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. include goodwill) could be separated Arguably, this case illustrates the need from the real estate. for appraisal guidance on intangible An intangible asset must also be legally valuation (such as this guide), so that transferrable. In some cases, intangible as- legislatures and revenue departments sets can be sold separately from the real do not have to define intangibles for estate. For example, the owner of an ice property tax purposes. cream store, liquor store, car wash, and When a property tax assessment that the like can sell the business separately may contain intangibles is being re- from the real estate. Many small busi- viewed, the four-part test can be applied nesses transfer this way. However, it is also to assist the assessor in determining common for real estate and intangible whether something intangible is in fact assets to transfer together. Hotels and an asset. To be an asset, the intangible certain other property types are often item should be able to be identified, have sold with both tangible and intangible documented ownership, be capable of assets included in the price. If an intan- being separated from the real estate, and gible cannot be legally transferred, then be legally transferrable from one party to it is probably not an asset. That is not to another. If an asset does not possess all say that an intangible asset must be sold four characteristics, then it is probably separately or independently from real not an intangible asset. property to qualify as an intangible asset. There are typically two circumstances It is common for certain intangible assets in which assessors might encounter the to be sold with real property. This trans- possibility of intangible value. ferability condition simply requires the In the first instance, a property sells ability of the asset to be legally transferred, and intangible assets are included in with or without real property included. the price. It is important to identify not The State of Montana defines intan- only those assets but also their owners. gible property in Section 15-6-218 of the Thus, the owner of a franchised hotel Montana Code. In that definition, the does not own the name licensed by the code identifies two specific characteris- franchisor but pays a fee for its use. The tics of intangible property: that it has no sale of that property does not include intrinsic value and that it lacks physical rights to the franchised name. On the existence. The Montana Department other hand, when Starwood Hotels and of Revenue attempted to expand that Resorts Worldwide was sold to Marriott definition by including four additional in 2016 for $14.41 billion, this sale also attributes, including the requirement transferred ownership of the rights to that “intangible personal property the hotel names using the Starwood must be separable from the other as- brands: Sheraton, Westin, Four Points sets in the unit” [Admin R.M. 42.22.110 by Sheraton, W Hotels, St. Regis, The (12)]. Those additional attributes were Luxury Collection, Le Méridien, ele- challenged by a taxpayer in a Montana ment, Aloft, and Tribute Portfolio. Value Supreme Court case in 2013 (Gold Creek of the management agreement inures Cellular of Montana Limited Partnership to the management companies, such as v. Department of Revenue). In that case, Interstate Hotels and Resorts, Aimbridge the court struck down the Department Hospitality, or White Lodging Services

4 Corporation. In short, the sale of a ho- identifying and allocating intangible val- tel with a franchise and management ue can be grouped into three categories: agreement in place does not include • Accounting purposes the value of those assets; however, a free- standing restaurant with a well-known • Business-related purposes nonfranchised name that sold with the • Real estate purposes. real estate has the potential to include intangible assets. Accounting and Intangible Assets In the second instance, income attrib- Table 1 is a nonexhaustive list of poten- uted to the business must be separated tial intangible assets. This list is grouped from the income attributed to the real into five major categories: marketing re- estate in valuing the property by the in- lated, customer related, artistic related, come approach. This is common in the contract based, and technology based. valuation of hotels, senior care facilities, Most of these assets are listed in IRS Sec- or other property types in which the real tion 197, “Amortization of Goodwill and estate and business are intertwined, and certain other intangibles.” it is customary in appraisal practice to Most of the intangible assets listed in value the real property using the income Table 1 are not typically encountered by from the going-concern. assessors in real property valuations. It is unlikely that an assessor will ever have to 2. Why It Is Necessary to Allocate address the impact of intangible values the Value of Intangible Assets arising from literary works or patents. There are many circumstances requiring Meanwhile, it is likely an assessor will intangible assets to be identified and encounter a property that is sold as a valued separately from other assets. A going-concern, in which both the business company might be reporting assets in and real property are included in the financial reports; a partner might be price. A primary reason for valuing and buying out another partner; a company allocating intangibles is for accounting might be depreciating or amortizing purposes. Companies purchase and own intangible assets on tax returns; or a not only tangible assets such as land, divorce may require an accurate valua- buildings, and personal property, but tion and allocation of all marital assets, also intangible assets such as franchises, including a business. In certain cases, it copyrights, and trademarks. Accountants is necessary to measure and allocate in- are often called upon to allocate the tangible value for property tax purposes. value of intangibles for purchase price al- The methods for identifying and valuing location, financial reporting, income tax intangible assets can vary depending on preparation, and supporting charitable the purpose. In general, the reasons for contributions, among others. Companies

Table 1. Types of potential intangible assets Marketing Related Customer Related Artistic Related Contract Related Technology Based Trademarks, trade names Customer lists Plays, operas, ballets Licensing agreements Patented technology Service marks Production backlog Books, literary works Service/supply contracts Computer software Trade dress Customer contracts Musical works Lease agreements Unpatented Newspaper mastheads Customer Pictures, photographs Construction permits technology Internet domain names relationships Audio/video material Franchise agreements Databases Noncompete agreements Broadcast rights Trade secrets Use rights: drilling, etc. Mortgage contracts Employment contracts

