2001, forpr smallereli pp.minar 6- 13,capitalizationy 45 D-46.ecember companies. information, which they -- they lm Strategies,Espen Robak July/August and Lance 2001, S. Hall, pp. ABringing 6-13, 45 Sanity-46. to Marketability Discounts: A New Data Source,@ Valuation m RobertEspen RobakP. Oliver and and Lance Roy S. H.Hall, Meyers, ABringing ADiscounts Sanity to Seen Marketability in Private Dis Placementscounts: A New of Data Restricted Source, Stock:@ Valuation The RobertStrategies,Espen RobakbeiP. Oliver ngJuly/August and the and Lance company Roy 2001, S. H.Hall, pp.Meyers, Bringing al6-so13, A45indDiscounts Sanity-46.icated to Seen Marketability that in ther Privatee Dis had Placementscounts: not A been New of Data Restricted an Source,y maj Stock:orValuation The m Strategies, July/August 2001, pp. 6-13, 45-46. m RobertStrategies, P. Oliver July/August and Roy 2001, H. pp.Meyers, 6-13, A45Discounts-46. Seen in Private Placements of Restricted Stock: The m 17Robert chaP. Olivernges and b etwRoyeen H. Meyers, their operADiscountsations Seen -- betwin Privateeen Placements the October of Restricted 31st and Stock: The 17 Richard A. Brealey and Steward C. Myers, AHow Corporations Issue Securities,@ Chapter 14, Principles of Corporate DecemRichard A. thberBrealey m andatte Stewardrs. C. Myers, AHow Corporations Issue Securities,@ Chapter 14, Principles of Corporate 17 Finance, 5 Edition, McGraw-Hill, Inc. 1996, pp. 399-401. 17 FinanceRichard ,A. 5 thBrealeyEdition, and McGraw Steward-Hill, C. Inc. Myers, 1996, AHow pp. Corporations399-401. Issue Securities,@ Chapter 14, Principles of Corporate Richard A. thBrealey and Steward C. Myers, AHow Corporations Issue Securities,@ Chapter 14, Principles of , 5th Edition, McGraw-Hill, Inc. 1996, pp. 399-401. Finance, 5th Edition, McGraw-Hill, Inc. 1996, pp. 399-401. Page29 Page29 Page29 Management Planning, Inc., Long-Term Study- 30 (1980 - -1996)@ published in Chapter 5 of Robert F. Reilly and Robert P. Schweihs, eds. The Handbook of Advanced Business Valuation (New York: McGraw-Hill, 2000). n Q.ManagementBruce Johnson,Well ,Planning, I' mARestricted jus Inc.,t tr LongyStocking- Term tDiscounts,o un Studyde r(19801991stand--1995,1996). I@t’@Shannonpublisheds obviou Pratt ins Chapter –=s Businesswel 5l ,of iRobertt Valuationseems F. Reilly Update and, RobertMarch 1999, P. Schweihs, pp. 1-3. eds. Also, The AQuantitative Handbook Support of Advanced for Discounts Business for Valuation Lack of Marketability,(New York: @McGrawBusiness-Hill, Valuation 2000). n obvious -- is it true that you never issued a full report using financial BruceReview Johnson,, December ARestricted 1999, pp. Stock 152-155. Discounts,th 1991-1995,@ Shannon Pratt=s Business Valuation Update, o MarchKathryn 1999,data Aschwald, pp. as 1 -of3. ARestricted NovAlso, emberAQuantitative Stock 30 Discounts Support, '93? Declinefor Is Discounts that as tr aue? Resultfor Lack of of 1 Marketability,-Year Holding@ Business Period,@ ValuationShannon ReviewPratt=s Business, December Valuatio 1999,n pp. Update 152-,155. May 2000, pp. 1-5. This study focuses on the change in discounts as a o A.Kathrynresult ofW Aschwald,theell, holding the A Restrictedperiod-- the reduction Novemb Stock fromDiscountser two 30th years Decline inf toorma one as year.a tionResult wouldn't of 1-Year Holdinghave beenPeriod, @--Shannon PrattSource:=s Business Guide to Valuatio Businessn Update Valuations, May, Practitioners2000, pp. 1-5. Publishing This study Co., focuses Fort Worth,on the changeTexas, 2002.in discounts as a result ofw theoul holdingd not periodhave reductionbeen av fromail abltwoe years Nov toember one year. 30th. THE NEXTSource: SECTION Guide OF THE to Business REPORT Valuations DISCUSES, Practitioners THE VARIOUS Publishing STUDIES Co., AND Fort HAS Worth, BEEN Texas, ELIMINATED 2002. TO SAVE SPACE. Q. Well, again, you issued the report on March 7th, '94. My question is, THE NEXT SECTION OF THE REPORT DISCUSES THE VARIOUS STUDIES AND HAS BEEN ELIMINATEDth TO SAVE SPACE.REVENUE RULINGany 77ti-287me, as of March 7th, '94 or thereafter, through March 15 , '94, did you ever issue a full report using financial data as of November InREVENUE 1977, in RevenueRULING30th, 77Ruling-287 '93? 77-287, the Internal Revenue Service specifically recognized the relevance of the data on discounts for restricted stocks. The purpose of the ruling was Ato provide information and guidance to taxpayers, Internal RevenueIn 1977, in Service Revenue personnel Ruling 77and-287, others the concerned Internal Revenue with the Service valuation, specifically for Federal recognized tax purposes, the relevance of securities of thethat data cannot on 18 bediscounts immediatelyA. for restricted resoldWe sdibecausetocks.d not The becthey purpose auseare restricted of w thee usruling edfrom was th resalee A toOc provide toberpursuant information 31s to tFederal informati and guidancesecurityon. laws.to taxpayers,@ The Internal ruling Revenuespecifically Service acknowledges personnel the and conclusions others concerned of the SEC with Institutional the valuation, Investor for Federal Study tax and purposes, the values of of securities restricted that securities cannot bepurchased immediately by investment resold because companies they asare part restricted of the Afromrelevant resale fac tspursuant and circumstances to Federal securitythat bear laws. upon@18 the The worth ruling of specificallyrestricted stock. acknowledges@ the conclusions of the SEC Institutional Investor Study and the values of restricted securities purchased by investment companies as part of the Arelevant facts and circumstances that bear upon the worth of AlAllrestrictedthoug of the studies stock.h T&A@ concerning was eng restrictedaged tostock valu generallye ABC deal as with of minority November blocks of30, stock 1993, in public they companies. never Therefore,did. In fact,the restricted Mr. Jo stocknes studies testi mayfied be th a atuseful he guide nev iner assessin askedg a fordiscount the for dat lacka of as marketability of the vato aluati minorityon interest. date, AllHowever, of the studies a control concerning value may restricted also need stock to generally reflect a deal DLOM, with minorityalthough blocks it probably of stock would in public be companies.smaller than Therefore, a DLOM Novembetheattributable restricted tor stock minority30, 19studies 93.shares. may W hile Sincebe a apuseful a minoritypraisers guide interest in use assessin isdat morega a nea discountdifficultr a tov for aluasel lackl thantion of marketabilitya datcontrollinge, the interest,tore a is minority no the ex DLOM interest.cuse is However,usually larger a control for minority value mayinterests. also needThe averageto reflect DLOM a DLOM, ranges although between it probably 25 and 45would percent be smallerbased onthan the a studiesDLOM notattributablediscussed to at previously.lea to minorityst ask Larger shares.for the discounts Since data a tha minoritymayt wbeoul appropriateinterestd impact is more if the the difficult starting repor to point selt. lT&A than is a marketable,a di controllingd not r eqmino interest,uestrity interest sutheff DLOMic ienvalue ist usuallybased on larger public for guideline minority companyinterests. methods. The average DLOM ranges between 25 and 45 percent based on the studies rediscussedlevant previously.data to a Largerllow th discountsem to pmayerf beorm appropriate their as ifs theign startingment pointprop ise arl marketable,y. minority interest value basedINITIAL on PUBLIC public guideline OFFERING company STUDIES methods.

INITIALAnother PUBLICmanner in OFFERING which the businessSTUDIES appraisal community and users of its services determines discounts for lack of Tmarketability&A makes is with ref theeren usece of closelyto the-he infld ormacompaniestion thattha underwentt they used an initial to publicperform offering th (IPO)e valua of itstion. stock. InM theseost Anotherinstances, manner the value in which of the the closely business-held appraisalstock is measured community before and users and after of its the services company determines went public. discounts for lack of busimarketabilityness v isalu withati theon use tr eatisof closelyes -hehaldve companies document that underwent checklists an initial that public can offeringbe used (IPO) to of itsas stock.sist in In thesethe instances,TO SAVE SPACE,the value THE of the DISCUSSION closely-held ABOUTstock is THEmeasured STUDIES before HAS and BEEN after ELIMINATEDthe company went public. gathering of the required information to perform a proper valuation. In the Practitioners TOOTHER SAVE CONSIDERATIONS SPACE, THE DISCUSSION ABOUT THE STUDIES HAS BEEN ELIMINATED Publishing Company (PPC) Guide to Business Valuations, Third Edition, May 1993, the OTHERAnother considerationCONSIDERATIONS in determining a discount for lack of marketability is the cost of flotation of a public offering. These authorcosts ares generally state: significant and will frequently include payments to attorneys, accountants, and investment bankers. TheAnother costs consideration associated within determining smaller offerings a discount can forbe lackas much of marketability as 25 to 30 is percent the cost of of a flotation small company of a public=s offering.equity. These costs are generally significant and will frequently include payments to attorneys, accountants, and investment bankers. TheCONCLUSION costs associated with smaller offerings can be as much as 25 to 30 percent of a small company=s equity. 115.14 Collect Data Appropriate for the Valuation Methods Used. In CONCLUSIONAs far back as 1977, through Revenue Ruling 77-287, the Internal Revenue Service recognized the effectiveness of restrictedor stockder study to est dataabl inis providingh a valu usefule for information a company for the, a quantification consultant of mus discountst gener for lackall yof gmarketability.ather The AsBaird far and backa Willamette gr aseat 1977, dea studiesthroughl of infof Revenue transactionsormation Ruling ainbou closely77-287,t the-held the comp stocksInternalany, did Revenue not its exist industry, Service at that recognizedtime, the but econ the the omIRS effectiveness yand in the courts of restrihave ctedbeenw stock hicreceptiveh study the to dataco usingmpany in providing this data oper usefulto assistate informations, in and quantifying ot forher the discountsco quantificationmpara forti lackv ofe discountscofompani marketability. fores. lack Iofn marketability. order The Baird and Willamette studies of transactions in closely-held stocks did not exist at that time, but the IRS and the courts have beento r eceptivebe useful, to using the this informati data to assiston min uquantifyingst be timely discounts, ac curfor lackate, of andmarketability. comparable to similar companies against which comparisons will be made. This information is usually gathered during the early stages of field work.

115.15 The specific types of information needed will vary from engagement 18 to engagemenRevenue Rulingt and 77 -287are (1977 prima-2 C.B.rily 319), base Sectiond on I. the valuation methods that are app18 ropriate for a particular project. The data gathering process usually Revenue Ruling 77-287 (1977-2 C.B. 319), Section I. Page30 Page30 The IPO studies are proof that larger discounts can be -justified 31 - than those quoted from the restricted stock studies. One of the best explanations of why a DLOM varies from case to case was included in an article published by Robert E. Moroney entitled AWhy 25% Discount for Nonmarketability in One Valuation, 100% in Another?@19 In Moroney=s article, The IPO studiesinvolv esare proofan that anal largerysis discounts of his cantor icbeal justified financi thanal those infor quotedmati fromon, the inter restrictedview sstock wit studies.h One he points out 11 different factors that should be considered in the application of a DLOM. These factors are as follows: of the bestcom explanationspany man of agemwhy a DLOMent, and varies ex fromtensiv casee reseato caserch was on included compara in antiv articlee com publishedpanies, by Robert E. Moroney entitled AWhy 25% Discount for Nonmarketability in One Valuation, 100% in Another?@19 In Moroney=s article, 1. High dividend yield: Companies that pay dividends tend to be more marketable than companies that do not. he pointsecono out 11 differentmic and factors indust thatry should trends, be considered and mark in theet prapplicationice data. of a Fi DLOM.nanci Theseal infor factorsmati areon as follows: 2. Brightmust growth often prospects: be ad Companiesjusted a thatnd analhave ybrightzed growthbefor prospectse it can arebe easierused to in sell the than valu comatipanieson that do not. This makes them more marketable. 1. High dividend yield: Companies that pay dividends tend to be more marketable than companies that do not. 3. Swingproce value:ss. If a blockComp of stockrehe hasnsive swing data value, gathe it mayring be more checklists marketable an thand question the typicalnaires small block are of 2. Bright growth prospects: Companies that have bright growth prospects are easier to sell than companies stock. This swing value could include a premium. This can be emphasized where a 2 percent interest that prdo esentnot. Thised makes in the them Pract moreic emarketable. Aids sections in Volume 2 of the Guide. exists with two 49 percent interests. The 2 percent interest can be worth quite a bit to either 49 percent 3. Swing value: If a block of stock has swing value, it may be more marketable than the typical small block of interest if it will give that interest control of the company. stock. This swing value could include a premium. This can be emphasized where a 2 percent interest 4. Restrictions on transfer: Restrictions on transfer make the stock less marketable due to the difficulty in In adexistsdit ionwith two to col49 percentlecting interests. the appr Theopr 2 percentiate dat interesta, t hecan be aut worthhor squite of a the bit to G eitheruide 49 t opercent Busin ess selling them. interest if it will give that interest control of the company. 5. Buy-sell agreements: Buy-sell agreements can go either way. The agreement can create a market for the Val4. uatiRestrictionsons al soon transfer:advise Restrictions the reader on to:transfer make the stock less marketable due to the difficulty in stock, making it more marketable, or the agreement can restrict the sale making it less marketable. selling them. 6. Stock=s quality grade: The better the quality of the stock, the more marketable it will be. This can be 5. Buy-sell agreements: Buy-sell agreements can go either way. The agreement can create a market for the evidenced by comparing the subject company to others for supporting strengths and weaknesses. stock, making it more marketable, or the agreement can restrict the sale making it less marketable. 7. Controlling shareholder=s honesty: The integrity of the controlling shareholder can make a big difference 6. Stock1=1s 5qu.1ality9 Do grade:cum Theent better All theWor qualityk Per of theforme stock,d theand more C onmarketableclusio nsit will Rea be. ched This can. Abe regarding the ability to sell a partial interest in a company. If the controlling shareholder tends to deal with evidenced by comparing the subject company to others for supporting strengths and weaknesses. the othercons shareholdersultant sh honestly,ould pr theepar othere interests a set in ofthat wcompanyorkpape tendrs to forbe more each marketable. valuation 7. Controlling shareholder=s honesty: The integrity of the controlling shareholder can make a big difference 8. Controlling shareholder=s friendliness: Similar to the shareholder=s honesty, the manner in which he or she regardingengagem the abilityent to. sell Th ae partial workpa interestpers in asho company.uld includ If the econtrolling not only shareholder the comp tendsleted to deal work with deals with others can make the stock more marketable. the otherprog shareholdersrams, but ahonestly,lso all thedata, other ca interestslculati ons,in that and company key tendassumpti to be moreons marketable. made by the 9. Prospects for the corporation: If a corporation has good prospects for the future, it will generally be more 8. Controlling shareholder=s friendliness: Similar to the shareholder=s honesty, the manner in which he or she marketable.engagement team, as well as all conclusions reached. deals with others can make the stock more marketable. 10. Prospects for the industry: A company that is in an industry with good prospects will also generally be more 9. Prospects for the corporation: If a corporation has good prospects for the future, it will generally be more marketable. marketable. 11. Mood of the investing public: When the investing public is bullish, they are more readily willing to make an T10.hisProspects publication for the was industry: the A on companyly treatise that is thin anat industryMr. Jones with good was prospects sure that will halsoe ha generallyd in T be&A’s more library investment. This can increase the marketability. at themarketable. time the valuation was performed. In fact, Mr. Jones used the report checklist from 11. Mood of the investing public: When the investing public is bullish, they are more readily willing to make an In this assignment, we are appraising a minority interest that has no control in Jones. Most of the marketability studies investment. This can increase the marketability. thidiscusseds publ haveicati supportedon, but nodiscounts othe rsof .25 W to e45 w percent.ill discus Theses t hestudies repor relatet c toheck minorilistty interestslater in in thi companiess repor thatt. are either public, with restrictions under Rule 144, or private, but about to go public. Therefore, an argument can easily be In this assignment, we are appraising a minority interest that has no control in Jones. Most of the marketability studies made to support a higher discount for an interest in a closely-held limited liability company that is not going public. discussed have supported discounts of 25 to 45 percent. These studies relate to minority interests in companies that are either public, with restrictions under Rule 144, or private, but about to go public. Therefore, an argument can easily be TATo derive 161 a DLOM for Jones, we considered the following factors: made to support a higher discount for an interest in a closely-held limited liability company that is not going public. Dividend Yield: The Agreement leaves the decision regarding the payment of distributions in the control of the To derive a DLOM for Jones, we considered the following factors: Management Committee. At the current time, The LLC has earnings; an approximate 4 percent return on its net asset Thevalue. nar However,rative the repor Managementt is appr Committeeoximately is 11currently pag esreinvesting beginn alling of theat TAearnings 161. in Besadditionalides assets.the fact Although that Dividend Yield: The Agreement leaves the decision regarding the payment of distributions in the control of the this could possibly increase the value of the portfolio, it does not provide a dividend yield to an investor. Management Committee. At the current time, The LLC has earnings; an approximate 4 percent return on its net asset theGrowthre isProspects little subst: The ancestock market in the was narrative, strengthening there at isthe no valuation conn ectiondate. However, between due thto erising narrativ intereste rates,repo rtthe value. However, the Management Committee is currently reinvesting all of the earnings in additional assets. Although value of the bonds will decrease. With bonds making up the vast majority of the portfolio, the growth prospects for Jones this could possibly increase the value of the portfolio, it does not provide a dividend yield to an investor. andare not the considered sched tou lebes strong. that are attached to it. The report lacks explanation, analysis, Growth Prospects: The stock market was strengthening at the valuation date. However, due to rising interest rates, the Degree of Control: All of The LLC=s operations are controlled by the Management Committee. In addition, the interest value of the bonds will decrease. With bonds making up the vast majority of the portfolio, the growth prospects for Jones rebeingferenc appraisedes and is an alassigneemost interest.anythi ng The el interestse that being w appraisedould per hasmit no the control. reader to gain a proper are not considered to be strong. Restrictions on Transfer: The restrictions on transfer of membership interests have been reviewed earlier. These Degree of Control: All of The LLC=s operations are controlled by the Management Committee. In addition, the interest underprovisionssta havending the ofeffect the of b limitingasis ftheor marketplacethe apprais forer these’s v aluinterests.ation. Furthermore, there is a lack of being appraised is an assignee interest. The interest being appraised has no control. Buy-Sell Agreements: There are no buy-sell agreements with respect to this interest. Restrictions on Transfer: The restrictions on transfer of membership interests have been reviewed earlier. These disStockcus Qualitysion Grade of key: If this as interestsumpti wasons publicly and traded, expla itsnati portfolioons, would and be asconsidered such, ofth averageis repor qualityt c dueannot to its provisions have the effect of limiting the marketplace for these interests. diversification. Buy-Sell Agreements: There are no buy-sell agreements with respect to this interest. reControllingplicate dShareholder. The na rrHonestyative :a Thislso isis not co consideredntradicto tory beth anro uissuegho inu tthis, wh appraisal.ich will be pointed out as we Stock Quality Grade: If this interest was publicly traded, its portfolio would be considered of average quality due to its Prospects for The Company: The LLC is expected to exist into perpetuity and its assets are expected to grow, although diversification. prtheoceed rate of .growth is unknown and could be cyclical. Therefore, if management decides to begin selling assets, the Controlling Shareholder Honesty: This is not considered to be an issue in this appraisal. timing of the sales could be crucial. Prospects for The Company: The LLC is expected to exist into perpetuity and its assets are expected to grow, although the rate of growth is unknown and could be cyclical. Therefore, if management decides to begin selling assets, the Thetiming fir ofst the par salesag racouldph bone crucial. this page is incorrect. The valuation that was done as of November 19 30, 1993, wasTaxes to assi, Mayst 1977 manag. ement in determining, as part of the implementation of an

