Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals BY IAAO SPECIAL COMMITTEE ON INTANGIBLES This guide was developed by the IAAO Special Committee on Intangibles for informational purposes only and does not necessarily represent a policy position of IAAO. This guide is not a Technical Standard and was developed for the benefit of assessment professionals. This guide was approved for distribution by the IAAO Executive Board on November 12, 2016. n most U.S. jurisdictions, assessors are how intangibles are treated by those prac- Iresponsible for estimating a market titioners. Business appraisers have their value for real property and/or personal own methods for estimating the value of property. Laws can vary from state to intangible assets, and real estate apprais- state, but for the majority of jurisdictions, ers and assessors must also contend with intangible assets are not taxable, at least intangible assets in valuing properties not as part of the real estate assessment. that are part of a going-concern. As a result, assessors must ensure their Complicating matters more, terms real estate assessments are free of any in- used to describe intangible assets and tangible value. Different interpretations their valuation approaches have become of law and proper appraisal approaches confusing over time. Some terms are for valuing intangibles sometimes result synonymous, such as going-concern value in disputes between taxpayers and asses- and value of the total assets, while others sors. Unfortunately, the identification have a different meaning depending and valuation of intangible assets is un- on the purpose. In this guide, terms settled in the appraisal and assessment are used based on definitions provided community. This guide is intended to by The Dictionary of Real Estate Appraisal assist assessors in understanding and (Appraisal Institute 2015). addressing intangible assets in property This guide is divided into five sec- tax valuation. tions, a summary, references, and two What often complicates identifying appendixes: and valuing intangible assets are the 1. Identifying Intangible Assets many disciplines that treat intangibles differently. The accounting world is 2. Why It Is Necessary to Allocate concerned with the treatment of Internal the Value of Intangible Assets Revenue Code 26 Section 197 intan- 3. Methods for Estimating or Allo- gibles for proper reporting in financial cating Intangible Asset Value statements and income tax accounting. Internal Revenue Service (IRS) rules and 4. Selected Property Types and In- accepted accounting principles dictate tangible Assets 1 5. Special Topics Intangible property has no physical substance. The Dictionary of Real Estate 6. Summary Appraisal defines intangible property as References Nonphysical assets, including but Appendix A. Selected Property not limited to franchises, trademarks, Types and Intangible Assets patents, copyrights, goodwill, equities, securities, and contracts as distinguished Appendix B. Glossary from physical assets such as facilities and equipment (Appraisal Institute 2015). 1. Identifying Intangible Assets There are numerous definitions of These assets derive their value from intangible assets. IAAO, the Appraisal the rights inherent in their ownership. Institute, the American Society of They are considered intangible because Appraisers (ASA), The Appraisal they cannot be seen or touched, yet they Foundation (TAF), the International have the potential to possess value. The Valuation Standards Council (IVSC), the first step in addressing intangible value IRS, the Financial Accounting Standards is to determine whether something is in Board (FASB), and many other legal, fact an intangible asset. accounting, or tax-related organizations The courts (In the Matter of the Ap- have their own definitions of intangible peal of Colorado Interstate Gas Co. 2003; assets. In addition, many states and Hardage Hotels, LLC v. Lisa Pope 2007), jurisdictions define intangible assets in real estate texts (Reilly and Schweihs statutes and rules. 1999, 5), financial accounting standards All property can be categorized into (FASB 2016, paragraph 20, section 20), three types: state laws (Montana Secretary of State 2015), and industry articles (Wood 1999, • Real property 8) have attempted to define intangible • Tangible personal property assets by identifying specific attributes. Identifying these attributes can assist • Intangible property. the assessor in determining whether There is an important distinction be- something intangible rises to the level of tween real property and real estate. Land an asset. Based on these sources, a four- and buildings (sticks and bricks) are real part test can be used to help determine estate, while real property is the bundle of the existence of an intangible asset, as rights flowing from the ownership of real follows: estate. Real estate and tangible personal 1. An intangible asset should be property can be observed, while real identifiable. property rights cannot. There are accepted guidelines for 2. An intangible asset should have discerning whether something should evidence of legal ownership, that be considered real estate or personal is, documents that substantiate property, and each has common tests rights. for determining that difference. When 3. An intangible asset should be an object is permanently affixed to land capable of being separate and or buildings, the object is usually consid- divisible from the real estate. ered part of the real estate. If an object is not permanently affixed and is mov- 4. An intangible asset should be able, it is usually considered personal legally transferrable. property. 2 For an intangible asset to exist, it often described as being intertwined, such should be identifiable. In some cases, that one is dependent on the other and intangible value is presumed but not they are not easily separated. specifically identified. This can occur In discussing whether the Southridge when property owners or their represen- Mall in Greendale, Wisconsin, had any tatives report the presence of intangible intangible value, the court noted, value, but cannot specifically identify The key of the analysis is whether the the source. An intangible asset can take value is appended to the property, and many forms, but that form should be is thus transferrable with the property, explicitly described and identified. If an or whether it is, in effect, independent intangible cannot be identified, it may of the property so that the value either not rise to the level of an asset. In some stays with the seller or dissipates upon cases, goodwill may be present, usually sale (State ex rel. N/S Associates by JMB measured as the residual value in a sale Group Trust v. Board of Review of the transaction involving a going-concern. Village of Greenview 1991). Although goodwill can be somewhat neb- ulous, it is recognized as an intangible If the real estate cannot be sold with- asset; therefore, it would meet this test. out the intangible, then the intangible More details on goodwill are presented is probably not an asset on its own but, in Section 5, Special Topics. instead, part of the real property. For An intangible asset should also possess example, the Waldorf Astoria hotel in evidence of legal ownership. That is true New York City may sell for a premium for any asset; without documentation, because of its historic significance. there are no legal rights. If property Some might argue this historic premium owners cannot prove legal ownership, represents intangible value. However, they cannot protect their rights from the hotel cannot be sold without its his- theft, harm, or damages or be able to toric significance in place, so the historic legally transfer the asset to another significance is not an intangible asset that party. There are many documents that can be valued separately from the real evidence ownership of intangible assets, estate. Instead, it is an attribute of the such as contracts, licenses, franchise real property and should be included agreements, management agreements, in the assessment. The same is true for and leases. If an intangible does not have other real property attributes that are legal documentation evidencing its legal intangible in nature, such as view, prox- ownership, then it probably is not an imity, prestige, appeal, and potential. All intangible asset. This test is somewhat re- these are intangible in nature but cannot lated to the first test (being identifiable). be sold without the real property, nor However, without legal ownership, even can the real property be sold without an identified intangible does not rise to them. These attributes/influences can the level of an asset. enhance the value of the real property, An intangible asset should also be but they do not have a value of and to capable of being separate and divisible themselves. They contribute to the over- from the real property. In some cases, all value of real property but cannot be the real property depends on the transferred separately from it. intangible asset being successful, such Goodwill is an intangible asset that is as a franchise agreement for a hotel or arguably inseparable from a business. a certificate of need for a nursing home. It is important to note that the test of Similarly, many intangible assets require separability does not suggest that an in- real estate to achieve their full potential. tangible asset must be capable of being Intangible and tangible property are separate and divisible from the business. 3 The point of the separability test is that of Revenue’s additional requirements the intangible asset should be capable because they were contradictory to state of being separate and divisible from the law. The court did not opine as to wheth- real estate. There are intangible assets, er the additional attributes imposed by such as goodwill, that might not be easily the Department of Revenue were valid separated from a business. But the ques- appraisal concepts, only that they ex- tion is whether the business (which may panded and contradicted existing law.