5 routinely report the acquisition and pres- guidance when companies merge or ence of these intangibles on financial acquire other companies or assets in reports and income tax documents. the United States. The IASB issued a Annual reports, balance sheets, profit- similar standard with International Fi- and-loss statements, income tax forms, nancial Reporting Standard 3R (IFRS-3R), and other financial reports are the tools “Business Combinations: Accounting for accountants use to report the financial contingent consideration in a business condition of companies. There are combination.” standards and rules accountants use to The division of a sale price into its ensure they are reporting appropriately. various components—land, building, The FASB governs financial reporting in personal property, and intangible as- the United States, and the International sets—is called a purchase price allocation Accounting Standards Board (IASB) (PPA). In the United States, guidance for sets standards outside the United States. preparing a PPA for financial reporting These organizations have issued various is provided by the FASB. For federal in- standards relating to the valuation and come tax purposes, PPAs are prepared in allocation of intangible assets. In addi- accordance with Internal Revenue Code tion, the IRS issues rules pertaining to the Section 1060, “Special Allocation Rules treatment of intangibles for tax-reporting for Certain Asset Acquisitions.” Those purposes. Congress enacted 26 U.S. Code rules require a purchase price to be al- §197 to bring “peace to the valley” after located among seven classes: the U.S. Supreme Court decided in the • Class I, cash and general deposit Newark Morning Ledger case (1993) that accounts the purchaser of the newspaper was allowed to write off paid subscribers, • Class II, actively traded securi- goodwill, and going-concern value. ties Historically, accountants allocated • Class III, assets marked to mar- the purchase price of a company’s as- ket annually sets predominantly as land, buildings, and personal property, with little regard • Class IV, inventory and property for the value of intangibles. However, held for sale in 2001, more emphasis was given to • Class V, assets not falling within intangible assets when the FASB issued the other classes, including Statement of Financial Accounting Standard land, buildings, and furni- (SFAS) No. 141, which required all U.S. ture fixtures, and equipment companies to report the values of ac- (FF&E) quired intangible assets on their balance sheets. This standard also eliminated the • Class VI, Internal Revenue Code pooling of interest method of accounting, Section 197 assets except good- in which the book value of the assets of will and going-concern value the merged companies was combined. • Class VII, goodwill and going- Instead, under SFAS No. 141, the value concern value. of acquired assets must be recorded at Land, buildings, and FF&E are re- the fair market value at the time of the ported as Class V assets. After a portion of transaction, including the value of any the purchase price has been allocated to intangible assets. tangible assets in Classes I through V, the In 2007, the FASB revised SFAS No. remainder is then allocated to intangible 141 with the issuance of SFAS No. 141R, assets. Class VI assets are those defined codified under Accounting Standards in Internal Revenue Code Section 197, Codification Topic 805 Business Com- which includes a laundry list of intan- binations (ASC-805). ASC-805 provides

6 gible assets including licenses, permits, provide training, guidance, and designa- franchises, trademarks, and workforce tions, including the Certified Business in place, among others. Goodwill and Appraiser (CBA) and Accredited Senior going-concern value are reported as Appraiser (ASA). Business appraisers use Class VII assets. resources such as Pratt’s Stats, operated In the accounting world, the classifica- by Business Valuation Resources, LLC, a tion and valuation of intangible assets database of business sales. vary depending on whether the purpose Whereas real estate appraisers are is financial reporting or tax report- typically concerned with the value of real ing. Rules can also vary depending on property, business appraisers are focused whether a company is public or privately on the value of a business. The value of held. The classification and method for a business can be considered intangible estimating and allocating intangible value, and business appraisers have their value for accounting purposes are rarely own techniques for estimating value. A the same for property tax purposes. common approach is to use EBITDA The type of value required for finan- (earnings before interest, taxes, depre- cial reporting is typically fair value, as ciation, and amortization) multipliers. defined by the FASB. The definition of fair value is different from the defini- Real Estate Purposes and Intangible tion of market value. This distinction Assets is important because market value is Besides valuing intangible assets for ac- typically the standard for most jurisdic- counting and business purposes, often the tions. There are some similarities in the need arises to value intangibles for real two definitions, but they also have key estate-related purposes. These purposes differences. In particular, the concepts can include eminent domain, real estate of an open market, reasonable time, financing, or property tax assessments. cash or its equivalent, prevailing market Eminent domain, sometimes called conditions, and similar key concepts are condemnation, is the right of govern- not embodied in the fair value definition ment to take private property for public on which financial reporting is based. use. Eminent domain is not limited to real property only. The government Business-Related Purposes and can also acquire personal property and Intangible Assets intangible assets as part of eminent do- Sometimes companies and business main proceedings. When a business is owners need to determine the value of a negatively affected as a result of eminent business or other intangible assets sepa- domain, compensation is based on the rately from real estate. Appraisals are difference between the business’s market often needed for the sale or purchase of value before and after the taking. In most a business, partner buyouts, estate settle- cases, compensation for business-related ments, divorce proceedings, litigation, damages is awarded only in partial tak- and other purposes. When the focus of ings. When government takes a whole the assignment is the value of a business, property, rarely are damages for business rather than real estate value, business losses awarded. When business damages appraisers are typically utilized. Like real are a factor, experts, including accoun- estate appraisal, these professionals have tants and business appraisers, are often their own organizations, designations, hired to measure that difference. and methods of estimating the value of a Lenders make loans on real estate, business, which often includes intangible personal property, and even businesses. assets. Organizations such as the Insti- When a business is intertwined with the tute of Business Appraisers and the ASA real estate, financial institutions typically