19 Taxes, May 1977. Page31

Page31 - 32 - Prospects for the Industry: The market where the various assets trade are relatively steady, although uncertain. Mood of the Investing Public: According to reports, the investing public expects the U.S. and global economies to ESOPcontinueProspects, tohow for expan the mu d.Industrych This ABC expansion: The and market the will where ESOPhelp increase the shou various bondld assets consu issuance trademm volume areate relatively transact in some steady, sectors,ions although f whileor w iththe uncertain. Mr.anticipation Morris of higherMood ofinterest the Investing rates will Public hurt volume: According in other to reports,parts of the market;investing the public municipal expects bond the market U.S. andbeing global one ofeconomies them. to andcontinue for tonew expanly d.iss Thisued expansion shares. will T&A help increase states :bond issuance volume in some sectors, while the anticipation of Inhigher addition interest to the rates factors will hurt above, volume a buy iner other of an parts interest of the in market; Jones wouldthe municipal obtain an bond assignee market interest, being one rather of them. than a full membership interest. This might make it more difficult for a willing seller to find a willing buyer. In addition to the factors above, a buyer of an interest in Jones would obtain an assignee interest, rather than a full Themembership seller,The on interest. purthe otherpose This hand, of might this might make st reduceudy it more w hisas difficultasking to arr forpriceiv ae willinginat order a vseller aluto obtain eto tofind beimmediate a willing used buyer. liquidity.by the ESOPThe LLC does not have a fixedtrust terminationees for orthe liquidation establ date,ishment and has of not the made ABC distributions. Jail Compan Althoughy a, memberInc. E canmp transferloyee his or her The seller, on the other hand, might reduce his asking price in order to obtain immediate liquidity. The LLC does not interest, Stoca memberk Ow cannotnershi requirep Pl an,The wLLCher toeby purchase immediat his or herely interest. follow ingThis the results acqinuis ownershipition of of the an asset that provideshave a fixed no currenttermination liquidity or liquidation and no definitive date, and future has liquidity. not made Therefore, distributions. a member Although might a member negotiate can a lowertransfer selling his or price her tointerest, provide stock,a himmember or herself th cannote ESO with require liquidity.P w Theould LLC o town purchase more his than or her ainterest. f ifty Thisperce resultsnt in inte ownershiprest of of an all asset that providesout no currentstanding liquidity corporat and no definitivee stock. future liquidity. Therefore, a member might negotiate a lower selling price Basedto provide on thehim facts or herself and circumstances, with liquidity. a DLOM of 30 percent was deemed appropriate for this assignment. Based on the facts and circumstances, a DLOM of 30 percent was deemed appropriate for this assignment. SiExamplence the 5 – EPremiumsSOP di dand no Discountst exist a t– NRealove Estatember 30, 1993, it would have been more accurate Note: Only those sections that are different from the section shown above are included here toExample state that5 – Premiums the purpose and Discounts of the v alu– Realati onEstate was to assist the ESOP trustees, once the ESOP Note: Only those sections that are differentPREMIUMS from the section AND shown DISCOUNTS above are included here was formed, in establishing the adequate consideration that must be paid by the ABC CONTROL PREMIUMPREMIUMS / LACK AND OFDISCOUNTS CONTROL DISCOUNT ESOP for the shares in CONTROLABC as ofPREMIUM the tran / LACKsaction OF dateCONTROL. It shou DISCOUNTld also have stated that this reThepor nett mayasset valuehave of to The be LLC upda wasted used to to g determineet closer the to control the avaluectual of trtheansac entire tientity.on dat However,e. to realize this value, an investor would need to be able to gain access to, and liquidate, the underlying assets of The LLC. If members Thewere net afforded asset thisvalue level of The of control, LLC was member used tointerests determine might the well control be worth value a ofpro the rata entire share entity. of The However, LLC=s net to asset realize value. this However,value, an investorthis is not would the caseneed into thisbe able valuation. to gain access to, and liquidate, the underlying assets of The LLC. If members = Atwere the afforded bottom this oflevel this of control,page, member T&A ref interestserences might Revenue well be worth Ruling a pro rata 59-6 share0 an of Thed indica LLC s tesnet assetthat value.this TheHowever, Agreement this is specifically not the case vests in this all decisionvaluation. making solely in the manager. The basis for lack of control adjustments for limited liability company member interests arise from a range of factors, which include: RevenueThe Agreement Ruling specifically “sets vests forth all decisionin som makinge detail solely the in thefollowi manager.ng fa Thectors basis (not for lack all of i nclusive),control adjustments which for generallylimited liabilityMembers are company begenerallylie memberve dcannot to interests becontrol fund arise theam dayfroment-to a- aldayrange enomanagement ofugh factors, to which or the operation include:valua oftion The LLC. of a closely held  Members generally cannot control the amount or timing of income distributions to other members.   Members dogenerally not have cannot specific control claims the on day the-to underlying-day management assets of orThe operation LLC, and of they The usually LLC. cannot compel the cor porateMe mbersstoc kgenerally that a cannotnalysi controls of each the amount is req or uirtiminged.” of incomeThe r distributionseport then to protheroceed members.s to list ten dissolution of a limited liability company or the liquidation of its underlying assets. In this case, The LLC has a  factors.Memberstermination Howev doer, date not the haveof Decemberse specific ten f acto claims31, 2026,rs on do the slightly not underlying allmore come than assets 20 from ofyears The Revenu LLC,from theand valuation ethey Ruling usually date. 59-60. cannot compel In Mr the.  Itdissolution is usually ofvery a limited difficult liability for members company to orremove the liquidation management. of its underlying assets. In this case, The LLC has a  Ittermination is usually datevery difficultof December for members 31, 2026, to amendslightly amore limited than liability 20 years company from the agreement. valuation date. Jones ’ deposIt is usuallyition very, he difficult was for ask membersed the to fol removelowing management. (January 24, 2004, beginning at page 82,  liThene net14) assetIt: is usually value method very difficult develops for members a freely traded, to amend control a limited value liability of The LLCcompany=s net agreement.assets of $4,870,962 as of August 28, 2006, and therefore does not provide a meaningful indication of value for a minority interest in The LLC. A discount = forThe lack net ofasset control value is methodappropriate develops here becausea freely traded, an interest control in Thevalue LLC of The represents LLC s net an assets indirect of ownership$4,870,962 interest as of August in the underlying28, 2006, and assets therefore held by does The not LLC. provide a meaningful indication of value for a minority interest in The LLC. A discount for lack ofQ. controlAnd is appropriate you’ve heregot tbecauseen items an attrinterestibu tedin The to LLCRev representsenue Ruli anng indirect 59-60, ownership corre ct?interest in the Oneunderlying approach assets to determining held by The an LLC. appropriate discount for lack of control is to compare the interest under appraisal to published control premium studies. This can be accomplished using publications such as Mergerstat Review, cited previously.One approachA. to Tdetermininghere’s ten an appropriateitems listed discount there, for lackyes. of control is to compare the interest under appraisal to published control premium studies. This can be accomplished using publications such as Mergerstat Review, cited previously. Another Q.method ofAnd estimating my question the appropriate is, w herediscount do for y oulack g ofet control this ninthfor RealCo and is tent to attempth item to if draw it's a parallel between The LLC=s portfolio and closed-end funds (CEFs). Hundreds of closed-end funds are available for numerous Anotherspecialized method investment ofnot estimating i noptions. Rev theenue Prices appropriate R paiduling for discount 59- publicly60? for-traded lack ofshares control in fora CEF RealCo represent is to attemptminority to interests draw a parallelin fully = betweenmarketable The securities. LLC s portfolio Therefore, and closed if the net-end asset funds value (CEFs). of a CEF Hundreds can be of determined closed-end and funds compared are available with the for freely numerous-traded specialized investment options. Prices paid for publicly-traded shares in a CEF represent minority interests in fully price of theA. fund, itW canell be, f rodeterminedm -- pro whenbab andly f rounderm o whatthe rconditions materia thels marketthat we affords con as iddiscounter wh (oren p remium)we to the marketablenet asset value securities. of a minority Therefore, interest. if the net asset value of a CEF can be determined and compared with the freely-traded price of the fund, itev canalua be determinedte a company when and bec underause what I conditionsthink those the market are - affords- thes ae discount are rele (or vpantremium) to the Unlikenet asset open value-end of mutualfacts. a minority funds, 59- interest. 60CEFs is issue-- Rev a fixedenu numbere Rulin of gshares. 59-60 Therefore, is a guid investorseline muststipul buyated shares by from other investors, not the thefund Iitself.RS. These CEFs mirror the motivations of buyers and sellers, and offer empirical evidence for determinationUnlike open-end of themutual appropriate funds, CEFs magnitude issue a of fixed the numberminority ofinterest shares. discount Therefore, to be investors applied. must buy shares from other investors, not the fund itself. These CEFs mirror the motivations of buyers and sellers, and offer empirical evidence for determination of the appropriate magnitude of the minority interest discount to be applied. Page32 Page32 - 33 -

We locatedQ. closedI- endagree. funds inI 'them jAugustust as 28,ki ng2006 y ouissue w ofhe Barronre you=s. Although got the these investments other tw oin potheseints, funds are not identical to the investmentsitem 9 andowned 1 by0, RealCo,since iandt's thenot CEFs in Revenue are considerably Ruling larger 59-6 and0. more Can diversified you tell than RealCo, the discounts from net asset value can serve as a proxy for a discount for lack of control for RealCo as these funds are in a similar industry asmeRealCo, what and auth theoritative investors insource these funds you have used similar for reductionsthose tw regardingo items? access to the funds as investors in The LLC have. A. Off the top of my head, I'm not -- I don't recall an authoritative source The data located insu Barronsch as isan as IRSof August Reven 25, u2006,e Ru andlin g.is presented in Table 5: TABLE 5 Q. Well, give me any authoREALritativ ESTATEe sou FUNDSrce --. 52 week A. Well, the --. Market Market NAV Price Prem/Disc Return

AEWQ. Real DoeEst Incsn’ (RIF)t have to be IRS. 24.03 20.55 -14.5 22.1 AIM Sel Real Est (RRE) 18.94 18.03 -4.8 34.0 CohenStrsAdvIncRltyA. -- the jud (RLF)gment of the -- the valu25.35ator when24.68 performing-2.6 a valuation32.6 CohenStrsPremIncRealanalysis. (RPF) 26.29 24.34 -7.4 33.5 Cohen&SteersQualInc (RQI) 24.56 23.08 -6.0 31.8 CohenStrsREITPref (RNP) 30.72 28.78 -6.3 25.0 OnceCohenStrsREITUtls again, despite M(RTU)r. Jones’ claim of having 23.49substantial20.04 experience,-14.7 he was unfamili15.1 ar ChnStrWldWRltyInc (RWF) 21.87 22.51 2.9 22.2 with RevenueDiv Cap Rlty Ruling Inc All (DCA)59-60, which is a cornersto14.50ne ruling 13.88in the profession-4.3 . It is the9.8 most widelyDWS cited RREEF revenue Real Estate ruling (SRQ) by business apprais27.25ers, and 23.45possibly the-13.9 most wide25.5ly cited DWSRREEF (SRO) 20.80 17.76 -14.6 24.0 documeINGnt ClrnGlbRlEst in business (IGR) valuation-a . What makes20.70 these respon19.40ses even-6.3 worse is40.8 that Mr. ING ClrnRlEst (IIA)-a 20.25 18.07 -10.8 30.9 Jones did not know where he took the ninth and tenth factors from. To give the response NubrgrRlEstSec (NRO) 19.36 16.43 -15.1 25.7 that itNeubrgrBrmREI was the judg (NRL)ement of the valuator, furt29.47her suppor25.62ts the - l13.1ack of professi27.3 onal Neuberger Realty Inc (NRI) 25.17 21.38 -15.1 26.9 competNuvence Real appEst (JRS)lied in this assignment. The depo24.48sition was24.93 approximate1.8 ly 11 years40.0 later, and heReal still Estate did notInc (RIT) know, without additional promp23.39ting in subse20.15quent -question13.9 s, tha18.7t these ReavesUtilityIncome (UTG) 24.39 21.20 -13.1 9.3 two addRMRitiona FIREl Fundfacto (RFR)rs came from the Department22.53 of Labor 20.30Regulations-9.9 relating to 7.5ESOPs. RMR HospRlEstFd (RHR) 23.93 20.70 -13.5 15.9 T&A heRMRRealEstateld itself out Fdas (RMR) having substantial experience17.71 in ES15.30OP valuation-13.6s. Throughou19.5 t Mr.