7 want a breakout of the collateral. For that an estimate of potential gross income. reason, lending guidelines often include When real estate and businesses are statements that instruct appraisers to al- intertwined, taxpayers and their rep- locate values when going-concern value resentatives have challenged property is sought. For example, the U.S. Small tax assessments on the basis of the im- Business Administration’s (SBA) apprais- proper inclusion of intangible value. The al requirements include the following: methods for determining and allocating If the appraisal engagement letter asks intangible value have been debated for the appraiser for a business enterprise or years. Assessors do not typically have the going-concern value, the appraiser must resources to hire a business appraiser allocate separate values to the individual or accountant to estimate the value of components of the transaction including intangibles independently from the land, building, equipment and business. real estate. As a result, they must utilize When the collateral is a special purpose methods to ensure the value of intan- property, the appraiser must be experi- gible assets is excluded from real estate enced in the particular industry. (U.S. assessments. The following section dis- Small Business Administration 2009) cusses the most common methods for allocating and valuing intangible assets Similarly, the Federal Deposit Insur- from the perspective of real estate ap- ance Corporation (FDIC) appraisal praisers and assessors. guidelines state Value opinions such as ‘going-concern 3. Methods for Estimating or value,’ ‘value in use,’ or a special value Allocating Intangible Asset Value to a specific property user may not be There are many methods for estimating used as market value for federally related and allocating the value of intangible transactions. An appraisal may contain assets, in fact, far too many to include in separate opinions of such values so long this guide. The reason there are so many as they are clearly identified and dis- methods is there are so many different closed. (FDIC 2010) professionals who estimate intangible value. Accountants use methods that are Property tax assessments in most states accepted by the FASB and the IRS. Busi- require an estimate of market value of ness appraisers use methods recognized real property and, in some cases, per- by the ASA and other organizations. sonal property. In most jurisdictions, Real property appraisers use methods intangible assets are not assessed—at advocated by professional appraisal least not as part of the real estate. Be- organizations. cause some property types are bought Accountants and business appraisers and sold with a business in place, it is are often focused on the value of intan- necessary to analyze the price to deter- gible assets completely independent of mine whether any consideration was real estate. Conversely, real estate ap- paid for intangible assets. In addition, praisers and assessors seek the value of certain property types are traditionally real property independent of intangible valued utilizing the income approach. assets. Business appraisers apply valua- In those cases, it is customary to utilize tion methods that concentrate on the the property’s income from the going- performance of the business, with no concern to determine the value of the regard for real property, such as EBITDA real estate. This is true for hotels, senior multipliers. Real property appraisers and care facilities, and other property types assessors seek methods that measure the in which the revenue from the property’s value of the real property but exclude business services is typically included in any intangible asset value.

8 Although there are many methods The cost approach is often criticized for directly valuing an intangible asset, because depreciation (especially func- such as EBITDA multipliers, the skill tional and external obsolescence) may and knowledge necessary to apply those be difficult to estimate. Even introduc- methods typically require a professional tory appraisal courses address the three business appraiser. However, it is not al- forms of depreciation, so appraisers and ways necessary to appraise an intangible assessors have been trained in their iden- asset to determine the value of the real tification and measurement. The possible property with which it is associated. There presence of intangibles does not neces- are methods for estimating the value of sarily increase the difficulty in estimating real property that effectively exclude the depreciation of the real property. It would value of intangible assets. These methods seem somewhat contradictory that a are described in the following sections. property suffers from extreme forms of obsolescence while at the same time com- Cost Approach manding a premium for business value. Because the value of intangible assets can Although the cost approach may have be explicitly excluded, the cost approach weaknesses, the difficulty in estimating has great appeal to assessors when only depreciation often pales in comparison the value of the real property is sought. to estimating intangible value indepen- The cost approach is very familiar to dently of real property. assessors and appraisers, and the data Another criticism of the cost approach necessary to complete the approach are is that it is not always the approach that readily available. Physical data related to market participants use in determining land and improvements are usually easy sale prices. However, for many property to obtain, and estimating construction types that include intangible assets, such costs can be accomplished using actual as hotels and senior care facilities, buy- costs or data provided by cost services ers and sellers are most concerned with such as the Marshall Valuation Service. the value of the going-concern. They Appraisers and assessors are accustomed typically do not use the cost approach to estimating replacement cost, deprecia- because it reflects only the value of the tion, and land value. In many cases, the real property, not the going-concern courts have embraced the cost approach value. When the goal is an estimate of the over the income approach when intan- real property only, the cost approach is gibles complicate the estimate of value an effective approach. According to The (Minnetonka Country Club Association v. Appraisal of Real Estate, County of Hennepin, 2003; Humble Oil & In its classic form, the cost approach Refining Co. v. Borough of Englewood Cliffs produces an opinion of the value of the fee- 1976; Livingston Mall Corp. v. Livingston simple estate (Appraisal Institute 2013). Township 1996; Redding Life Care, LLC v. Town of Redding 1999; GTE Florida v. In many cases, such as newer properties, Todora 2003; Heritage Cable Vision v. Board personal property, and special-purpose of Review 1990). properties, the cost approach is clearly For certain properties, real estate may the best approach to value. As with any represent a small percentage of the total other valuation assignment, sometimes value, with personal property and intangi- the cost approach may not be sufficient ble assets being dominant. In those cases, as a stand-alone approach. However, the cost approach is undeniably the best when used in conjunction with other ap- approach, because it inherently excludes proaches to value, it can be an excellent intangible value and it is the preferred cross-check, particularly when intangible method for valuing personal property. assets are part of a sales comparison or income approach. The cost approach

9 can be used to value intangibles directly. Verifying individual sales can assist the The value of a patent can be measured appraiser or assessor in determining how by the cost of bringing that patent to a buyer or seller allocated a sale price. fruition. Nevertheless, most assessors are As part of the verification process, ques- not interested in valuing intangible assets tions should be asked concerning what directly, but prefer to exclude intangibles was included in the price. For example, from an estimate of real property value. an appraiser might ask a buyer/seller/ Although the cost approach may not broker, “Were there any intangible assets be ideal in every case, it is often the included in the price? If so, what were simplest approach for assessors and they and how were they valued?” Market appraisers to apply. It is free of any participants are often willing to provide influence from going-concern or other this type of information and can assist intangible assets. When seeking the value the appraiser or assessor in determining of the real property only, assessors and whether an adjustment is warranted. appraisers might be wise to apply a cost Public financial reports and account- approach, ideally with support from the ing documents often reveal how buyers other approaches to value. and sellers allocate prices of properties that contain intangible assets. Publicly Sales Comparison Approach traded companies report their acquisi- Some property types sell as a going- tions and allocations in annual reports concern, in which the price includes and other financial documents. These real estate, personal property, and an documents are often available online ongoing business. The late William and can indicate how the buyer allocated Kinnard, Jr. observed that, “The most the purchase price to real estate, per- important question in any appraisal as- sonal property, and intangible assets. In signment is: market value—of what and addition, these companies often report to whom?” (Kinnard and Beron 1984). the type of intangible assets acquired When appraisers or assessors utilize a and even the methods for calculating sales comparison approach on a property their value. Sale verification can reveal type commonly sold as a going-concern whether the allocations reported in fi- (or include other intangible assets), the nancial reports were also contemplated appraiser or assessor must first identify in the pricing decision. intangible assets that were included in Helpful accounting documents in- the purchase, such as cash and prepaid clude IRS Form 8594, “Asset Acquisition bookings, but not intangible assets Statement.” Under Internal Revenue owned by others, such as the franchisor Code Section 1060, buyers and sell- or third-party management company. If ers must use this form to report the the assessor determines the price includ- allocation of the purchase price when ed intangible assets, he or she should a business is purchased. If available, determine the value of such intangible this form can help in determining the assets. This can often be accomplished by amount of personal property and/or researching and verifying sales through intangible value included in a sale price. the market survey method. Appraisers or assessors should request The market survey method is an ap- copies of IRS Form 8594 when a taxpayer, proach in which the appraiser or assessor attorney, or agent reports that a sale looks to the market to determine how price includes intangible assets. market participants allocate intangible Although price allocations by real es- assets. This can be accomplished by veri- tate investment trusts (REITs) and other fying specific sales, researching public publicly traded companies are usually financial reports, or conducting surveys an accounting function, they can assist of market participants. the appraiser or assessor in determining

10 adjustments to sale prices, particularly piece to the puzzle that could assist the when personal property and intangible appraiser or assessor in reaching a sup- assets were included in a sale. Sometimes portable estimate of value. taxpayers or their agents argue that the allocations reported in financial reports Income Approach and other documents have nothing to The income approach is a common do with property tax and should be ig- technique for valuing commercial prop- nored. They suggest value attributed to erties. In most cases, the income utilized real estate or intangible assets is purely in this approach is based on an estimate an accounting function and does not of rent for leasable space. However, in necessarily reflect the true value for some cases, such as for hotels and senior those components. The issue of conflict- care properties, it is customary to value ing intangible allocations came up in a the real property using going-concern case involving a Hawthorn Suites hotel income (income attributable to all (Hilliard City Schools, Board of Education, sources, to include the real property, v. Franklin County Board of Revision et al. personal property, and business) and 2011), in which the taxpayer sought a then subtracting from the income all reduction based on the value of personal business- and personal-property-related property and goodwill, pointing to the expenses. When appraisers or assessors amounts it had allocated in its balance use going-concern income to value real sheet to those items. However, an ap- property, the possibility of including praisal that was prepared for the owner intangible value exists. Although that in conjunction with bank financing possibility exists, there are techniques allocated different amounts. Based on for ensuring any value related to the busi- these conflicting allocations, the Ohio ness is excluded. The best method for Supreme Court rejected the tax appeal, excluding intangible value in an income stating, approach is the management fee method Allocating $800,000 to personal property (also known as the Rushmore approach). conflicts with other evidence that more closely relates to the sale. The appraisal Management Fee Method (Rushmore prepared for K.D.M.’s lender in December Approach) 2004 determined a value of $3,265,000 Property owners who choose to have for the realty itself and separately stated a a passive role in operations can hire a value of $280,000 for personal property management company to oversee the and $34,077 for business value. Given business and real estate. The manage- the other reasons for not relying on the ment fee approach is based on the year-end financial statement, we conclude premise that any intangible value arising that the existence of contrary evidence from a going-concern can be measured furnishes a powerful reason to reject it. by capitalizing the management fee nec- essary to compensate a third party to run Valuation and allocation for account- the business. The approach is similar to ing purposes may be different from, another intangible value technique used and possibly not applicable to, the by business appraisers called the relief value of real property in a property tax from royalty method. If the goal is to ex- assessment scenario. But like any other clude intangible value from an estimate valuation assignment, the more infor- of real property value, the management mation appraisers and assessors have fee approach can be applied by includ- available, the more helpful. Although ing a going-concern management fee as accounting documents may not prove or an operating expense. By including this disprove the presence or value of intan- fee, the net operating income (NOI) gible assets, they do represent another is reduced by the amount necessary to