JonesMean’ deposition, he kept referring to the subjective judgment - o9.5f the appraiser to compenMediansate for his lack of documentation or knowledge of the appraisal-12.0 literature. This Source: AClosed-End Funds@ (Barrons, August 28, 2006): M52. Anotherwas one source mor ofe discount instance information where located this took is real pla estatece. limited partnerships that trade in the secondary market. The real estate partnerships analyzed were compiled by Partnership Profiles, Inc. We started our search by looking for those partnerships that were classified as retail and had not announced liquidation plans. We did not utilize partnerships thatTA had163 announced plans for liquidation because RealCo is planning on a long-term existence and therefore would not be similar to partnerships that had announced their intentions to liquidate. Ten partnerships were located that matched this criteria. Of these, three did not include pricing information. The details of the remaining partnerships located appear in Table 6. At the top of this page, the T&A report states:

Page33 - 34 -

We have relied heavily in our valuationTABLE upon 6 known operating results and the Number Types financial condition of AofBC forPrice the to prior five fiscal years. Addofitionally, we have Partnershipanalyz eNamed projectionPropertiess as prepNAVared byTotal m NavanageRevenuement forProperties future Borr/NAVyears. Yield/NAV W e Yield/Price Angeles Income Properties II 5 0.695 : 1 $ 15,796,805 $ 5,220,000 MF, R 146.20% 0.00% 0.00% Angeles Opportunitybelie Propertiesve that this is the5 mos0.676t sa t: i1sfacto1,838,900ry method1,593,000 of valuC,i MF,ng Rthe260.20% stock of0.00% a 0.00% Corporate Propertyclosely Associates held 12 corporation40 such0.853 as : 1ABC.407,789,465 50,642,000 C, R 46.20% 6.20% 7.30% Rancon Realty Fund IV 12 0.711 : 1 58,555,492 7,544,000 C, R, Land 41.00% 3.00% 4.30% Rancon Realty Fund V 9 0.870 : 1 69,719,100 10,415,000 C, R, Land 54.10% 3.20% 3.70% Resources Accrued Mortgage Investors 2 1 0.676 : 1 25,763,695 3,090,000 R 0.00% 0.00% 0.00% WellsHow Realev Estateer, Fund T&A VIII -Aultimately used7 valu0.806ation : 1 metho20,739,333ds in its fin1,064,000al analC,ysi R s that0.00% are incons5.20%istent6.40% MF = Multi-Family. C =w Commercialith this (OfficestatementBuildings, Industrial. This Warehouses, will be poiResearchnted and out Development as we Facilities, review Business the Parks).schedules at the back of its R = Retail. Landre =por Undevelopedt. Land.

Beginning on this page, the T&A report begins to address the 10 items from Revenue Ruling 59-60 and the Department of Labor Regulations. Each of these sections is woefully inadequate to accomplish its intended purpose. In the History and Nature of the Business section there is very little information to allow a reader to truly understand the history and nature of ABC. In fact, this entire narrative section only takes up one half of one page. The valuation report omits important items such as the legal form of the entity, the state of incorporation, information about company management, competition, information about key employees, sensitivity to seasonal or cyclical factors, and strengths and weaknesses.

Page34 The small amount of information that is included in the report includes the ownership of the corporation including the proposed transaction, which as of November 30, 1993 should not be considered in the valuation of ABC. The process of valuing ABC was to determine what the value should be for a transaction. Including information about the transaction makes this valuation hypothetical. Hypothetical valuations are defined as those that are contrary to fact. There is nothing in the Department of Labor Regulations that permits hypothetical appraisals to be performed for an actual ESOP transaction. This is one more instance where T&A mixes up its assignments. Either this report is for planning purposes to demonstrate what would happen after the ESOP transaction takes place, or it is a valuation of ABC stock for the purpose of meeting the adequate consideration requirements in an actual transaction. The same report cannot be used for both purposes. - 35 -

NotBased onl ony thesh ouldatad inthe Table histo 6, rythe andaverage natur ande medianof the pricebusi nessto net seassetcti onvalues of thewere r epor75.5 andt pr 71.1ovide perce thent, respectively. This equates to average and median discounts from net asset value of 24.5 and 28.9 percent, respectively. reader with an explanation of information about the company, but some of the items Of the partnerships reporting pricing information, most of them have debt, and four of them pay distributions. discussed in this section should ultimately be used by the appraiser to support some of the Since many of the partnerships are categorized as both retail and commercial, the valuation analyst ran a search for subjecommercialctive properties. judgment The search that elocatednters 20 into partnerships; the valu fiveati ofon them pr didoces not s.include F orpricing ex information,ample, in and the one reported negative revenues. These were eliminated from our analysis. The remaining partnership data is reflected in devTableelo 7. pment of the discount rate, the lack of depth of management, or having inadequate management, would be a risk factor that should be considered. Since there is no information in this section to discuss the strengths and weaknesses of management, it would be impossible for the appraiser to support any adjustment to a discount rate relating to this item. Later in the report, T&A assigns a significant risk factor to the continuity of management, which is totally unsupported.

Revenue Ruling 59-60 in Section 4, Paragraph .02 states the following:

The history of a corporate enterprise will show its past stability or instability, its growth or lack of growth, the diversity or lack of diversity of its operations, and other facts needed to form an opinion of the degree of risk involved in the business. For an enterprise which changed its form of organization but carried on the same or closely similar operations of its predecessor, the history of the former enterprise should be considered. The detail to be considered should increase with approach to the required date of appraisal, since recent events are of greatest help in predicting the future; but a study of gross and net income, and of dividends covering a long prior period, is highly desirable. The history to be studied should include, but need not be limited to, the nature of the business, its products or services, its operating and investment assets, capital structure, plant facilities, sales records and management, all of which should be considered as of the date of the appraisal, with due regard for recent significant changes. Events of the past that are unlikely to recur in the future should be discounted, since value has a close relation to future expectancy. (Emphasis added).

TA 164

The next section addressed in the T&A report is the Economic and Industry Outlook. Once again, this section lacks substance. Furthermore, it is irrelevant to ABC. There are three paragraphs regarding the economy dealing with slow economic growth, deficit reduction

Page35 - 36 -

and health care legislation. There is alsoTABLE no 7mention about consumer and business Number Types of of confidenPartnershipce and Name speculation aboPropertiesut interePrice tost NAV rates,Total but Nav noneRevenue of thisProperties is discussedBorr/NAV wiYield/NAth respeYield/Pricect Angelesto A OpportunityBC or us Propertiesers of its services. 5 0.676 : 1 $ 1,838,900 $ 1,593,000 C,MF,R 260.20% 0.00% 0.00% Consolidated Capital Institutional Properties 1 13 0.887 : 1 67,675,300 23,117,000 C, MF 95.70% 0.00% 0.00% Consolidated Capital Institutional Properties 3 8 0.514 : 1 27,578,376 12,410,000 C,MF 192.90% 0.00% 0.00% Corporate Property Associates 12 40 0.853 : 1 407,789,465 50,642,000 C,R 46.20% 6.20% 7.30% Corporate Realty Income Fund I 8 0.476 : 1 60,147,985 8,133,000 C 50.70% 0.00% 0.00% HCWThe Pension ind ustryReal Estate dat Funda consists LP of two para2 0.541graph : 1 s, but8,853,672 also lacks2,286,000 sufficientC,MF informa54.20%tion toNSD assist NSD Rancon Realty Fund IV 12 0.711 : 1 58,555,492 7,544,000 C,R,Land 41.00% 3.00% 4.30% Rancon Realty Fund V 9 0.870 : 1 69,719,100 10,415,000 C,R,Land 54.10% 3.20% 3.70% Wellsan Real appr Estateais Funder IXin- Adetermining a prospec9 0.808tive :gr 1 owth19,834,116 rate or indust1,079,000ry risCk. Here0.00% also, by6.00% taking7.40% Wells Real Estate Fund VIII-A 7 0.806 : 1 20,739,333 1,064,000 C,R 0.00% 5.20% 6.40% Wellsa s Realhor Estatetcut Fund app X ro- Bach to performing7 the0.811 valu : 1ation, 1,562,945T&A missed592,000 the intentC of Rev0.00%enue0.00% Ruling0.00% Wells Real Estate Fund X-A 7 0.803 : 1 11,131,903 592,000 C 0.00% 4.80% 6.00% Wells59- Real60, Estate when Fund XIIit -sCPtates in Section 4,7 Par0.874ag ra: 1 ph .018,392,2752: 1,276,000 C 0.00% 6.50% 7.50% Wells Real Estate Investment Trust 114 0.877 : 1 4,045,312,924 593,963,000 C 29.70% 6.70% 7.70%

C = Commercial (Office Buildings, Industrial Warehouses, Research and Development Facilities, Business Parks). R = Retail. Land – UndevelopedA sound Land. appraisal of a closely held stock must consider current and MF = Multi Family.prospective economic conditions as of the date of appraisal, both in the national economy and in the industry or industries with which the corporation is allied. It is important to know that the company is more or less successful than its competitors in the same industry, or that it is maintaining a stable position with respect to competitors. Equal or even greater significance may attach to the ability of the industry with which the company is allied to compete with other industries. Prospective competition which has not been a factor in prior years should be given careful attention. For example, high profits due to the novelty of its product and the lack of competition often lead to increasing competition. The public’s appraisal of the future prospects of competitive industries or of competitors within an industry may be indicated by price trends in the markets for commodities and forPage securities.36 The loss of the manager of a so-called “one-man” business may have a depressing effect upon the value of the stock of such business, particularly if there is a lack of trained personnel capable of succeeding to the management of the enterprise. In valuing the stock of this type of business, therefore, the effect of the loss of the manager on the future expectancy of the business, and the absence of management-succession potentialities are pertinent factors to be taken into consideration. On the other hand, there may be factors which offset, in whole or in part, the loss of the manager’s services. For instance, the nature of the business and of its assets may be such that they will not be impaired by the loss of the manger. Furthermore, the loss may be adequately covered by life insurance, or competent management might be employed on the basis of the consideration paid for the former manager’s services. These, or other offsetting factors, if found to exist, should be carefully weighed against the loss of the manager’s services in valuing the stock of the enterprise. The average and median price to net asset values are 75.2- 37 and - 80.7 percent, respectively. This equates to average and The average and median price to net asset values are 75.2 and 80.7 percent, respectively. This equates to average and medianThe average discounts and median of 24.8 price and 19.3to net percent, asset values respectively. are 75.2 and 80.7 percent, respectively. This equates to average and medianThe average discounts and median of 24.8 price and 19.3to net percent, asset values respectively. are 75.2 and 80.7 percent, respectively. This equates to average and medianTheDur averageing discounts Mr. and Jones median of 24.8’ depos price and 19.3toit ionnet percent, asset, he w values asrespectively. q uestare 75.2ion anded 80.7about percent, infor respectively.mation that This he equates says htoe av leareragened and medianPartnership discounts Profiles of has 24.8 been and reporting19.3 percent, data regardingrespectively. sales of units of real estate partnerships in the secondary market Partnership Profiles has been reporting data regarding sales of units of real estate partnerships in20 the secondary market Partnershipsinceduring 1990. hi Profiless A summary mana hasg beenement of price reporting- to in-valuete rviewdata discounts regarding, in parreported salesticul of inar units its aboutannual of real studiesestate the company partnerships is as follows:’s in 20 exthepansi secondaryon market into sincePartnership 1990. Profiles A summary has been of price reporting-to-value data discounts regarding reported sales of in units its annual of real studiesestate partnerships is as follows: in20 the secondary market sincePartnership 1990. Profiles A summary has been of price reporting-to-value data discounts regarding reported sales of in units its annual of real studiesestate partnerships is as follows: in20 the secondary market sinceproject 1990.s in A Australia summary of an priced England-to-value discounts. Since reported Mr. Jo innes its annual describe studiesd ABC is as follows:as an20 industry leader, 1993 46% 1993 46% questions were asked regarding its ran19931994king in terms o48%46%f other private prison companies. To 19931994 48%46% 19941995 48%41% this, he responded (January 24, Page19941995 90, line 5): 48%41% 19951996 41%38% 19951996 41%38% 19961997 38%30% 19961997 38%30% 19971998 30%29% A. I don’t recall us having19971998 a ranking of one,30%29% two, three, four. 19981999 29%27% 19981999 29%27% 19992000 27%25% 19992000 27%25% When he was asked to produce his 20002001workpapers that25%28% support the management interview, 20002001 25%28% 20012002 28%22% his answer was (January 24, Page 90,20012002 line 5): 28%22% 20022003 22%21% 20022003 22%21% 20032004 21%23% 20032004 21%23% 20042005 23%28% A. Well, I’m not -- I do20042005n’t have notes 23%28%from that discussion when 20052006 28%29% management said that 20052006their -- they were28%29% a leader, but I think the other information contained 2006in our file infers29% that they are in a leadership This data includes all categories of partnerships.2006 In discussing the discounts,29% Partnership Profiles states the following: This data includesposi all categoriestion in theof partnerships. industry. In discussing the discounts, Partnership Profiles states the following: This data includes all categories of partnerships. In discussing the discounts, Partnership Profiles states the following: This dataThe includes overall all decline categories in price of partnerships.-to-value discounts In discussing since 1994the discounts,is primarily Partnership the result of Profiles secondary states market the following: The overall decline in price-to-value discounts since 1994 is primarily the result of secondary market Thebuyers overall shortening decline thein price holding-to-value period discounts expectations since in1994 their is pricingprimarily models. the result In of1993 secondary and 1994, marketfor buyersThe overall shortening decline thein price holding-to-value period discounts expectations since in1994 their is pricingprimarily models. the result In of1993 secondary and 1994, marketfor Once agbuyersTheinstance,a inoverall, shorteningwhe when declinen average M r.thein Joprice holding pricenes-to-- tovalue wperiod-valueas discountsq discountsexpectationsuestion sinceed were in1994in a their hihefty iss pricingprimarilyd 46%eposi and models. tithe 48%,on result abou respectively, In of1993 secondaryt the and ec secondary 1994,onomic marketfor and instance,buyers shortening when average the holding price-to period-value discountsexpectations were in atheir hefty pricing 46% and models. 48%, respectively, In 1993 and secondary 1994, for instance,buyersmarket buyersshortening when ofaverage real the estateholding price -partnershipto period-value discountsexpectations interests were anticipated in atheir hefty pricing 46% it would and models. 48%,be many respectively, In 1993years and before secondary 1994, thesefor marketinstance, buyers when ofaverage real estate price -partnershipto-value discounts interests were anticipated a hefty 46% it would and 48%,be many respectively, years before secondary these industrymarketinstance,programs section buyers whenwould of ofaveragehis liquidate real report, estate price their -partnershiphisto assets,-value answ atdiscounts erswhichinterests w timeere were anticipated t heg aene priceheftyralities- 46%to it- valuewould and tha discount 48%,bet hemany respectively, co and yearsnside any before subsequentred secondary thethese ov erall programsmarket buyers would of liquidate real estate their partnership assets, at whichinterests time anticipated the price-to it- valuewould discount be many and years any before subsequent these programsmarketincrease buyers in would value of liquidate realof the estate program their partnership assets,=s real at estate whichinterests wouldtime anticipated the be price realized-to it- valuewould in the discount beform many of anda years capital any before subsequent gain. these This increaseprograms in would value liquidate of the program their assets,=s real at estate which wouldtime the be price realized-to-value in the discount form of anda capital any subsequent gain. This economyincreaseprogramslong, -butterm in notwouldliquidation value once liquidate of thescenario w programas their h ewasassets, a=s bgenerallyrealle at testate owhich ge eight t wouldtime speci to t hetenbe fic.price realizedyears, -Into -consideringvaluefact, in the discounta formt one thereof and apoi capitalwas anynt no hesubsequent gain. reason ans Thisw ater ed a increaselong-term in liquidation value of thescenario program was=s generallyreal estate eight would to tenbe realizedyears, considering in the form thereof a capitalwas no gain. reason This at increaselongthat -timterme in- liquidationwith value real of estate thescenario program in the was =doldrumss generallyreal estate - to eight wouldbelieve to tenbe that realizedyears, these considering inprograms the form would thereof a capitalwasbe liquidated no gain. reason Thisany at thatlong -timterme - liquidationwith real estate scenario in the was doldrums generally - to eight believe to ten that years, these considering programs wouldthere wasbe liquidated no reason any at questionthatlongsooner. as -timterm fe ollows Indeed,- liquidationwith real (Januabout estate scenario theary in only the24, was doldrumspartnership Pagenerallyge 103, - to eightliquidations believe line to ten 6):that years, occurring these considering programs in 1993 would thereand 1994wasbe liquidated nowere reason forced any at sooner.that time Indeed,- with real about estate the in only the doldrumspartnership - to liquidations believe that occurring these programs in 1993 would and 1994 be liquidated were forced any sooner.thatliquidations time Indeed,- with by debt real about- ladenestate the partnerships in only the doldrumspartnership unable - to liquidations tobelieve hang onthat tooccurring thesetheir properties programs in 1993 until would and the 1994 be real liquidated estatewere forcedsector any liquidationssooner. Indeed, by debt about-laden the partnerships only partnership unable liquidations to hang on tooccurring their properties in 1993 until and the 1994 real estatewere forcedsector liquidationssooner.bounced Indeed,back. by debt about-laden the partnerships only partnership unable liquidations to hang on tooccurring their properties in 1993 until and the 1994 real estatewere forcedsector bouncedliquidations back. by debt-laden partnerships unable to hang on to their properties until the real estate sector bouncedliquidations back. by debt-laden partnerships unable to hang on to their properties until the real estate sector bouncedThisA. long I-back. termthin liquidationk one of scenario the factor begans tothat change, was however, good forin 1995 the and compa 1996 whenny, a realgai estaten, I This long-term liquidation scenario began to change, however, in 1995 and 1996 when real estate Thisfinally long turned-term the liquidation corner whichscenario led began some toof change,the more however, prominent in 1995 sponsors and 1996 of real when estate real limitedestate finallyThis long turnedrecollectio-term the liquidation cornern, w whichscenarioas -- led w erebegan some som toof change,ethe stricter more however, prominent sente inncing 1995 sponsors andguid 1996 ofel inesreal when estate th realat w limitedestateere finallyThispartnersh long turned-ipsterm to the liquidationbegin corner selling whichscenario properties led began some out oftoof their change,the programs,more however, prominent much in 1995to sponsors the anddelight 1996 of of real secondarywhen estate real marketlimitedestate partnershfinally turnedcomips to theing begin corner into selling playwhich properties during led some out this ofof their timethe programs,more period. prominent much Now to sponsors the, w delighthet herof of real secondaryor estatenot that marketlimited’s partnershfinallyinvestors turned ipswho to thehad begin corneracquired selling which interestsproperties led somein out these ofof their partnershipsthe programs,more prominent at much steep to discounts.sponsors the delight of When of real secondary theestate real market limitedestate investorspartnersh ipswho to had begin acquired selling interestsproperties in out these of their partnerships programs, at much steep to discounts. the delight When of secondary the real market estate investorspartnershrecovery re fullyipswholat to kickedhading begin acquiredto inselling theduring interestspropertiese conomy1997 and in out these 1998,i nof gtheir partnershipsener more programs,al, sponsors I caat much steepnmade’t s to discounts.p theeak,the delight move but When ofto I’ secondarybeginm the sur sellingreale market thaestate realt recoveryinvestors fullywho kickedhad acquired in during interests 199721 and in these 1998, partnerships more sponsors at steepmade discounts. the move When to begin the sellingreal estate real recoveryinvestorsestate out ther fullywho of their ekickedhad is partnerships. acquired o inbv duringiou interestssly 199721 some and in these 1998,studi partnerships morees out sponsors ther at steepemade how discounts. the the move econo When to beginmy the sellingrealeff ectestate reals estaterecovery out fully of their kicked partnerships. in during 199721 and 1998, more sponsors made the move to begin selling real estaterecovery out crfully ofime. their kicked partnerships. in during 199721 and 1998, more sponsors made the move to begin selling real The articleestate goes out on ofto theirsay: partnerships.21 The article goes on to say: The article goes on to say: The articleTheQ. goes effect onBu ofto t all say:y outhis dison that,’t ha whatve had an yonce of tbeenhos ean s eighttudiBesten, doyear y anticipatedou, on how holding the periodecon forom realy The effect of all this is that, what had once been an eightBten year anticipated holding period for real estateThe effect partnerships of all this istrading that, whatin the had secondary once been mark an eteight hasB tennow year become anticipated more likeholding a two period-to-five for year real estateThe effect partnershipseff ofect all thiss c isritrading methat, i whatnin ytheour had secondary wonceorkpape been mark anrs eteight, hasdoB tenynowou? year become anticipated more likeholding a two period-to-five for year real outlook.estateThe effect partnerships Given of all thisthe istradinggreater that, what inlikelihood the had secondary once of reaping been mark an capital eteight hasB tengainsnow year become from anticipated partnership more likeholding liquidationsa two period-to-five for in year realthe outlook.estate partnerships Given the tradinggreater inlikelihood the secondary of reaping mark capitalet has gainsnow become from partnership more like liquidationsa two-to-five in year the outlook.relativeestate partnerships near Given term the - astradinggreater opposed inlikelihood the to secondary eight of toreaping ten mark years capitalet hasdown gainsnow the become fromroad partnership- buyersmore like began liquidationsa two paying-to-five higherin year the relativeoutlook. near Given term the - asgreater opposed likelihood to eight of toreaping ten years capital down gains the fromroad partnership- buyers began liquidations paying higherin the relativeoutlook.A. near NotGiven term in the my - asgreater w opposedorkpape likelihood to rseight, ofno. toreaping ten years capital down gains the fromroad partnership- buyers began liquidations paying higherin the relative near term - as opposed to eight to ten years down the road - buyers began paying higher 20 20 AExecutive Summary: 2006 Survey of Partnership Re-Sale Discounts, (Partnership Profiles, Inc. 2006): 2. 20 AExecutive Summary: 2006 Survey of Partnership Re-Sale Discounts, (Partnership Profiles, Inc. 2006): 2. 20 AExecutive Summary: 2006 Survey of Partnership Re-Sale Discounts, (Partnership Profiles, Inc. 2006): 2. Once ag20ain, MAExecutiver. Jones Summary: attempt 2006s toSurvey make of Partnership up for the Re-Sale fact Discounts, that his (Partnership workpape Profiles,rs w Inc.er e2006): defic 2. ient 21 AExecutive Summary: 2006 Survey of Partnership Re-Sale Discounts, (Partnership Profiles, Inc. 2006): 2. 21 Ibid. 21 Ibid. and that21 the T&AIbid. report does not address pertinent data that should have been included 21 Ibid. Ibid.