11 compensate management for running The Rushmore approach also requires the business. Theoretically, under this adjustments to exclude the value of method, any value arising from the personal property referred to as FF&E. management of the business has been Deducting a reserve expense and the excluded. Under the theory of substi- assessed value of the personal property tution, no one would pay more for a effectively removes FF&E from the value business or building than the presumed of the real property. Although not intan- cost to replace it. gible assets, these additional adjustments As noted, for lodging properties the are necessary to isolate the value of the management fee technique is commonly real property (Rushmore 1992). called the Rushmore approach. The Critics of the management fee ap- Rushmore approach was introduced by proach argue that simply capitalizing the Stephen Rushmore, an appraiser and management fee and franchise fee (or author of five textbooks on hotel valua- including them as operating expenses) tion and three reference books on hotel does not go far enough to capture all the investing. In his 1992 book on hotel valu- intangible value. They say that cost does ation, Rushmore describes his approach not equal value; hence the management for excluding intangible value as follows: fee does not reflect the value of the busi- Deducting a management fee from the ness. However, since the management stabilized net income removes a portion of fee is based on a percentage of revenue, the business component from the income the intangible value that results from the stream. An additional business value management fee approach rises and falls deduction must be made if the property with the revenue achieved. If a manage- benefits from a chain affiliation. This ment company succeeds at increasing is accomplished by either increasing the revenues, the resulting intangible value management fee expense or making a increases accordingly. In other words, separate franchise fee deduction. (Rush- good management rewards the business more 1992) with higher revenues and an increased intangible value. Poor management Rushmore’s assertion is that, by deduct- results in lower revenues and lower in- ing the costs associated with intangible tangible value. value and personal property from a prop- Critics also argue that including a erty’s operating expenses, the remaining management fee and franchise fee in NOI is for the real property only. Because an income approach removes no intan- the management fee and franchise fee gible value. The argument states that cover the cost of running the business, management fees are standard expenses capitalizing these costs and removing in an income approach, often included them from the total value theoretically re- in the appraisal of other properties sults in the residual value of the real estate. such as office buildings, apartments, When owners hire a management or retail buildings. Including them for company and pay a franchise fee to a hotel, senior care facility, or other brand a property, they turn over the going-concern property does nothing to entire responsibility to run the business remove business value. However, these to a third party. The business benefits, particular management fees account for and therefore the business value that is the management of the business, not achieved by hiring a management com- only the real estate. pany and/or paying a fee for a brand can Another criticism of the management be duplicated. There are many manage- fee approach is that simply including ment companies and franchises that can the management fee and franchise fee be chosen by the owner. as an expense does not provide a return

12 on those intangible assets, so more needs of rights with which the ownership of the to be deducted from NOI. However, the real estate is endowed, then the going- management company and franchise concern value doesn’t include intangible brand are not assets owned by the hotel assets. owner. They are simply expenses in- Moreover, appraisals are requested by curred by the property owner to allow clients for virtually any reason, such as fi- the property to achieve highest and best nancings, litigations, and condemnations, use. The presence of an expense related etc. Appraisers should be valuing hotels to intangible assets (the hotel business) the same way under any circumstances, does not automatically necessitate a including property tax appeals. In other return on that expense. For example, in- words, the assets and the rights being ap- surance is one of the expenses an owner praised do not change just because the use incurs to operate the hotel business of an appraisal varies. Appraisers should successfully. Does the owner of a hotel also value hotels the same way that inves- require a return on the insurance ex- tors analyze deals. (Elgonemy 2013) pense? Making an additional deduction for return on operating expenses has no Despite criticism, the Rushmore ap- foundation and would be improper in proach has been widely embraced by the valuation of a hotel. the courts. In 1989, the New Jersey Tax Some practitioners argue that capi- Court sided with a taxpayer’s appraiser talizing the NOI in hotel appraisal or who used the Rushmore approach for assessment results in a going-concern excluding intangibles (Glenpointe Assocs. value. This is incorrect because any v. Teaneck Township 1989). In 1995, the intangible value has been removed by de- Rushmore approach was used by both ducting the management and franchise appraisers in a New Jersey court case fees. In fact, by deducting management involving the assessment of a Hilton ho- and franchise fees, the resulting NOI tel (Prudential Insurance Co. v. Township represents the income to real property of Parsippany-Troy Hills 1995). In 1999, a only. Elgonemy articulated this point in Kansas court embraced the Rushmore his article, “Clarifying Misunderstand- approach in the assessment appeal of ings about Intangible Assets of Hotels,” a Marriott hotel (Marriott Corporation in which he states, v. Board of Johnson County Commissioners To recap, the misunderstandings about 1999). A 2001 Michigan Tax Tribunal intangible assets center round the accepted, with some criticism, the Rush- following. First, the NOI of a hotel, more method (Grand Haven Investment, especially when analyzed by active LLC v. Spring Lake Township 2001). In participants in the market, represents 2005, the New Jersey Tax Court cited income attributable to the real and numerous cases in which the Rushmore tangible personal property only; therefore, approach was accepted in its decision in when capitalizing the NOI, the resulting favor of the assessor in a case involving amount is the market value of the land, the Saddle Brook Marriott (Chesapeake improvements, and equipment that’s Hotel LP v. Saddle Brook Township 2005). In owned by an investor, not the going- 2006, the Maryland Tax Court approved concern value. Second, if the intangible the use of the Rushmore approach in assets of a hotel are fully owned by a the assessment challenge of a Red Roof management or a franchise company, Inn (RRI Acquisitions Co. Inc. v. Supervi- then the bundle of rights with which the sor of Assessments of Howard County 2006). ownership of the real estate is endowed Another 2006 case involved the assess- does not include intangible assets of the ment of the Sands Hotel and Casino hotel to start with. Third, if intangible in Atlantic City (City of Atlantic City v. assets of a hotel are not part of the bundle Ace Gaming, LLC 2006). In that case

13 the court acknowledged the Rushmore These court cases concerning the approach was applicable. In 2009, a Rushmore approach are not exhaustive, District of Columbia court supported but they illustrate the many times courts the use of the Rushmore approach in a have embraced the Rushmore approach case involving the Capital Hilton Hotel for removing intangible assets. Although (CHH Capital Hotel Partners LP v. District there have been cases in which the Rush- of Columbia 2009). In another case involv- more approach was rejected, those are ing the 2009 assessment of a Ramada Inn very rare and are usually found in states hotel in Detroit (U.S. Can. Hospitalities, where laws or assessor handbook rules LLP v. City of Romulus 2009), the court prevent the use of the management fee also embraced the Rushmore approach. approach, such as California. Finally, In 2006, a Maryland court sided with and perhaps most significantly, the Rush- the assessor on the assessment appeal of more approach reflects market behavior the Red Roof Inn in Jessup, Maryland, as evidenced by comparable sale trans- saying the Rushmore approach was “mar- actions verified by many appraisers who ket driven and tested” (RRI Acquisition routinely value hotel properties. In this Company, Inc. v. Supervisor of Assessments committee’s opinion, in valuing real of Howard County 2006). In 2013, a property the Rushmore approach is California court decided the case of the the most valid approach for excluding assessment of the Glendale Hilton Hotel intangible assets in an income approach. in Los Angeles (EHP Glendale, LLC v. County of Los Angeles 2011). The primary 4. Selected Property Types and dispute centered on the proper way to Intangible Assets value intangible assets. The court ap- Some property types have the potential proved the Rushmore approach, despite for possessing intangible value; this often the California State Board of Equaliza- occurs when the real estate is intertwined tion Assessors’ Handbook, Section 502, with the business. disallowing the use of the management The real estate marketplace deter- fee approach alone (California State mines whether intangibles are included Board of Equalization 1998). In another or excluded in verified sale prices of real 2013 case, the New Jersey Tax Court property transactions. The market partic- once again approved the Rushmore ipants who invest, divest, or lend are the approach in the assessment for a casino best sources of the deal terms, although (Marina District Development Co., LLC v. others familiar with the transaction, such City of Atlantic City 2013). In that case, the as sale brokers, can also shed light on the judge approved the use of the Rushmore pricing methodology and allocations, if approach by the taxpayer’s appraiser for any, between the real property, personal the Borgata Casino. The New Jersey Tax property, and intangibles. Court also allowed the Rushmore ap- For non-owner-occupied, income- proach in another 2013 case involving a generating real estate, a management Hilton hotel (BRE Prime Properties, LLC function is usually necessary to deal with v. Borough of Hasbrouck Heights 2013). In tenant issues (lease negotiations, tenant a 2015 case involving the assessment of complaints about the operation of the the Capitol Hilton Hotel, the District property, and maintenance of the physi- of Columbia Superior Court yet again cal plant, including evaluating capital sided with the assessor who utilized the needs for major system replacements, Rushmore approach for removing intan- renovations, and so on). How the man- gible assets (CHH Capital Hotel Partners agement function is addressed in the LP v. District of Columbia 2015); that case pricing methodology is determined by is currently under appeal.

14 buyers and sellers. For instance, whether value” column always include intangible a deduction of a management fee and assets. The list in Table 2 represents the related brand expenses adequately most common scenarios. As always, veri- removes business or other intangible fication of actual real estate transactions asset values in a hotel valuation by a provides the best opportunity for asses- real property appraiser should be based sors to determine whether a buyer and/ on verified market behavior. It is not a or seller acquired intangible assets and function of the opinions of theorists or how they were valued in the acquisition appraisers. Appraisers, in particular, are price. Additional discussion on selected responsible for researching the pricing property types and intangible assets is behavior of buyers and sellers and repli- presented in Appendix A. cating their pricing methodology using methods and techniques consistent with 5. Special Topics the observed market behavior. This is Skilled and Assembled Workforce true for any real property appraisal. The The skilled and assembled workforce transaction marketplace is the primary argument has found its way from the ac- source of appropriate valuation method- counting world to the assessment world. ology to replicate in any appraisal. Under FASB Topic 805, an intangible Thus, it is the appraiser’s responsibility asset is recognized as an asset apart from to (1) qualify comparable transactions as goodwill only if it arises from contrac- bona fide and reflective of market value tual or legal rights, such as a patent or and (2) verify all the pertinent attributes trademark, or if it is separable, able to of the transaction, including the price be sold, transferred, licensed, rented, or paid (allocated to debt and equity), the exchanged (FASB 2016). An assembled pricing methodology, and allocations of the price to real property, personal Table 2. Types of real estate with possible property, and intangibles. intangible value The list in Table 2 summarizes the Rarely Have May Have types of real estate that may or may not Intangible Value Intangible Value sell with intangible values included in the sale transaction price. Properties Office Fast-food restaurant that derive their revenue from a business Warehouse Restaurant operating at the real estate, such as a car Retail mall Auto dealership wash or minimart, often sell with the in- Self-storage center Auto repair/tire center tangible business assets included in the Drugstore Hotel/lodging facility sale price of the transaction between the Corporate headquarters Golf course seller and buyer. Other property types, Truck terminal Casino such as hotels, usually sell with the in- Flex-industrial Convenience store tangibles excluded from the transaction Shopping mall Marina price through deductions in the pricing Shopping center Fitness center decision that represent business-related Apartment building Ski resort intangible assets. Some properties such Mobile home/RV park Bowling center as restaurants may sell as a going-concern Retail store Funeral home including the real estate and business Big-box retail store Landfill assets or through separate sales of the Used-auto dealership Racetrack real estate and the business. Movie theater This is not to suggest that those prop- Self-service car wash erties in the “rarely have intangible Full-service car wash value” column would never include in- Amusement/theme park tangible value. Nor does it mean the Senior care facility properties in the “may have intangible Telecommunications/utilities