Page37 Page37 Page37 - 38 - therein.prices When for units he wofas real aske estated partnershipswhether he relativealth ca to renet legisl asset ationvalues. and This def hasicit caused reduction average w ould discounts to decline from a high of 48% in 1994 to roughly half that amount in today=s secondary be positmarket.ive or22 negative factors for ABC’s valuation he responded (January 24, Page 105, lineHowever, 1): an investment in RealCo is much longer because The Agreement states that The LLC cannot be dissolved until December 31, 2026 without the vote of a majority of the members and the approval of the mortgage holder. It is unlikely that the mortgage holder would permit the dissolution of The LLC until the mortgage is paid in full. Currently, there is just under $2 million owed, and principal is only being reduced at a rate of about $20,000 per year. This indicates that it will be some A.time untilGener the mortgageally sp haseaki beenng discharged., I would say that those factors in itself would not necessarily a large impact one way or the other. In summarizing its most recent results, Partnership Profiles states:

Consistent with previous price-to-value discount surveys published by PPI, the programs in this year=s In a dissurveycussi onwere of grouped indust intory plcategoriesayers, the based T&A upon re thepor keyt l isattributests compani that impactes suc howh secondary as Concep marketts, Inc., buyers price these interests. While the overall average discount for all of the programs included in this Esmor,survey Inc., is W29%,ack priceenh-tou-tvalue Cor discountsrections can Cor varypor significantlyation and from Proneis programon Sy toste thems, next dependingLtd. Despi te mentionprimarilying these upon debtcom structurepetitors, and T the&A ability use tod payno cashinforma distributionstion from from operatingthese co cashmp flow.anies’ public filings oTher annual results of r thisepor newts price to -stouppor-value tdiscount its opin surveyions are thr entirelyoughout consistent the withrepor previoust. M surveysr. Jones in was that the two most important factors considered by secondary market buyers when pricing units of real questionestateed aprogrbouamst this that and have responnot announcedded as a definitive follows liquidation (January plan 24, continue Page to be128, (i) the line program 11): =s ability to pay operating cash distributions and recent history of actually paying such distributions and (ii) the degree of debt financing, if any, utilized by the program.

QThe. emphasisOkay. buyers Wha tplace I'm woon nregularderin goperating about iscash wh edistributionsre in you r andwo rkfinancing papers structure, if any, is evidenced by the fact that units of debt-free partnerships paying high distribution yields trade in the secondarydo market you ana at thely lowestze these price -compto-valueanie discsounts, in the while sam none- distributingindustry thatpartnerships you've owning just improvednamed real estate to ladenanal ywithze debtthei typicallyr growth trade rates at the, thei highestr str discounts.engths and While w eaknethe typess ofes real estate ownedof one by a coprogrammpany might ver havesus some anot bearingher i non terhowms its units of y areou priced develo in thepin secondaryg your market, this factor is not nearly as important to buyers as the program=s ability to pay operating cash distributionsvalu andati theon amountof fair ofmar debt,ket if any,valu encumberinge of ABC ?its Dproperties.id you do23 that?

A. Well, we -- we thought about it, considered it and decided that that We utilized the data classified as commercial for the analysis, as it included all of the partnerships in the retail category, as well as severalw others.as no At thelarger best dataset ap isproa generallych to more use statistically in valuing valid. the business.

Of the 14Q. partnerships,Oka onlyy. I nine appr of ecithemate had y debtour inansw their capitaler, but structure. that real Of those,ly wasn' onlyt fourmy of q themuest payion distributions? , and the dividend yields range from 4.30 to 7.70 percent.

The appraiserQ. analyzedWher thee imediann your discounts work paper24 for variouss, if any categories., do you These anal areyze summarized these compani below: es in the same industry that you've just named to analyze their growth raOveralltes, discount their str (14eng partnerships)ths and weaknesses of one company19.3% versus another in developing your valuation of the fair market value of ABC? Partnerships with debt (9 partnerships) 28.9%

A. I Pdonartnerships't know with tha distributionst there's any(8 partnerships) documentation in our work pap17.0%ers that -- that specifically go to that, although we thought about it and discussed Partnerships with both (4 partnerships) 13.9% it with management team, et cetera.

Once again, not only did T&A ignore the main industry players, which would be an 22 essential part ofIbid.: the 3. analysis in valuing ABC, but Mr. Jones claims that this information was 23 considered, buIbid.:t ther 5. e was no documentation in the workpapers. The workpapers did not contain24 any level of documentation to meet the sufficient relevant data standard. Once Median discounts are used because they minimize the effects of outliers that are part of the dataset.

Page38 Clearly, the last category is the most relevant, but with only four data points, the results are not statistically valid. The Clearly, the last category is the most relevant, but with- only 39 four - data points, the results are not statistically valid. The Clearly,datasets the with last only category nine and is eight the most partnerships relevant, are but also with relatively only four sparse.data points, Therefore, the results the valuation are not analyststatisticallystarted valid. with Th thee Clearly,datasets the with last only category nine and is eight the most partnerships relevant, are but also with relatively only four sparse.data points, Therefore, the results the valuation are not analyststatisticallystarted valid. with Th thee discountClearly,datasets the withfor lastthe only category nine and asis eight the a whole. most partnerships relevant, are but also with relatively only four sparse.data points, Therefore, the results the valuation are not analyststatisticallystarted valid. with Th thee discountClearly,datasets the withfor lastthe only category nine and asis eight the a whole. most partnerships relevant, are but also with relatively only four sparse.data points, Therefore, the results the valuation are not analyststatisticallystarted valid. with Th thee agdiscountdatasetsClearly,ain, the withfor M r.lastthe only Jocategory ninenes and isasis eightthe raely whole. most partnershipsing relevant, on h isare but stalso withatement relatively only four sparse.ofdata dis points, Therefore,cus thesing results theit valuation w areith not manag analyststatisticallyementstarted valid. with as Th thee discountdatasets withfor the only category nine and as eight a whole. partnerships are also relatively sparse. Therefore, the valuation analyst started with the discountOnedatasets of the withfor problems the only category nine that and arisesas eight a whole. in partnerships utilizing this aredata also is what relatively the price sparse. to value Therefore, discount the actually valuation represents analyst started. Partnership with the discountOne of the for problems the category that arisesas a whole. in utilizing this data is what the price to value discount actually represents. Partnership justifOneProfilesdiscount ofication the describes for problems the f orcategory the not that discounts using arisesas a whole. tin hisin utilizing relationship informa this data tion.to the is what dataWhile theas follows: thepricere to is value no doudiscountbt th actuallyat an representsappraiser. Partnership will ask OneProfiles of the describes problems the that discounts arises in in utilizing relationship this data to the is whatdata theas follows: price to value discount actually represents. Partnership OneProfiles of the describes problems the that discounts arises in in utilizing relationship this data to the is whatdata theas follows: price to value discount actually represents. Partnership OneProfiles of the describes problems the that discounts arises in in utilizing relationship this data to the is whatdata theas follows: price to value discount actually represents. Partnership maOneProfilesn ofa theg describesValuatione meproblemsnt q theprofessionalsu thate discountss tarisesions, in iniattributet utilizing irelationships up thethisto tfact datah toe thatthea isp what datapminorityra itheasse follows: r priceinterests to p toe valuer foin rnonm discount -hlistedis o realractually he estater o wrepresents npartnerships analy. si Partnerships, and Profiles describesValuation theprofessionals discounts inattribute relationship the fact to thatthe dataminority as follows: interests in non-listed real estate partnerships Profiles describesValuationare priced the professionalsat discountsdiscounts from inattribute relationship net asset the fact values to thatthe in dataminority the as secondar follows: interestsy market in non to-listed two factors,real estate both partnerships of which are Valuationare priced professionalsat discounts from attribute net asset the fact values that in minority the secondar interestsy market in non to-listed two factors,real estate both partnerships of which are where necValuationarediscussed pricedessar professionalsatbelow:y discounts, due dili from gattributeence net asset to the t estfact values thethat in minorityinfor the secondarmati interestsony th market inat non manag to-listed two factors,ementreal estate both is partnershipsp ofro whichviding are. That Valuationarediscussed priced professionalsatbelow: discounts from attribute net asset the fact values that in minority the secondar interestsy market in non to-listed two factors,real estate both partnerships of which are areValuationdiscussed priced professionalsatbelow: discounts from attribute net asset the fact values that in minority the secondar interestsy market in non to-listed two factors,real estate both partnerships of which are arediscussed priced atbelow: discounts from net asset values in the secondary market to two factors, both of which are is one ofdiscussedareDiscount many priced for atbelow:r easonMarketabilitydiscountss wfromhy netan asset independen values in thet appsecondarraisyer market is hir toed. two factors, both of which are discussedDiscount for below: Marketability discussedDiscountWhile the forpartnership below: Marketability secondary market does provide a market for minority interests in otherwise non- DiscountWhile the forpartnership Marketability secondary market does provide a market for minority interests in otherwise non- DiscountWhiletraded the limited forpartnership Marketability partnerships secondary this marketmarket does does provide not offer a market the liquidit for minorityy of say, interests the New in otherwise York Stock non- DiscountWhiletraded the limited forpartnership Marketability partnerships secondary this marketmarket does does provide not offer a market the liquidit for minorityy of say, interests the New in otherwise York Stock non- WhileDiscounttradedExchange the limited forpartnership where Marketability partnerships investors secondary can this convert marketmarket theirdoes does securities provide not offer a marketinto the cash liquidit for in minority ay matterof say, interests of the days. New in otherwise As York previously Stock non- WhiletradedExchange the limited partnership where partnerships investors secondary can this convert marketmarket theirdoes does securities provide not offer a marketinto the cash liquidit for in minority ay matterof say, interests of the days. New in otherwise As York previously Stock non- The T&AtradedWhileExchangenoted repor the alimited spokesman partnership twhere contai partnerships investorsned forsecondary APB, t oocan this thel itconvert markettlmarket emost informati their does activedoes securities provide notsecondaryon offer abou a marketinto the markettcash tliquidithe for in minority ec firmay onomymatterof in say, intereststerms of the anddays. of New intrading iotherwise ndustAs York previously volume, ryStock non, and- the tradedExchangenoted alimited spokesman where partnerships investors for APB, can this the convert market most their activedoes securities notsecondary offer into the marketcash liquidit in firmay matterof in say, terms of the days. of New trading As York previously volume, Stock Exchangetradednotedrecently alimited indicatedspokesman where partnerships investors that for the APB, typicacan this the convert lmarket seller most their receives activedoes securities notsecondary payment offer into the for marketcash liquidit their in firm ayunits matterof in say, interms approximatelyof the days. of New trading As York previously 45volume, Stockdays. Exchangenotedrecently a indicatedspokesman where investors that for the APB, typicacan the convertl seller most their receivesactive securities secondary payment into for marketcash their in firm aunits matter in interms approximatelyof days. of trading As previously 45volume, days. little bit notedExchangerecently(Thisof inf comment aorma indicatedspokesman wheretion was investors thatth made forat the wAPB, by as typicacan Neal includthe convertl sellerBuckley, mosted their receivesactive in Sales thesecurities secondary Managerpaymentreport into w offor marketcashas APB, their irrelev in at firm aunits amatter May inant interms 2006 approximatelytoof days.the conferenceof trading v aluaAs previously 45tionvolume, on days. non of- ABC. notedrecently(This comment a indicatedspokesman was that made for the APB, by typica Neal thel sellerBuckley, most receivesactive Sales secondary Managerpayment offormarket APB, their atfirm units a May in interms 2006approximately conferenceof trading 45volume, on days. non- recentlynoted(Thislisted comment REITsa indicatedspokesman in wasNew that made Yorkfor the APB, by Citytypica Neal thesponsoredl sellerBuckley, most receivesactive bySales Information secondary Managerpayment Managementofformarket APB, their atfirm units a May inNetwork.) interms 2006approximately conferenceof Ittrading is important 45volume, on days. non to- recently(Thislisted commentREITs indicated in wasNew that made York the by Citytypica Neal sponsoredl sellerBuckley, receives bySales Information Managerpayment Managementoffor APB, their at units a May Network.) in 2006approximately conference It is important 45 on days. non to- (Thisrecentlylistedmention, commentREITs indicated however, in wasNew that made thatYork the this by Citytypica Neal time sponsoredl sellerBuckley,-frame receives can bySales Information vary Managerpayment significantly Managementoffor APB, their dependingat units a May Network.) in 2006approximately upon conference It howis important often 45 on days. nonthe to- (Thislistedmention, commentREITs however, in wasNew made thatYork this byCity Neal time sponsored Buckley,-frame can bySales Information vary Manager significantly Managementof APB, dependingat a May Network.) 2006 upon conference It howis important often on nonthe to- listed(Thismention,partnership commentREITs however, recognizes in wasNew made thatYork change this byCity Neal time sponsored of Buckley, -frameownership can bySales Information transfersvary Manager significantly and Managementof APB,the timing dependingat a May Network.)of 2006the upon sale conference It howrelativeis important often onto nonthatthe to- listedmention,partnership REITs however, recognizes in New thatYork change this City time sponsored of -frameownership canby Information transfersvary significantly and Management the timingdepending Network.)of the upon sale It howrelativeis important often to thatthe to TA 165mention,listedpartnershipinterval. REITs however, recognizes in New thatYork change this City time sponsored of -frameownership canby Information transfersvary significantly and Management the timingdepending Network.)of the upon sale It howrelativeis important often to thatthe to mention,partnershipinterval. however, recognizes that change this time of -frameownership can transfersvary significantly and the timingdepending of the upon sale howrelative often to thatthe partnershipmention,interval. however, recognizes that change this time of -frameownership can transfersvary significantly and the timingdepending of the upon sale relativehow often to thatthe partnershipinterval. recognizes change of ownership transfers and the timing of theA sale relative to that interval.partnershipWhen it comes recognizes to the marketability change of ofownership the partnership transfers interests and the included timing inof thethe A Partnershipsale relative Re to- Salethat interval.When it comes to the marketability of the partnership interests included in the APartnership Re-Sale Discountinterval.When it comes Studies to@ thepublished marketability annually of bythe PPI, partnership it is not a interests matter of included whether inbuyers the APartnership can be found Re for-Sale the DiscountWhen it comes Studies to@ thepublished marketability annually of bythe PPI, partnership it is not a interests matter of included whether inbuyers the APartnership can be found Re for-Sale the On thisDiscountWhenunits pag of ite acomes Studiesparticular of the to@ thepublishedT&A partnership, marketability repor annually assumingt, ofan bythe atPPI, partnership thetempt it unitsis not toare a interests matter dinotsc overpriced.uss of included whether the BookAs inbuyers the stated A Partnership can Val above, beue found andmore Re for - SaleFithan thenanci al WhenDiscountunits of it acomes Studiesparticular to@ thepublished partnership, marketability annually assuming of bythe PPI, partnership the it unitsis not are a interests matter not overpriced. of included whether As inbuyers the stated APartnership can above, be found more Re for- Salethan the DiscountWhenunits$1.2 billionof it acomes Studiesparticular in sales to@ thepublished transactionspartnership, marketability annually occurredassuming of bythe PPI, inpartnership the the it units issecondary not are a interests matter not market overpriced. of included whether from 1994 As inbuyers the statedthrough APartnership can above, 2005 be found whichmore Re for- saysSalethan the Discountunits$1.2 billionof a Studiesparticular in sales@ published transactionspartnership, annually occurredassuming by PPI, in the the it units issecondary not are a matter not market overpriced. of whether from 1994 As buyers statedthrough can above, 2005 be found whichmore for saysthan the ConditionDiscountunits$1.2a lot of billionofabout ABCa Studiesparticular in the sales takes marketability@ published transactionspartnership, place. annually of Toccurredassuming the&A byinterestsind PPI, in icatesthe the it units issecondarythat not which arechange a matter not market balanoverpriced. hands of whether fromce in 1994shethis As buyers statedetsmarket.through canit above,used 2005 beWith found whichmorein plenty its for saysthan analysithe of s units$1.2a lot billionofabout a particular in the sales marketability transactionspartnership, of occurredassuming the interests in the the units secondarythat arechange not market overpriced. hands from in 1994this As statedmarket.through above, 2005 With whichmore plenty saysthan of $1.2asecondaryunits lot billionofabout a particular marketin the sales marketability buyers transactionspartnership, standing of occurredassuming the ready interests toin the thepurchase units secondarythat arechange these not market overpriced. intehandsrests, from in the1994this As real statedmarket.through issue above, 2005of With liquidity whichmore plenty is saysthan the of $1.2asecondary lot billionabout marketin the sales marketability buyers transactions standing of occurred the ready interests toin thepurchase secondarythat change these market intehandsrests, from in the1994this real market.through issue 2005of With liquidity which plenty is says the of and statesasecondaryamount$1.2 lot: billion about of markettimein the sales itmarketability takesbuyers transactions for standing the of occurredseller the ready interests to receivetoin thepurchase secondarythat payment change these market for intehands theirrests, from unitsin the1994this realwhich market.through issue is a 2005of functionWith liquidity which plenty of is says the of asecondaryamount lot about of markettime the itmarketability takesbuyers for standing the of seller the ready interests to receiveto purchase that payment change these for intehands theirrests, unitsin the this realwhich market. issue is a of functionWith liquidity plenty of is the of secondaryamountmechanicsa lot about of markettime ofthe this itmarketability markettakesbuyers for andstanding the theof seller thetransfer ready interests to receiveto cycle purchase that of payment the change these particular for intehands theirrests, partnership unitsin the this realwhich market. or issue REIT. is a of functionWith liquidity plenty of is the of secondaryamountmechanics of markettimeof this it markettakesbuyers for andstanding the the seller transfer ready to receiveto cycle purchase of payment the these particular for inte theirrests, partnership units the realwhich or issue REIT. is a of function liquidity of is the amountmechanicssecondary of markettimeof this it markettakesbuyers for andstanding the the seller transfer ready to receiveto cycle purchase of payment the these particular for inte theirrests, partnership units the realwhich or issue REIT. is a of function liquidity of is the Discountamountmechanics of for timeof Lack this it ofmarkettakes Cont for roland the the seller transfer to receive cycle of payment the particular for their partnership units which or REIT. is a function of the Discountmechanics for of Lack this ofmarket Cont roland the transfer cycle of the particular partnership or REIT. BooTheDiscountmechanics otherk v aluefor factor of Lack this is that ofmarketg eaccountsContne rarolandlly forthe def why transferined partnership cycleas the of interests the to talparticular netradet v inpartnershipalue the secondary of the or REIT. Corpomarket atration discounts’s TheDiscount other for factor Lack that of accountsControl for why partnership interests trade in the secondary market at discounts isTheDiscount that other these for factor Lackare thatnoncontrolling, of accountsControl for minority why partnership interests interestsin every sense.trade in theThis secondary means that market the owner at discounts of the assisDiscountThe that otherets these onfor factor Lackarea ( thatsinoncontrolling, ofc) accountsCont historolri calfor minority why co stpartnership basiinterestss o interestsfin accou every sense.tradenting in , the Thisles secondary smeans total thatli marketabi theliti owner es.at discounts The of the interestTheisDiscount that other these has for factor noLackare control thatnoncontrolling, of accountsCont orrol influence for minority why over partnership intereststhe affairs interestsin everyof the sense.tradepartnership. in theThis secondary means Indeed, that marketthe the prospectus owner at discounts of thefor CorinterestTheis that otherpor these hasati factor on’ noare controls thatnoncontrolling, b accountsook or influencevalu for minoritye why isover partnership indi intereststhecataffairsed interestsin everyof in the th sense.tradepartnership.e s uin m theThismary secondary means Indeed, of that themarketthe the prospectus v owner aluat discountsati ofon thefor everyTheisinterest that other publicthese has factor nolimitedare control thatnoncontrolling, partnershipaccounts or influence for everminority why over formed partnership intereststhe containsaffairs interestsin everyof a the statement sense.tradepartnership. in theThisthat secondary says means Indeed, something that marketthe the prospectus owner toat discountsthe ofeffect thefor everyisinterest that publicthese has nolimitedare control noncontrolling, partnership or influence everminority over formed interests the containsaffairs in everyof a the statement sense.partnership. Thisthat says means Indeed, something that the the prospectus ownerto the ofeffect thefor methateveryisinterest that tho>all publicthese decisionsds,has nolimitedareho control wnoncontrolling, withever, partnership respect or thisinfluence to veverminority thealue over managementformed indicatio intereststhe containsaffairs inofn everyoftheis a the statement seldompartnership sense.partnership. Thisthatc willonside says means beIndeed, made somethingred that the exclusively dethe prospectusf ownerinitivto the e byofeffect in ttheforhe thatinterestevery >all public decisionshas nolimited control with partnership respect or influence to ever the over managementformed the containsaffairs of ofthe a the statement partnership partnership. that will says beIndeed, made something the exclusively prospectus to the byeffect tforhe thatinterestevery >all public decisionshas nolimited control= with partnership respect or influence to ever the over managementformed the containsaffairs of ofthe a the statement partnership partnership. that will says beIndeed, made something the exclusively prospectus to the byeffect tforhe natureveryinterestgeneralthat >all publice. decisionshaspartner. nolimited control= withAs partnership would respect or influence be to expected,ever the over managementformed the secondary containsaffairs of ofthe marketa the statement partnership partnership. buyers that willof says minoritybeIndeed, made something intereststhe exclusively prospectus to thein limited byeffect tforhe everythatgeneral >all public decisionspartner. limited= withAs partnership would respect be to expected,ever the managementformed secondary contains of the marketa statement partnership buyers that willof says minoritybe made something interests exclusively to thein limited byeffect the thateverygeneralpartnerships >all public decisionspartner. limitedare= unwilling withAs partnership would respect to bepay to expected,ever the>full management formedvalue secondary= for contains an interestof the marketa statement partnership in abuyers partnership that willof says minoritybe over made something which interests exclusively they to thein have limited byeffect theno thatgeneralpartnerships >all decisionspartner. are= unwilling withAs would respect to bepay to expected, the>full management value secondary= for an interestof the market partnership in abuyers partnership willof minoritybe over made which interests exclusively they in have limitedby theno managementthatgeneralpartnerships >all decisionspartner. are influence= unwilling withAs would respect or control.to bepay to expected, the> full Valuation management value secondary= for analyst an interestofs the marketrefer partnership in to a buyersthis partnership as willaof discount minoritybe over made which forinterests exclusively lack they of in control.have limitedby theno managementgeneralpartnerships partner. are influence= unwillingAs would or control.to bepay expected, > full Valuation value secondary= for analyst an interests marketrefer in to a buyersthis partnership as aof discount minority over which forinterests lack they of in control.have limited no managementgeneralpartnerships partner. are influence= unwillingAs would or control.to bepay expected, > full Valuation value secondary= for analyst an interests marketrefer in to a buyersthis partnership as aof discount minority over which forinterests lack they of in control.have limited no Despitemanagementpartnerships this statement are influence unwilling, Sche or control.to paydule > full ValuationXXI value al= locfor analyst anates interests soreferme in to a this wpartnershipeig asht a discountto overbook whichfor v lackalu they eof as control.have a metno hod Whilemanagementpartnerships the discount are influence unwilling for marketability or control.to pay > full Valuation component value= for analyst an of interestthes refer overall in to a this pricepartnership as-to a- valuediscount over discount whichfor lack isthey ofa relatively control.have no Whilemanagement the discount influence for marketability or control. Valuation component analyst of thes refer overall to thisprice as-to a- valuediscount discount for lack is ofa relativelycontrol. straightmanagementWhile the-forward discount influence concept for marketability or since control. it addresses Valuation component the analyst liquidityof thes refer overall of non to thisprice-publicly as-to a- value-discounttraded discount partnership for lack is ofa relativelycontrol.interests of appraWhilestraightisal. the - forwardBo discountok v conceptalu fore marketabilityis since not anit addresses appropr component theiat liquidityofe method.the overall of non price-Ipubliclyt is -merto-value-tradedely discountan partnership acc ountiis a relativelyinterestsng co ncept Whilerelativestraight the -forwardto discountother conceptinvestments for marketability since suchit addresses ascomponent exchange the liquidityof-listed the overall ofsecurities, non price-publicly -theto-value -tradeddiscount discount partnership for lack is a of relativelyinterests control Whilestraightrelative the -forwardto discountother conceptinvestments for marketability since suchit addresses ascomponent exchange the liquidityof-listed the overall ofsecurities, non price-publicly -theto-value -tradeddiscount discount partnership for lack is a of relativelyinterests control straightcomponentWhilerelative the -forwardto discountother reflects conceptinvestments forthe marketabilityfact since that suchit the addresses owner ascomponent exchange of thea non liquidityof--listed controllingthe overall ofsecurities, non interest price-publicly -theto in-value - tradeddiscounta partnership discount partnership for lack doesis a of relativelyinterestsnot control have that shoulstraightrelativecomponentd not -forwardto other havreflects e conceptinvestments been the fact since used that suchit the addressesin owner asthe exchange vofalu thea nonati liquidity--listedoncontrolling of ofsecurities, ABC non interest-publicly. the in - tradeddiscounta partnership partnership for lack does of interestsnot control have relativethestraightcomponent ability -forwardto to:other reflects conceptinvestments the fact since that suchit the addresses owneras exchange of thea non liquidity--listedcontrolling ofsecurities, non interest-publicly the in - tradeddiscounta partnership partnership for lack does of interestsnot control have relativecomponentthe ability to to:other reflects investments the fact that such the owneras exchange of a non--listedcontrolling securities, interest the in discounta partnership for lack does of not control have componentrelativethe ability to to:other reflects investments the fact that such the owneras exchange of a non--listedcontrolling securities, interest the in discounta partnership for lack does of not control have componentthe ability to: reflects the fact that the owner of a non-controlling interest in a partnership does not have thecomponent ability(1) to: reflects manage, the refinance fact that theor liquidate owner of the a non assets-controlling held by interest the partnership; in a partnership does not have the ability(1) to: manage, refinance or liquidate the assets held by the partnership;= When qtheuest abilityion(2)(1) to:ed distributemanage, why the refinanceincome defini and/or orti onliquidate capital of book thegains assets va generatedlue held is incby by the ludthe partnership; edpartnership in the =repors assets;t, andor what T&A (1)(2) distributemanage, refinanceincome and/or or liquidate capital thegains assets generated held by by the the partnership; partnership=s assets; or (1)(2)(3) distributemanage,utilize the refinance incomepartnership and/or or =sliquidate assets capital forthegains collateral assets generated held purposes. by by the the partnership; partnership=s assets; or (1)(2)(3) distributemanage,utilize the refinance incomepartnership and/or or =sliquidate assets capital forthegains collateral assets generated held purposes. by by the the partnership; partnership=s assets; or was attempting(2)(1)(3) todistributemanage,utilize express the refinance incomepartnership to theand/or or =sliquidatereade assets capitalr forthegainsof collateral assetsthe generated valuation held purposes. by by the the, Mr.partnership; partnership Jones=s respoassets;nde or d (January (2)(3) distributeutilize the incomepartnership and/or=s assets capital forgains collateral generated purposes. by the partnership=s assets; or The discount(2)(3) distributeutilize for lack the incomepartnershipof control and/or also=s assets capital reflects forgains collateralthe generated potential purposes. pitfallsby the partnershipassociated swith assets; owning or a non- The discount(3) utilize for lack the partnershipof control also=s assets reflects for collateralthe potential purposes. pitfalls associated with owning a non- 24, PageThecontrolling, 109 discount,(3) line minority utilize for 16): lack the interest partnershipof control in a limited alsos assets reflectspartnership, for collateralthe potential whether purposes. publicpitfalls or as private.sociated Some with of owning the issues a non that- controlling,The discount minority for lack interest of control in a limited also reflectspartnership, the potential whether publicpitfalls or as private.sociated Some with of owning the issues a non that- Thecontrolling,are applicable discount minority forto limitedlack interest of partnerships control in a limited also include: reflectspartnership, (i) the general potential whether partner publicpitfalls entrenchment; or as private.sociated Some (ii)with no of owningminimum the issues a cashnon that- areThecontrolling, applicable discount minority forto limitedlack interest of partnerships control in a limited also include: reflectspartnership, (i) the general potential whether partner publicpitfalls entrenchment; or as private.sociated Some (ii)with no of owningminimum the issues a cashnon that- controlling,aredistributionThe applicable discount minorityrequ fortoirements; limitedlack interest of partnerships controland in a(iii) limited also the include: inability reflectspartnership, (i) tothe generalcontrol potential whether orpartner influence publicpitfalls entrenchment; or asthe private.sociated timing Some of (ii)with the no of owningliquidationminimum the issues a cashnon ofthat a- distributioncontrolling,are applicable minorityrequ toirements; limited interest partnerships and in a(iii) limited the include: inability partnership, (i) to generalcontrol whether orpartner influence public entrenchment; or the private. timing Some of(ii) the no of liquidationminimum the issues cash ofthat a aredistributionpartnershipcontrolling, applicable minorityrequwhich toirements; limited can interest leave partnerships and in investors a(iii) limited the include: inability >partnership,trapped (i) to= in generalcontrol this whether investment orpartner influence public entrenchment; foror the private. many timing years. Some of(ii) the no of liquidationminimum the issues cash ofthat a aredistributionpartnership applicable requwhich toirements; limited can leave partnerships and investors (iii) the include: inability >trapped (i) to= in generalcontrol this investment orpartner influence entrenchment; for the many timing years. of(ii) the no liquidationminimum cash of a distributionpartnershipare applicable requwhich toirements; limited can leave partnerships and investors (iii) the include: inability >trapped (i) to= in generalcontrol this investment orpartner influence entrenchment; for the many timing years. of(ii) the no liquidationminimum cash of a A.distributionpartnershipThat requwhich there'sirements; can leave this and investors (iii)conce the inability >pttrapped of -- to= in ofcontrol this boo investment ork influencevalue forw thehich many timing isyears. notof the n ecessaliquidationrily of a Anyonepartnershipdistribution familiar requwhich withirements; can limited leave and partnerships investors (iii) the inability >trapped realizes to= in controlthat this there investment or influenceare unique for the manyrisks timing associated years. of the liquidation with owning of a Anyonepartnership familiar-- awhichnd with th cana limitedt leaveterm partnerships investorsis a lot in>trapped realizesa lot =oin fthat cthisir therec investmentles ,are ac uniqueco uforn manytrisksing cassociated years.ircles, yo withu knowningow, a Anyonepartnershipnoncontrolling familiar which interest with can limited leavein a partnerships partnershipinvestors >trapped realizes- whether= in that this public there investment orare private unique for - manyrisksthat associated resultyears. in lack with of owning control a Anyonenoncontrolling familiar interest with limited in a partnershipspartnership realizes- whether that public there orare private unique - risksthat associatedresult in lack with of owning control a Anyonenoncontrolling familiarinvest interest withment limited incir acl partnershipspartnershipes, et cet errealizes- whethera, that that publicis there not or areneces private uniquesar - risksthatily iassociatedndiresultcat iniv lacke with of of beiowning controlng a Anyonenoncontrolling familiar interest with limited in a partnershipspartnership realizes- whether that public there orare private unique - risksthat associatedresult in lack with of owning control a noncontrollingAnyone familiarthe f ainterest withir m limiteda rkin eat partnerships partnershipvalue of a realizes-nwhether entit thaty. public there orare private unique - risksthat associatedresult in lack with of owning control a noncontrolling interest in a partnership - whether public or private - that result in lack of controlPage 39 noncontrolling interest in a partnership - whether public or private - that result in lack of controlPage 39 Page39 Page39 Page39 discounts being factored in by buyers of these interests. The theory that partnership units trade in the secondary market at significant price-to-value discounts because the sellers of such interests are >distressed= is incorrect. While it may be that a particular seller is >distressed= due to some adverse discounts being factored in by buyers of these- interests.40 - The theory that partnership units trade in the discountspersonal situation, being factored the multiple in by buyers bidders of theseoffering interests. to buy the The units theory would that ha partnershipve no way units of knowing trade in this the secondarydiscounts being market factored at sig nificantin by buyers price of-to these-value interests. discounts The because theory thethat sellerspartnership of such units interests trade in arethe discountssecondarysince secondary being market factored market at sig transactionsnificantin by buyers price ofare-to these- valuebrokered interests. discounts through The because third theory-parties thethat sellerspartnership in arms of-length such units intereststransactions trade in arethe discounts>secondarydistressed being =marketis incorrect. factored at sig nificantinWhile by buyers it pricemay of -beto these- valuethat interests.a discountsparticular The becauseseller theory is > distressed thethat sellerspartnership= dueof such to units some interests trade adverse in arethe secondary>wheredistressedQ. buyersRi =marketisg ht. incorrect.and atsellers sig nificantWhile have it pricemayno direct -beto- valuethat contact. a discountsparticular Even becauseseller if in is the > distressedthe very sellers unlikely= dueof such toevent some interests all adverse of arethe secondary>personaldistressed situation, =marketis incorrect. atthe sig multiple nificantWhile itbidders pricemay -beto offering- valuethat a discounts particularto buy the becauseseller units iswould > distressedthe hasellersve no= dueof way such to of some interestsknowing adverse thisare >prospectivepersonaldistressed situation,= isbuyers incorrect. thewere multiple Whilesomehow itbidders may awa be offeringre that that a a particularto seller buy wasthe seller units >distressed, iswould >distressed ha= theve partnershipno= due way to of some knowing units adverse would this >sincepersonaldistressed secondary situation,= is incorrect. market the multiple transactionsWhile itbidders may arebe offering thatbrokered a particularto buythrough the seller units third is-wouldparties >distressed ha inve arms no= due -waylength to of some knowingtransactions adverse this stillpersonalsince go secondary to thesituation, highest market the bidder multiple transactions who bidders would are price offering brokered the tounits buythrough irrespective the units third -wouldparties of why ha in theyve arms no were -waylength being of knowingtransactions sold. This this personalwheresinceA. secondary buyers situation,That's and market w thesellershat multiple transactionsw ehave w erbidders noe s directareay offeringing brokered contact. in totha buythrough t parEven theag units thirdifra in ph.- wouldpartiesthe very ha inve armsunlikely no -waylength event of knowingtransactions all of thisthe issincewhere really secondary buyers no different and market sellersthan transactionspurchasing have no shares directare brokered contact.of a company through Even listed thirdif in on- partiesthe the very New in armsunlikely York- lengthStock event Exchangetransactions all of the in sinceprospectivewhere secondary buyers buyers and market weresellers transactionssomehow have no awa directarere brokered that contact. a seller through Even was third>distressed,if in- partiesthe very= inthe armsunlikely partnership-length event transactions units all ofwould the thatwhereprospective (i) sellerbuyers buyers=s personaland weresellers reasons somehow have forno awaselling directre that arecontact. nota seller only Even wasunknown >distressed,if in butthe alsovery= the irrelevant unlikely partnership toevent the units buyerall ofwould andthe stillwhereprospective go tobuyers the buyers highest and weresellers bidder somehow havewho would no awa direct pricere that contact. the a unitsseller irrespectiveEven was >distressed,if in the of why very= the they unlikely partnership were beingevent units sold.all ofwould This the (ii)stillprospective the go toidentify the buyers highest of the were bidderseller somehow is who not would even awa known.pricere that the a unitsseller irrespective was >distressed, of why= the they partnership were being units sold. would This Despitestill kn goowi to theng highest that bo bidderok v whoalue would is no pricet nece the unitsssari irrespectively in> dicat ofiv whye= otheyf bei wereng being the fasold.ir mar Thisket stillisprospective really go to no the different buyers highest werethan bidder purchasingsomehow who would awa shares pricere that ofthe aa unitscompanyseller irrespective was listed distressed, on of the why Newthe they Yorkpartnership were Stock being Exchange units sold. would This in stillthatis really go(i) toseller no the different= shighest personal than bidder reasons purchasing who wouldfor selling shares price are ofthe anot unitscompany only irrespective unknown listed on but of the whyalso New theyirrelevant York were Stock beingto the Exchange sold.buyer Thisand in Appraisersisthat really (i) seller no differentusing=s personal data than from reasons purchasing this forsurvey selling shares for arevaluation of anot company only purposes unknown listed muston but the alsomake New irrelevant absolutelyYork Stock to the sureExchange buyerthat andthe in value (ii)isthatof really the an(i) selleridentify noentity different=s personalof, theT& than Aseller includereasons purchasing is not for eventhis selling shares meknown. thoare of anotd company in only the unknown v listedalua tionon but the alsoa Newnd irrelevant a Yorkssigned Stock to the wExchange eightbuyer andto in it in family(ii)that the (i) limitedselleridentify=s partnership personalof the seller reasons (FLP) is not orfor even other selling known. interest are not being only unknownvalued is butindeed also a irrelevant noncontrolling to the buyerinterest and in (ii)that the (i) selleridentify=s personalof the seller reasons is not for even selling known. are not only unknown but also irrelevant to the buyer and every(ii) the respect. identify ofThis the requires seller is a not thorough even known. examination of the governing documents of the FLP or other reachi(ii)Appraisersng the its identify final using co of ncl thedata usiseller fromon. is this not survey even known. for valuation purposes must make absolutely sure that the entityAppraisers that isusing the issuerdata from of the this interest survey bforeing valuation valued. purposes If it cannot must be make clearly absolutely established sure bythat these the familyAppraisers limited using partnership data from (FLP) this orsurvey other for interest valuation being purposes valued is must indeed make a noncontrolling absolutely sure interestthat the in governingfamilyAppraisers limited documentsusing partnership data fromthat (FLP) thethis orownersurvey other offor interest the valuation interest being purposes valuedbeing valuedis must indeed makehas a noncontrolling noabsolutely ability to sure control interestthat the in Appraiserseveryfamily respect.limited using partnership This data requires from (FLP) thisa thorough orsurvey other examinationfor interest valuation being ofpurposes thevalued governing is must indeed makedocuments a noncontrolling absolutely of the sure FLP interest thator other the in familymanagementevery respect.limited ofpartnership This the entityrequires =s(FLP) assets, a thorough or otheror if thereexamination interest are beingno formalof thevalued governinggoverning is indeed documentsdocuments a noncontrolling ofthat the even FLP interest addressor other in familyeveryentity respect.thatlimited is thepartnership This issuer requires of (FLP) the a thorough interest or other bexamination interesteing valued. being of thevaluedIf it governingcannot is indeed be documents clearly a noncontrolling established of the FLP interest by or theseother in In the everyentitythislasissue,t prespect.thatar aitis gmay rathe Thisph beissuer ofthatrequires this theof the data seca thorough interest reportedtion, t bexaminationheing ine thisT &valued. Asurvey re ofp o shouldtheIfr tit sgoverningcannotta nottes be “beW useddocuments clearlyhe nsince v aestablishedl theseu ofin theg pricet FLPhe by-s toort -o thesevalueotherck o f a everyentitygoverning respect.that isdocuments the This issuer requires that of thethe a thorough interestowner ofbexaminationeing the valued.interest of theIfbeing it governingcannot valued be documents hasclearly no establishedability of the to FLP control by or theseother the discountgoverning figures documents primarily that =reflect the ownerlack of ofcontrol the interestconsiderations, being valued as discussed has no further ability below.to control the closelyentitygoverningmanagement held that corporat isdocuments theof the issuerion, entity that weof=s the assets,believethe interestowner or theif oftherebeing adjuthe are valued.intereststed no formal boo Ifbeing it kgoverningcannot v valuedalue be of documentshasclearly the no Corporat establishedability that toeven ion’scontrol by address thesestock the is governingmanagementthis issue, itdocuments may of the be thatentity that the=s assets,datathe ownerreported or if ofthere in the this are interest survey no formal shouldbeing governing valuednot be used documentshas sinceno ability these that to evenprice control -addressto-value the managementDiscountthis issue, for it may Marketability of the be thatentity the= svs. assets,data Lack reported ofor Controlif there in this are survey no formal should governing not be used documents since these that evenprice -addressto-value discountmanagementthis issue, figures it may of the primarilybe thatentity the =reflects assets,data lackreported or of if therecontrol in this are considerations, survey no formal should governing not as bediscussed used documents since further these that below. evenprice -addressto-value importantdiscountForthis appraisissue, in figuresdeter iters may usingmini primarilybe that ngdata the the reflectfrom data act this lackreportedual survey of cucontrol inrr to thisent value considerations, survey fa whatir m should isa rketruly nott as a v noncontrolling bealudiscussed usede.” sinceW furtherhen theseinterest below. M pricer. in Jo -antones- entityvalue w as discountthis issue, figures it may primarilybe that the reflect data lackreported of control in this considerations, survey should not as bediscussed used since further these below. price-to-value discountowning real figures estate, primarily the real reflect issue lackis not of whether control discountsconsiderations, are valid as discussedwhen valuing further such below. an interest, but discountDiscount figuresfor Marketability primarily reflectvs. Lack lack of ofControl control considerations, as discussed further below. questionhowDiscounted much in for hi ofsMarketability dtheeposi pricetion- tovs.