15 workforce does not typically meet that a first-class full service hotel. (Kinnard, test, so in the accounting world it is Worzala, and Swango 2001) not considered an intangible asset, but rather a residual asset categorized as In the appraisal or assessment of goodwill. A residual asset arises in the real property, an estimate of fee-simple purchase of a business, when all other market value assumes competent man- assets have been categorized and valued. agement. It also assumes the presence The residual is whatever is left over. of necessary intangible assets to achieve The presence of a skilled workforce highest and best use. Although these does not automatically create a valu- intangibles are not separately assessed, able intangible asset. If employees are they are necessary to achieve the prop- not bound by contract or noncompete erty’s intended purpose. For example, a agreements, the owner has little control hotel requires a workforce to operate. over whether the employees stay or go. Typically, the management company of If employees are new or nearing retire- a hotel, not the owner, hires the manag- ment, they likely have little value to a ers and workers. Therefore any value prospective buyer. The Oregon Tax of the assembled workforce belongs to the Court rejected the workforce argument management company. in a case involving the assessment of a The issue of skilled workforce being veneer mill. In that case, the court said, included in a real estate assessment was If the buyer and seller specifically negoti- addressed by a Canadian court in the as- ate and set a price on a contract provision sessment of the Fairmont Hotel in British retaining management or work force in Columbia. The court recognized that a place, then possibly a value can be at- trained workforce is intertwined with the tributed to those factors. However, any real estate, and its frequent turnover in value assigned is not part of the market a hotel negates its value, stating, value of the property. It would simply With respect to an assembled workforce, be a separate determination of a service while we accept that there must have contract provision, as opposed to a sale been an initial investment in hiring and provision. Therefore, it should not be training a workforce, we do not accept deducted from any estimate of market that the initial investment necessarily value. (Boise Cascade Corporation v. continues to have discreet market value Department of Revenue 1991) or that its value is separable from the real estate… The business of the hotel is The Oregon Tax Court’s position dif- to generate income through the nightly fers from that of the authors of a 2001 rental of rooms and the provision of Appraisal Journal article on the topic. In other guest services to support that basic that article, the authors advocate deduct- function. All of the factors of production, ing the value of a skilled workforce from including labor, are integrated to create the sale price of a hotel, stating, and maintain the going-concern. To the A skilled work force would have to be extent there is or could be value in an assembled and trained by a purchaser of assembled workforce, we find that such the real estate only. Therefore, a portion value is, necessarily, inextricably inter- of any purchase price of an operating twined with the realty… Furthermore, the hotel is the opportunity cost of assembling evidence was that the workforce of a hotel and training the required work force. On is constantly turning over, which means average, a period of approximately six that a hotel is constantly re-investing weeks of training (and hiring) is report- in its workforce. It is constantly recruit- edly appropriate and reasonable for staff ing, hiring and training, and all of the to be assembled and prepared to operate expenses associated with this activity are

16 already deducted from the income stream. Originally designed in 1922, the Fair- To deduct the cost of replacing the existing mont Jasper Park Lodge is a picturesque workforce and equating that cost to an in- resort located in Jasper National Park, tangible value for the assembled workforce Alberta, Canada. Lodging consists of is in our view double counting. In any authentic log cabins, and amenities in- event, there is nothing to substantiate the clude golf, skiing, skating, and horseback assumption that the current replacement riding. In a case involving the property’s cost of assembling a workforce would nec- assessment, the court recognized an as- essarily equate to its market value upon sembled workforce might not be desired the sale of the going-concern. (Fairmont by a potential buyer, saying, Hotels v. Area 01 2005) … the assembled workforce may actu- ally be a liability, instead of an asset. The California Court of Appeal ar- As acknowledged by (taxpayer’s expert rived at conflicting rulings on the skilled witnesses) Mr. Vernor and Mr. Rosen, workforce argument. In a case involving the buyer in a commercial transaction the assessment of the Glendale Hilton in may require that the seller terminate all, Los Angeles, California, the new owner or some, employees. The potential sever- argued for a lower assessment on the ance pay and pension and health benefit basis that the price included intangible liabilities result in significant liability to assets, including a trained and assembled the seller. (CP Hotels Real Estate Corpo- workforce. The court rejected the work- ration v. Municipality of Jasper 2005) force argument, stating, Absent superior management or an excep- In most sales involving real property, tional workforce, though, the presence of buyers are under no compulsion to pay prudent management and a reasonably for a workforce. The issue may be resolved skilled workforce are required to put a in specific cases through the comparable property to its beneficial and productive sale verification process. Did the buyers use, and no additional value needs to and sellers believe that any intangibles, be deducted from the income stream. including the assembled workforce, were (EHP Glendale, LLC v. County of Los included in the transaction price? Angeles 2011) Start-up Costs In another hotel case, a different New businesses usually incur start-up California court came to the opposite costs before they can begin business op- conclusion in the assessment of the Ritz erations. Examples of these costs include Carlton Half Moon Bay Hotel. In that pre-opening marketing and sales expens- case, the court determined that the as- es, hiring and training of a workforce, sessor failed to remove the value of the and other expenses. Some practitioners hotel’s assembled workforce, stating, argue this cost is an intangible asset that … the deduction of the management should be excluded from the value of and franchise fee from the hotel’s pro- certain properties, particularly hotels jected revenue stream pursuant to the (Lennhoff and Reichardt 2011). The income approach did not—as required theory suggests that unless a hotel is by California law—identify and exclude vacant, a buyer would pay a premium intangible assets such as the hotel’s as- to avoid the start-up costs originally sembled workforce, the hotel’s leasehold incurred. Critics of this approach say interest in the employee parking lot, and a hotel provides short-term occupancy, the hotel’s agreement with the golf course so marketing and sales is an ongoing operator. (SHC Half Moon Bay, LLC v. process and what can be referred to County of San Mateo 2014) as start-up costs are included in normal