- valueabou Lack oftdiscounts t hisControl statement, applicable he to asenswcondaryered market(Janua tradingry 24, inPag limitede 110, ForDiscount apprais forers Marketability using data vs.from Lack this ofsurvey Control to value what is truly a noncontrolling interest in an entity DiscountpartnershipsFor apprais forers Marketabilityreflects using lackdata of vs.from marketability Lack this ofsurvey Control versus to value lack what of control is truly considerations. a noncontrolling Indeed, interest the in questionan entity line 24owningDiscountFor): apprais real forers estate, Marketability using the data real vs.from issue Lack this is notofsurvey Control whether to value discounts what is are truly valid a noncontrolling when valuing suchinterest an interest,in an entity but Formostowning apprais often real poseders estate, using by the businessdata real from issue valuation this is notsurvey whether professionals, to value discounts what real is are trulyestate valid a noncontrolling appraiserswhen valuing and suchinterest CPAs an wheninterest,in an entityusing but howowningFor apprais much real ers estate,of usingthe theprice data real- tofrom issue-value this is notdiscountssurvey whether to valueapplicable discounts what is areto truly validse condarya noncontrolling when valuingmarket suchinteresttrading an interest, inin an limited entity but owningdatahow frommuch real the estate,of annual the thepricediscount real-to issue-value surveys is notdiscounts published whether applicable discounts by PPI to aredetermineto validsecondary when discounts valuingmarket for such minoritytrading an interest, interestsin limited but in owningpartnershipshow much real estate,of reflects the theprice lack real -ofto issue -marketabilityvalue is notdiscounts whether versus applicable discounts lack of control areto validse considerations.condary when valuingmarket Indeed, such trading an the interest, in question limited but howrealpartnerships estatemuch assetsof reflects the isprice lackhow -of tomuch -marketabilityvalue of discountsthe overall versus applicableprice lack- toof- valuecontrol to sediscount considerations.condary reflects market Indeed,lack trading of marketability the in question limited partnershipshowmost oftenmuch posedof reflects the by price lackbusiness -ofto -marketabilityvalue valuation discounts professionals, versus applicable lack of real control to estate se considerations.condary appraisers market and Indeed, tradingCPAs the when in question limited using partnershipsmostversusA. often lackIt' posed sof reflects ocontrolne by of lackbusiness issues.the of factor marketability valuations we professionals,c versusonsider lack, y ofes. real control Iestatet's considerations.one appraisers of the many and Indeed, CPAs import the when questionant using mostdatapartnerships from often the posed reflects annual by discountlackbusiness of marketability surveys valuation published professionals, versus lackby PPI of realtocontrol determine estate considerations. appraisers discounts and for Indeed, minority CPAs the when interests question using in realmostdata estatefrom often the posedassets annual by is discountbusinesshow much surveys valuation of the published overall professionals, price by PPI-to - realtovalue determine estate discount appraisers discounts reflects and for lack minority CPAs of marketability when interests using in datarealAlthough estatefrom fittheacto isassets annualnotrs. possible is discounthow muchto preciselsurveys of they published quantifyoverall price theby PPIamount-to- tovalue determine of discount discount discounts reflects attributable for lack minority ofto marketability interests in realdataversus estatefrom lack the assetsof annual control is discount howissues. much surveys of the published overall price by PPI-to- tovalue determine discount discounts reflects for lack minority of marketability interests in realversus estate lack assetsofof controlcontrol is considerations,howissues. much of the it isoverall the opinion price- ofto -PPI,value along discount with manyreflects appraisers, lack of marketability that most of realversus estate lack assetsof control is howissues. much of the overall price-to-value discount reflects lack of marketability versusthe overall lack discountof control is issues. due to lack of control issues. While the partnership secondary market is versusAlthough lack it isof notcontrol possible issues. to precisely quantify the amount of discount attributable to marketability Once Althoughcertainlyagain, notMit r.is a Jonotrecognizednes’ possible lack securities to ofprecisel under exchange,y quantifystandi itng the is a ofamount market busi nesswhereof discount therevalu atiattributableareon usually princ multipletoipl marketabilityes becomesbidders versusAlthough lack it isof notcontrol possible considerations, to precisel ity isquantify the opinion the amount of PPI, alongof discount with many attributable appraisers, to marketability that most of Althoughversuswho stand lack it ready isof notcontrol to possible purchase considerations, to theprecisel units ity ofisquantify thevirtually opinion the any amount of publicly PPI, alongof-registered discount with many attributable partnership appraisers, to that marketability that has most value. of versusAlthoughthe overall lack it isdiscountof notcontrol possible isconsiderations, due to to precisel lack of ity iscontrolquantify the opinion issues. the amount of PPI,While alongof thediscount withpartnership many attributable appraisers, secondar to marketability ythat market most ofis apparent.versustheAs previouslyoverall W lackhen discountof controldiscussed,he w asisconsiderations, due askit is to edtypic lack allyto of its not iscontrolhow the a matter opinionw issues.her ofe of whetheri n PPI,While Rev along enuethethe unitswithpartnership R many ofuli ang partnership appraisers, 59-60secondar i tscan ythat markets beta most tessold, ofis that theversuscertainly overall lack not discountof a controlrecognized isconsiderations, due securities to lack exchange,of it iscontrol the opinion issues.it is a ofmarket PPI,While alongwhere the with partnershipthere many are usuallyappraisers, secondar multiple ythat market biddersmost ofis adjustedcertainlythebut aoverallboo matter notk vdiscount aalueof recognized how is long isimp due it securities ortantakes to lack tto in get exchange,of det controltheermin sale issues.it proceeds ingis a marketthe While fintoair where thema hands partnershiprketthere v areofalue the usually secondar seller.of a multiple comy marketpan biddersy suchis certainlythewho overall stand not readydiscount a recognized to purchase is due securities to the lack units exchange,of ofcontrol virtually issues.it is any a market publicly While where -registeredthe partnershipthere arepartnership usually secondar multiple thaty hasmarket bidders value. is whocertainlyAs previously stand not ready a discussed,recognized to purchase itsecurities is typicthe unitsally exchange, notof virtually a matter it is any ofa market whetherpublicly where -theregistered units there of arepartnership a partnership usually multiple that can has bebidders value. sold, whoPPIAs previously hasstand examined ready discussed, to severalpurchase it ismethods typicthe unitsally to notof gauge virtually a matter the any extentof whetherpublicly to which -theregistered units the total of partnership a partnershipprice-to-value that can hasdiscounts be value. sold, as ABCAswhobut, previouslyhisa stand matter re sponsready of discussed, how toe purchase longindic itit ated takesis typicthe Par tounitsally getag not ofthera virtually a phsale matter 4- proceeds Cany of of whetherpublicly the into R -evtheregisteredtheenue unitshands of R ofpartnership auli thepartnershipng seller. as hithats can jhasust be ificvalue. sold,ati on. Asobservedbut previouslya matter in theof discussed, how partnership long itit takesis secondary typic toally get not themarket a sale matter reflectproceeds of whether marketability into thethe unitshands issues. of of a thepartnership One seller. of these can analyses be sold, butAs previouslya matter of discussed, how long itit takesis typic toally get not the a sale matter proceeds of whether into thethe unitshands of of a thepartnership seller. can be sold, butconsidered a matter the of howamount long of it time takes it takesto get tothe sell sale a publicly proceeds-held into limited the hands partnership of the seller.or REIT interest and WhenbutPPI he ahas wmatteras examined furt of howhe rseveral long ask ite takesdmethods wher to get eto ithegaugen Par sale theag proceeds raextentph 4- tointoC, which thehe hands theread total of from theprice seller. -thito-values par discountsagraph as PPIpay thehas net examined proceeds several to the methodsseller. (As to previouslygauge the noextentted, APB to which has statedthe total that price the -averageto-value amountdiscounts of PPIobserved has examined in the partnership several methods secondary to gaugemarket the reflect extent marketability to which the issues. total price One- toof- valuethese discountsanalyses PPIobservedtime hasrequired examined in the to actuallypartnership several disburse methods secondary funds to gauge marketto a seller the reflect extentin this marketability tomarket which is the approximatelyissues. total price One- toof 45- valuethese days discountsanalyses from the followsobservedPPIconsidered (Janu has examinedary in the the 24, amount partnership Paseveralge of time111, methods secondary it linetakes to 24): to gaugemarket sell a the publiclyreflect extent marketability-held to whichlimited the partnershipissues. total price One or- to ofREIT- valuethese interest discountsanalyses and observedconsidereddate of sale.) in the the Simplyamount partnership using of time secondarythe it timetakes value to market sell of a money, publiclyreflect marketability-thisheld analysis limited partnershipissues.suggests One that or of REITa theserelatively interest analyses small and consideredobservedpay the net in proceedsthe the amount partnership to ofthe time seller. secondary it takes (As topreviously market sell a publiclyreflect noted, marketability-held APB limited has stated partnershipissues. that Onethe or average ofREIT these interest amount analyses and of consideredpayportio then ofnet the proceedsthe overallamount to discount ofthe time seller. it istakes due(As topreviouslyto sell marketability. a publicly noted,-held APB Specifically, limited has stated partnership the that estimated the or average REIT portion interest amount of andthe of payconsideredtime the required net proceedsthe to amount actually to ofthe disburse time seller. it takes funds (As topreviously to sell a sellera publicly no inted, this-held APB market limited has is stated partnershipapproximately that the or average REIT45 days interest amount from and the of timepaydiscount the required net for proceeds marketability to actually to the disburse was seller. less funds (Asthan previously 10%to a sellerof the no in overallted, this APB market discount. has is stated approximately that the average 45 days amount from the of timedatepayA. the requiredof sale.)netSor proceeds tory Simply .actually “In to usingc omputithe disburse seller. the ngtime funds (As the value previously tobook a of seller money, v aluno inted, ethis thisper APB market analysis sh hasar is estated approximatelyofsuggests st thatock the ,that as average seta45 relatively dayss o amountf thefrom small the of datetimeportio requiredofn sale.)of the to Simplyoverall actually usingdiscount disburse the istime fundsdue value to to marketability. a of seller money, in this this Specifically,market analysis is approximatelysuggests the estimated that a45 relatively portiondays from ofsmall the dateportioWhile ofn it sale.)appearsof the Simplyoverall that most usingdiscount of the isoveralltime due value priceto marketability. of-to money,-value discounts this Specifically, analysis inherent suggests the in estimatedthe that pricing a relatively portionof partnership ofsmall the portiodatediscount ofn sale.)of forinvestme the marketability Simplyoverallnt usingdiscount type was the shouless istime duethanld value beto 10% marketability. revalued of of money, the overall onthis Specifically, the analysisdiscount. basis suggests ofthe their estimated that ma arket relatively portion price ofsmall the interestsportiodiscountn of fortrading the marketability overall in the discount secondary was less is market duethan to 10% ismarketability. due of the to lackoverall of Specifically, control,discount. it is thedifficult, estimated it not impossible,portion of the to discountportion of forand the marketability overallthe book discount was valu less ise adjduethanust to 10% edmarketability. of ac thecor overalldin gSpecifically, lydiscount..” the estimated portion of the allocatediscount with for marketabilityany precision was the lackless ofthan control 10% versus of the theoverall marketability discount. component of the total discount. discountWhile it appears for marketability that most wasof the less overall than price 10%- toof- valuethe overall discounts discount. inherent in the pricing of partnership WhileSome it valuation appears thatprofession most ofals the believe overall that price the-to issues-value discountsof control andinherent marketability in the pricing are soof partnershipinterrelated interestsWhile it appears trading thatin the most secondary of the overall market price is -dueto-value to lack discounts of control, inherent it is difficult, in the pricing it not impossible,of partnership to intereststhatWhile it isit appearssimply trading not thatin possible the most secondary of to the ascertain overall market priceexactly is -dueto -howvalue to lackmuch discounts of of control, the inherenttotal it discountis difficult, in the is pricing attributableit not impossible,of partnership to lack toof The prallocateinterestsWhileoblem it appears with wtradingit hany Mr thatprecisionin. theJones most secondary ofthe’ 25there lackspons overall marketof controle price is is that -versusdueto-value tothe lackthe discountsass marketability of etscontrol, of inherent ABC it componentis difficult, arein the oper pricing itof not theati impossible, oftotalng partnership assets discount. to and allocateinterestscontrol versus with trading any marketability. inprecision the secondary the lack marketof control is versusdue to lackthe marketability of control, it componentis difficult, itof not the impossible, total discount. to allocateinterestsSome valuation with trading any professionprecisionin the secondary theals lackbelieve marketof control that is the versusdue issues to lackthe of marketability controlof control, and it marketability componentis difficult, itof arenot the soimpossible, total interrelated discount. to not assetsthatallocateSome it is ofvaluation simplywith the any investmnot professionprecision possibleent the alsto ty ascertain lackbelievepe. of controlA that exactlysimple the versus issueshow read themuch of ingmarketability control of ofthe Rev andtotal marketability enucomponentdiscounte Ruling is attributable of are the 59-60so total interrelated discount.to mlackakes of it thatSome it is valuation simply not profession possible alsto25 ascertain believe that exactly the issueshow much of control of the andtotal marketability discount is attributable are so interrelated to lack of controlthatSome it is valuationversus simply marketability.not profession possible alsto25 ascertain believe that exactly the issueshow much of control of the andtotal marketability discount is attributable are so interrelated to lack of thatcontrol it is versus simply marketability.not possible to25 ascertain exactly how much of the total discount is attributable to lack of very obvcontroliou sversus that tmarketability.he Revenue25 Ruling distinguishes between investment type assets and controlthat it is versus simply marketability.not possible to ascertain exactly how much of the total discount is attributable to lack of control25 versus marketability.25 operating typeIbid.: a ssets.10-12. An investment asset is one that a company would invest in such as mark25 etable securities, excess real estate, etc. An operating asset is one that is used 25 Ibid.: 10-12. 25 Ibid.: 10-12. 25 Ibid.: 10-12. Page40 Ibid.: 10-12. Page40 Page40 Page40 Page40 - 41 - As previously discussed, in determining a discount for The LLC, we began with the commercial properties= median As previously discussed, in determining a discount for The LLC, we began with the commercial properties= median discountAs previously of 19.3 discussed, percent. inAll determi of thesening partnerships a discount are for largerThe LLC, than we RealCo began and with more the diversified,commercial which properties would= mediantend to discountAs previously of 19.3 discussed, percent. inAll determi of thesening partnerships a discount are for largerThe LLC, than we RealCo began and with more the diversified,commercial which properties would= mediantend to indiscountincrease the busi ofthe 19.3 discount.ness percent. oper However, atiAll onsof these there to perpartnerships is nomit statistically the are company larger valid waythan to to RealCo persupportform and an sermoreadditionalv icdiversified,es discount.or sel whichls g oods,would tend and to discountincrease ofthe 19.3 discount. percent. However, All of these there partnerships is no statistically are larger valid waythan to RealCo support and an moreadditional diversified, discount. which would tend to increase the discount. However, there is no statistically valid way to support an additional discount. therAccordingincreaseefore, the to discount.earPartnershipn a r eturHowever, Profiles,n bas there edmost onis ofno it thissstatistically day discount to day va islid businereflective way to supportss of operatia lack an additionalofons. control, W discount. however,hen Mr. itJo believesnes w asthat According to Partnership Profiles, most of this discount is reflective of a lack of control, however, it believes that Accordingapproximately to Partnership 10 percent ofProfiles, the discount most isof associated this discount with is a lackreflective of liquidity of a (marketabilitlack of control,y). However,however, theit believes discount ratethat Accordingapproximately to Partnership 10 percent ofProfiles, the discount most isof associated this discount with is a lackreflective of liquidity of a (marketabilitlack of control,y). However,however, theit believes discount ratethat questionapproximatelyderived in theed previous 10a boupercentt sectionw ofhat the is discountassets derived is fromon associated thethe sameba withlance data, a lack andshee of therefore liquidityt are (marketabilit reflectsof the similar iny).vestm lackHowever, ofent control thetype discount and in liquidity th rateis approximatelyderived in the previous 10 percent section of the is discount derived is from associated the same with data, a lack and of therefore liquidity (marketabilitreflects similary). lackHowever, of control the discount and liquidity rate derivedcharacteristics. in the previous Therefore, section a discount is derived of 19from percent the same for lackdata, of and control therefore is derived reflects from similar this data. lack of control and liquidity derivedcharacteristics. in the previous Therefore, section a discount is derived of 19from percent the same for lackdata, of and control therefore is derived reflects from similar this data. lack of control and liquidity vcharacteristics.aluation, his Therefore, respon sea discount was (Janu of 19 percentary 24, for Pa lackge of 112,control line is derived 18): from this data. Basedcharacteristics. on our analysis, Therefore, the applicable a discount discount of 19 percent utilizing for CEFs lack ofwas control approximately is derived 12 from percent, this data. while the discount using the Based on our analysis, the applicable discount utilizing CEFs was approximately 12 percent, while the discount using the BasedPartnership on our Profiles analysis,= data the is applicable 19 percent. discount utilizing CEFs was approximately 12 percent, while the discount using the BasedPartnership on our Profiles analysis,= data the is applicable 19 percent. discount utilizing CEFs was approximately 12 percent, while the discount using the = Partnership Profiles= data is 19 percent. WePartnership choseA the. Profiles dataW fromedatall, Partnership Iis w19o percent.uld Profilesconsid ase rbeing all moreof th appropriatee assets for to several be i nreasons.vestme Thents underlying of the assets in We chose the data from Partnership Profiles as being more appropriate for several reasons. The underlying assets in Wethe CEFschose are the marketable datac ofrommp Partnership asecurities;ny. these Profiles assets as being can be more sold appropriate and converted for several to cash reasons. in three days. The underlying In addition, assets they are in Wethe CEFschose are the marketable data from Partnership securities; these Profiles assets as being can be more sold appropriate and converted for several to cash reasons. in three days. The underlying In addition, assets they are in thevery CEFs diversified are marketable funds; for securities;most of them, these their assets largest can holding be sold isand only converted 2 to 3 percent to cash of in net three asset days. value. In addition, they are thevery CEFs diversified are marketable funds; for securities;most of them, these their assets largest can holding be sold isand only converted 2 to 3 percent to cash of in net three asset days. value. In addition, they are very diversified funds; for most of them, their largest holding is only 2 to 3 percent of net asset value. Thevery realdiversified estateQ. partnershipsfunds;Well, for itmost say on ofthes them, assetsother their hand of largest are the not iholdingn asvestm diversified is onlyent 2orty to liquidpe 3 percentsh asould the of CEFs. benet assetrevalued. In addition, value. their Are underlying The real estate partnerships on the other hand are not as diversified or liquid as the CEFs. In addition, their underlying Theassets real are estate also partnershipscommercialyou say ingproperties;on the that other tha many handt's of areref them erringnot areas diversified retail to all properties. asset or liquids? as the CEFs. In addition, their underlying Theassets real are estate also partnershipscommercial properties;on the other many hand of are them not areas diversified retail properties. or liquid as the CEFs. In addition, their underlying assets are also commercial properties; many of them are retail properties. Basedassets onare the also foregoing, commercial a discount properties; for lackmany of ofcontrol them oaref 19 retail percent properties. is deemed applicable for this valuation. Based onA. the foregoing,Well, aall discount assets for arelack investedof control o f in19 by percent the compis deemedany. applicable They havefor this tovaluation. make Based on the foregoing, a discount for lack of control of 19 percent is deemed applicable for this valuation. Based on the foregoing, a discount for lack of control of 19 percent is deemed applicable for this valuation. investment inDISCOUNT all their assets. FOR LACK OF MARKETABILITY DISCOUNT FOR LACK OF MARKETABILITY DISCOUNT FOR LACK OF MARKETABILITY CONCLUSION DISCOUNT FOR LACK OF MARKETABILITY CONCLUSION HowCONCLUSIONever, upon further questioning, he gave the following answers (January 24, Page 113, CONCLUSIONIn this assignment, we are appraising minority interests that have no control in RealCo. Most of the marketability studies In this assignment, we are appraising minority interests that have no control in RealCo. Most of the marketability studies discussedIn this assignment, have supported we are appraisingdiscounts of minority 25 to 45 interests percent. that These have studies no control relate in RealCo.to minority Most interests of the inmarketability companies thatstudies are lineIndiscussed this 14 assignment,): have supported we are appraisingdiscounts of minority 25 to 45 interests percent. that These have studies no control relate in RealCo.to minority Most interests of the inmarketability companies thatstudies are eitherdiscussed public, have with supported restrictions disco underunts Rule of 25 144, to 45 or percent. private, Thesebut about studies to go relate public. to minorityTherefore, interests an argument in companies can easily that are be discussedeither public, have with supported restrictions disco underunts Rule of 25 144, to 45 or percent. private, Thesebut about studies to go relate public. to minorityTherefore, interests an argument in companies can easily that are be madeeither public,to support with a restrictions higher discount under for Rule an 144,interest or private, in a closely but about-held limitedto go public. liability Therefore, company thatan argument is not going can public. easily be eithermade public,to support with a restrictions higher discount under for Rule an 144,interest or private, in a closely but about-held limitedto go public. liability Therefore, company thatan argument is not going can public. easily be made to support a higher discount for an interest in a closely-held limited liability company that is not going public. madeTo derive to support a DLOM a higherfor RealCo, discount we consideredfor an interest the in following a closely factors:-held limited liability company that is not going public. To deriveQ a. DLOMO forka RealCo,y. Th awet's considered what yo theu'r efollowing telling factors: me. What is the difference, if any, To derive a DLOM for RealCo, we considered the following factors: DividendTo derive Yield a DLOM: Theb for eAgreementt wRealCo,een a weleavesn consideredinv thees decisiontme thent following tregardingype a factors:s these paymentt and a ofn distributions operatin ing the a scontrolset o off th ae manager. Dividend Yield: The Agreement leaves the decision regarding the payment of distributions in the control of the manager. SinceDividend inception, Yield: The distributionsco Agreementmpany? have leaves been the made decision that have regarding been theerratic. payment In 2005, of distributions total distributions in the werecontrol $155,193; of the manager. a return DividendSince inception, Yield: The distributions Agreement have leaves been the made decision that have regarding been theerratic. payment In 2005, of distributions total distributions in the werecontrol $155,193; of the manager. a return onSince investment inception, of distributions approximately have 3.2 been percent, made and that to havedate inbeen 2006, erratic. $145,000 In 2005, has total been distributions distributed. were Clearly, $155,193; the members a return Sinceon investment inception, of distributions approximately have 3.2 been percent, made and that to havedate inbeen 2006, erratic. $145,000 In 2005, has total been distributions distributed. were Clearly, $155,193; the members a return arone investment receiving a of dividend approximately yield, which 3.2 percent, should and continue, to date although in 2006, $145,000that could has depend been on distributed. how long Clearly,it takes theto find members a new onare investment receivingA. a of dividend approximatelyWell, yield,an owhich 3.2pe percent,ra shouldting and acontinue,ss toe datet w althougho inu 2006,ld b e$145,000that o ncoulde t hhas dependat beenus eon distributed.d howin tlonghe Clearly,it-- takes as thetoby find members a new tenant.are receiving a dividend yield, which should continue, although that could depend on how long it takes to find a new artenant.e receiving a dividend yield, which should continue, although that could depend on how long it takes to find a new Growthtenant. Prospectsdefini: Since titheon inception the oper of Theations LLC, of the the value -- ofof the the real d ayestate-to- hasday grown. oper However,ations of a minoritythe owner tenant.Growth Prospects: Since the inception of The LLC, the value of the real estate has grown. However, a minority owner cannotGrowth forceProspects the sale: Since of this the real inception estate ofto Theobtain LLC, any the of valuethis increase of the real in value.estate hasTherefore, grown. untilHowever, such timea minority that the owner real Growthcannot forceProspects the salebusin: Since of thisess. the real inception estate ofto Theobtain LLC, any the of valuethis increase of the real in value.estate hasTherefore, grown. untilHowever, such timea minority that the owner real estatecannot is force sold the and sale The of LLC this is real liquidated, estate to which obtain might any notof this be untilincrease at least in value. 2026, theTherefore, growth isuntil irrelevant such time to the that valuation the real cannotestate is force sold the and sale The of LLC this is real liquidated, estate to which obtain might any notof this be untilincrease at least in value. 2026, theTherefore, growth isuntil irrelevant such time to the that valuation the real subject.estate is Insold addition, and The real LLC estate is liquidated, markets have which been might known not be to untildecline at least in value 2026, as thewell, growth and any is irrelevantincrease in to value the valuation could be estatesubject. is Insold addition, and The real LLC estate is liquidated, markets have which been might known not be to untildecline at least in value 2026, as thewell, growth and any is irrelevantincrease in to value the valuation could be wipedsubject. out InQ. if addition, the marketSo real for turns. estate example markets -- have go beenahead known. to decline in value as well, and any increase in value could be subject.wiped out In if addition, the market real turns. estate markets have been known to decline in value as well, and any increase in value could be Degreewiped out of ifControl the market: All of turns. The LLC=s operations are controlled by the manager. This has been reviewed previously. The wipedDegree out of ifControl the market: All of turns. The LLC=s operations are controlled by the manager. This has been reviewed previously. The interestDegree sof being Control appraised: All of The have LLC no=s control, operations unless are they controlled vote with by otherthe manager. interests. This There has is been nothing reviewed to indicate previously. that this The will Degreeinterest sof A.being Control appraised:And All of t Thehe have iLLCnv noest=s control, operationsment unless ty peare they wcontrolledoul voted bewith by g othertheener manager. interests.ally -- Thisg Thereener has isall been nothingy sp reviewedeaki to indicateng previously., on that this The will happen.interests beingIn addition, appraised certain have matters no control, must also unless be approvedthey vote withby the other mortgage interests. holder, There which is nothing further to decreases indicate that the thislevel will of interesthappen.s beingIn addition, appraised certain have matters no control, must also unless be approvedthey vote withby the other mortgage interests. holder, There which is nothing further to decreases indicate that the thislevel will of control.happen. In addition,th acertaint is h matterseld fo rmust inve alsostm bee approvednt purp obys thees mortgageonly. holder, which further decreases the level of happen.control. In addition, certain matters must also be approved by the mortgage holder, which further decreases the level of Restriccontrol.tions on Transfer: The restrictions on transfer of membership interests have been reviewed earlier. These control.Restrictions on Transfer: The restrictions on transfer of membership interests have been reviewed earlier. These provisionsRestrictions have on Transferthe effect: Theof limiting restrictions the marketplace on transfer for of these membership interests. interests have been reviewed earlier. These RestricprovisionstionsQ. have on TransfertheOka effecty:. The ofSo limiting restrictionsin the the si marketplacetuati on transferon w itfor hof these ABCmembership interests. Jail C interestsompany have, Inc. been, obv reviewediously earlier. the These Buyprovisions-Sell Agreements have the effect: There of limitingare no buythe -marketplacesell agreements for thesewith respect interests. to this interest. provisionsBuy-Sell Agreements have the effect: There of limitingare no buythe -marketplacesell agreements for thesewith respect interests. to this interest. StockBuy-Sell Quality Agreements Gradepr:is If: Thereonsthese w interestsareoul nod buybe were- sellan publicly agreementsoper atitraded,ng with asits portfoliosetrespect, not towould anthis iinterest.benv consideredestment toty bepe of as poorset quality,. as it is StockBuy-Sell Quality Agreements Grade: If: Therethese interestsare no buy were-sell publicly agreements traded, with its portfoliorespect towould this interest.be considered to be of poor quality, as it is notStock diversified. Quality Grade: If these interests were publicly traded, its portfolio would be considered to be of poor quality, as it is Stocknot diversified. Quality Grade: If these interests were publicly traded, its portfolio would be considered to be of poor quality, as it is Controllingnot diversified. Shareholder Honesty: This is not considered to be an issue in this appraisal. notControlling diversified.A. ShareholderThe p Honestyrisons: Thiswould is not be considered used in toope be anration issues, in y thises. appraisal. PControllingrospects for Shareholder The Company Honesty: The: LLCThis isis expectednot considered to exist to until be an2026 issue and in its this assets appraisal. are expected to grow, although the ControllingProspects for Shareholder The Company Honesty: The: LLCThis isis expectednot considered to exist to until be an2026 issue and in its this assets appraisal. are expected to grow, although the rateProspects of growthfor Theis unknown Company and: The could LLC be is cyclical. expected Therefore, to exist until if management 2026 and its decides assets are to sell expected the real to estate, grow, althoughthe timing the of rateProspects of growthfor Theis unknown Company and: The could LLC be is cyclical. expected Therefore, to exist until if management 2026 and its decides assets are to sell expected the real to estate, grow, althoughthe timing the of therate sales of growth could is be unknown crucial. and In addition, could be The cyclical. LLC currently Therefore, only if managementhas one tenant. decides This lossto sell of the realother estate, one, or the an timing inability of ratethe sales of growth could is be unknown crucial. and In addition, could be The cyclical. LLC currently Therefore, only if managementhas one tenant. decides This lossto sell of the realother estate, one, or the an timing inability of Thetothe secure sales sig couldnifica new ancebe tenant crucial of quickly. Mr In addition,. Jocouldne create sThe not LLC a und cash currentlyer flowsta onlyproblem,ndi nghas onethewhich tenant. differenc would This eliminate eloss bet of distributionswtheeen other an one, invfor or theest an minorityinabilityment theto secure sales coulda new be tenant crucial quickly. In addition, could create The LLC a cash currently flow onlyproblem, has onewhich tenant. would This eliminate loss of distributionsthe other one, for or the an minorityinability owner.to secure a new tenant quickly could create a cash flow problem, which would eliminate distributions for the minority toowner. secure a new tenant quickly could create a cash flow problem, which would eliminate distributions for the minority tyProspectsowner.pe asset for theand Industry an oper: Afterati raisingng ass interestet is ratesa cr itatic everyal er Federalror in applOpeny Marketing the Committee spirit of meeting Revenue from June Ruli 2004ng owner.Prospects for the Industry: After raising interest rates at every Federal thOpen Market Committee meeting from June 2004 throughProspects June for 2006,the Industry interest: Aft rateser raising were leftinterest unchanged rates at at every the August Federal 8 thOpenmeeting. Market Although Committee there meeting is a severe from slowdown June 2004 in Prospectsthrough June for 2006,the Industry interest: Aft rateser raising were leftinterest unchanged rates at at every the August Federal 8 thOpenmeeting. Market Although Committee there meeting is a severe from slowdown June 2004 in 5through9-60. June In se2006,ctio interestn 5 o ratesf this were ve ryleft im unchangedportant at Re theven Augustue 8Ruth meeting.ling, it Althoughstates ttherehe f iso lloa severewing: slowdown in through June 2006, interest rates were left unchanged at the August 8 meeting. Although there is a severe slowdown in Page41 Page41 - 42 - the residentialSec. real 5. estateWeigh market,t to theBe commerc Accorialded real Varestateio marketus Fact wasor strongs. at the valuation date, in particular in the Route 46T retailhe valuatiocorridor. n of closely held corporate stock entails the consideration of all Mood of the Investing Public: According to reports, the investing public appears to be more bullish regarding the outlook for the equitiesrelev markets.ant fact Valorsue as Line sta believested in that sec theti onequity 4. markets Dependi will Angwork upon its way the irregularly circums highertanc overes the next six months.@in each case, certain factors may carry more weight than others because of the nature of the company’s business. To illustrate: In addition to the factors above, a buyer of an interest in RealCo would obtain an assignee interest, rather than a full membership interest. This might also make it more difficult for a willing seller to find a willing buyer. 1. Earnings may be the most important criterion of value in some cases The seller, on the wotherher hand,eas assmightet reduce value his w askingill recei priceve inpr orderimar toy obtaincons immediateideration liquidity. in other Thes. LLC In does not have a fixed termination or liquidation date, and is making minimal distributions. Although a member can transfer his or her interest, a membergene rcannotal, th erequire app raTheise LLCr will to acpurchasecord prihism ora ryher con interest.side raThistio nresults to ea inrn ownershipings of an investment that provideswhen some valu currenting st ockliquiditys o andf compani unknown eslong w-termhich liquidity sell pr. Therefore,oducts or a member servic mightes to negotiate a lower selling pricet tohe provide publi chim; co orn herselfverse withly, ithen t habilitye in veto diversifystmen tand/or or ho obtainlding liquidity. type of company, The problem with the restricted apprais stocker m studiesay accor is thatd the these gr areeates basedt w oneig operatinght to the companies assets undertraded only ingvarious stock exchanges, while theRealCo secur is a itsmally to privately be valu-helded. holding company. The question of relevance arises.

The studies are used as a proxy to measure the decrease in value of an investment due to the inability to sell it and have cash in three2. days.The Altho vughalu ea memberof the insto Theck LLC of cana ctransferlosely an hel interestd inv toest a familymen tmember, or real or estsell atethe interest to The LLC or anotherhol party,ding it cotakesmpany time to, findwhether a buyer or for not an investment family ow thatned, is not is actively close traded,ly rela andted pays to minimal distributions. the value of the assets underlying the stock. For companies of this The other exit strategytype for thane investorapprais is erto wait sh oulfor dissolutiond determine of The the LLC. fai However,r values there of are the currently asset nos ointentionsf to sell the properties,the and compThe Agreementany. Ope statesrating that the expense terminations dateof such is not untila com 2026.pan Therefore,y and the without cost large growth in the asset, an investorof liqu mightidat inhaveg it ,no if returnany, onme therit investment.consideration when appraising the relative The studies describedvalu ones the of previousthe stoc pagesk and indicate the underthat whenlying an investorassets does. The not markhave accesset valu toes an active,of liquid market, his investmentthe uisnder worthly less.ing asAn seinvestorts giv ine RealCo due wdoeseig notht have to pot accessenti alto anear active,ning sliquid and market and therefore, these studiesdividen areds relevant, of the as they particular are objective items information of prope and rtydata unthatd measureserlying thethe loss stock, in value due to illiquidity. capitalized at rates deemed proper by the investing public at the date However, marketabilityof appra was alsoisal. included A cur asre partnt apof theprais discountal by for the lack inv of estcontroling and publ rateic of sh return.ould Asbe previously discussed, Partnershipsupe Profilesrior to does the not r etknowros thepe cexacttive differentiationopinion o fin anits dataind ibetweenvidual. lack F orof controlthese and lack of marketability. However, it estimates it to be about 10 percent. reasons, adjusted net worth should be accorded greater weight in Based on the factsv andaluin circumstances,g the stoc ka DLOMof a cl ofosel 30 percenty held was invdeemedestment appropriate or real for es thistate assignment. holding This was reduced by 10 percentcompany to reflect, w thehether liquidity or discount not alreadyfamily included owned, in thethan rate aofn returny of and the discount other for lack of control. Therefore,cus the tomarDLOM utilizedy yardst is 27ic percent.ks of appraisal, such as earnings and dividend paying capacity.

Based on the above quote, earnings would be the most important consideration in the valuation of ABC. Despite this, the T&A report places a significant amount of weight on methodologies that rely heavily on adjusted book value and/or book value. While it would be appropriate to consider these methods, they should have been eliminated based on the nature of ABC’s business. Furthermore, the manner in which the various methodologies were applied, even those that should not have been used in the valuation of ABC, was incorrect.

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In calLindaculati B.ng Trugman the adjust CPA/ABV,ed book valu MCBA,e, the onl ASA,y adj MBAustment is the made Vice to tPresidenthe balance of sheet Trugman was Valuation Associates, Inc., a firm specializing in business valuation and litigation support a write up of the real estate values to fair market value based on appraisals performed by services. Linda is a Certified Public Accountant licensed in the states of Florida and New an Jersey.outside She real ise stadesignatedte apprais aser Accredited. No otherin as Businesssets or li Valuationabilities w byere the disc Americanussed reg Institutearding of CPAs, a Master Certified Business Appraiser by The Institute of Business Appraisers anyand pote annti Accreditedal adjust mSeniorents. Appraiser Furthermore, by The T&A American failed Society to tak eof iAppraisers.nto consider Lindaation is any a intanmembergible asset of thes thaQualificationst may need Revie to bew ref Committeelected to prop of Theerly Institute adjust theof Business balance sheeAppraisers,t to fair and formerly served on the International Board of Examiners of the American Society of markAppraisers.et value. SheNowhere is currently in its rservingeport, doesas International T&A discuss Vice the President fact that ofit isthe deter Americanmining adjSocietyusted book of A vppraisersalue with as onl welly the a stang Pastibl Chaire assetsof the and Busi liabinesslities. Valuation When as Committeeked where of in that the organization. Linda formerly served as chair of the American Society of Appraisers literBusinessature Mr. Valuation Jones coul Educationd point Committee.to for suppo Lindart of isthe a aFellowdjuste andd book former valu Governore not incl ofudi Theng intanInstitutegible assets, of Business his respo Appraisernse wass. She (Janu formerlyary 24, served Page as126, Chair line of 20): the FICPA’s Relations with the Florida Bar Committee, and on the steering committee of the Valuation, Litigation and Forensic Accounting Section of the FICPA. Linda currently serves as Secretary of the ASA Educational Foundation. A. I can't specifically say that I have a source to cite you off the top of my Linda is thehead. former editor of the ABV e-Alert, a publication of the AICPA’s Business Valuation Committee. She formerly served as editor of Business Appraisal Practice, the At tprofessionalhe bottom of journal this p agof e,The the Institute T&A repor of Businesst discuss Appraisers.,es the Earnin andg C servedapacityon of the ABC. editorial T&A board of BV Q&A published by Business Valuation Resources. Linda formerly served on disthecus sesBusiness annuali Valuationzed revenues and thegro wBusinessing from $4.Valuation/Forensic7 million to appr oxandimat Litigationely $13. 7Services million. HowExecutiveever, ther Committeese is no further of analthe AICPA.ysis bey ondShe tcurrentlyhis. In thi servess secti on,on theythe editorialso indal icboardate t hatof Financial Valuation and Litigation Expert published by Valuation Products, LLC. In “NetNovember earnings 2009, of an Linda ongoin wasg corinductedporati oninto ar thee, AICPA’sin our opi Businessnion, one Valuation of the most Hall ofim Fame.portant factors available in determining the fair market value of a closely held corporation’s stock.” Linda teaches business valuation courses throughout the country for The Institute of TheBusiness report c ontiAppraisers,nues wit h:the AICPA, various state societies of CPAs, and the American Society of Appraisers. She also lectures nationwide. She has served as faculty for the National Judicial College. Linda is a co-author of the first, second and third editions of FinancialWe be Valuationlieve the Applicationspotential investors and Models, in the publishedstock of a bycorporat Wiley ionFinance would, has place authored severalmore self emphasi-study coursess on theand moshas tserved recent as yaear technicals’ earnin reviewersgs when on v allalu fouring editions the of the AICPA’scorporati on.Understanding Therefore, Businesswhen usi ngValuation: the net earnA Practicalings metGuidehod in to det Valuingermini ngSmall to Mediumthe faiSizedr mark Businesseset value ofas ABC well’s stasock The, w eLawyer's have w eigBusinesshted the Valuation most recent Handbook authoredyears’ by net Shannon earnings Pratt mo andre hea publishedvily than by the the prior American years’ Barearn Association.ings. She is also the editor of BVR’s Guide to Business Valuation Issues in Estate and Gift Tax, 2010 edition. Reading the T&A report, thus far, leaves the reader with the feeling that adjusted book Linda can be reached at [email protected]. value is very important, but so are earnings. T&A contradicts itself by stating that these methods are both very important in this assignment. ABC was an operating company, and as such earning capacity is much more important that its assets and liabilities.