17 operating expenses. Similarly, a hotel Real Estate, LLC v .Board of Supervisors undergoes significant turnover of staff of Loudoun County 2004). each year, so much of those start-up costs are incurred annually as management In 2015, the Superior Court of the replaces staff. According to data from the District of Columbia rejected the start-up Bureau of Labor Statistics, the employee costs approach in an assessment dispute turnover rate in the hospitality industry of the Capitol Hilton Hotel in Washing- exceeded 70 percent in 2015 (Bureau of ton, D.C., stating, Labor Statistics 2016). The second major aspect of (taxpayer’s The judge in an assessment appeal of appraiser’s) critique concerns his conten- the Red Roof Inn in Jessup, Maryland, was tion that an appraiser or assessor must skeptical of the start-up costs adjustment calculate and deduct the ‘start-up’ costs for hotels that were not brand-new. In associated with getting the hotel up and rejecting the approach, the court stated, running—even if, as here, that happened In addition, [taxpayer’s appraiser] in 1943. The Court does not find this start-up cost adjustment may have some plausible on either a practical or theoreti- theoretical soundness where the hotel cal level. (CHH Capital Hotel Partners business is actually still benefiting from LP v. District of Columbia 2015) start-up costs, and the costs can be specifi- cally identified and limited to those that Other courts have rejected the start- produce business value as opposed to real up cost approach for hotels and other estate value. However, the subject property property types (CP Hotels Real Estate Cor- is fourteen years old, and there is no data poration v. Municipality of Jasper 2005; to support such an adjustment. (RRI Chesapeake Hotel LP v. Saddle Brook Town- Acquisition Company, Inc. v. Supervisor ship 2005; GGP Maine Mall, LLC v. City of of Assessments of Howard County 2006) South Portland 2008). In essence, start-up costs are not applicable for properties A Virginia court allowed the start-up that are not actually in a start-up phase. cost adjustments for a 1.2 million-square- It would be improper to make a start-up foot training center. However, in that costs adjustment on an existing, stabi- case, the building was undergoing a lized property. change of use from a training center to a conference center, for which start-up Leases-in-Place and Above- and Below- costs were not a historical data point, but Market Leases instead a current event. The new owner, In the accounting world, leases-in- Oxford, intended to convert the facility place and above- and below-market into a national conference center, which leases are considered intangibles. That would require extensive renovation guidance is provided by the FASB in (the buyer ultimately spent $23 million Accounting Standards Codification in renovation costs after the sale). The Topic 805 “Business Combinations” court acknowledged that start-up costs, (FASB 2016). When fair value purchase in this case, should be considered given price allocations are prepared for the change in use, stating, accounting purposes, leases-in-place [Taxpayer’s appraiser] recognized that and above- and below-market leases are the use of the property was being changed allocated to the category of intangibles. and, as a result, the value of intangibles, Although leases-in-place and above- such as start-up expenses and the cost of and below-market leases are treated as assembling a work force, has to be deter- intangibles for accounting purposes, real mined before the value of the real estate estate appraisers and assessors typically can be ascertained (WXIII/Oxford-DTC consider them part of the bundle of rights

18 associated with real property. That is not Leases, easements, zoning, building per- to say they are not intangible assets; leases mits, air rights, mineral rights, and other are essentially contracts. Although leases real estate-related intangible assets are and contracts are tangible (the paper part of the real property. Trade names, can be seen and touched), the rights franchises, and employee contracts are associated with them are intangible. Tech- business-related intangibles that should nically, all rights, including the bundle of be excluded from an estimate of real rights that constitute real property, are property value. intangible. There are real property intan- TAF addresses the issue of excess rent gibles inherent in the ownership of real in USPAP FAQ 193 (TAF 2016, 299). estate, and there are business property The question is, “Should I allocate the intangibles inherent in the ownership of portion of above-market rent to the a business (such as a trade name). real estate or treat it as an intangible?” Real property intangibles include The Appraisal Standard Board’s answer easements, air rights, mineral rights, pos- is, “The subject of this appraisal is real sessory rights, building permits, zoning property, not intangibles, specifically the (including variances), and leases (both leased-fee estate; therefore, Standards positive and negative leasehold inter- Rule 1-2(e) applies.” By stating unam- ests). As expressed in the text, Valuing biguously the subject of the appraisal Intangible Assets, is “real property not intangibles,” the Intangible real property includes all answer implies that above-market leases of the individual interests, benefits, are part of real property. Leases-in-place and above- and below- and rights inherent in the ownership market leases are part of real property of the physical real estate (Reilly and and should be considered in any esti- Schweihs 1999). mate of the value of real property rights. That’s not to say that above-market Investors would typically pay more for contract rents should be used to esti- properties that are fully leased or those mate fee-simple value. If above-market with above-market leases. Those lease contract rents are used to estimate value, benefits are intangible in nature but the result would be the value of the are included in the real property when leased-fee interest. If fee-simple value is it transacts. When investors purchase sought, market rents should be utilized. real property, they acquire all the rights associated with that property—good or Goodwill bad. A zoning variance on a property Goodwill rarely comes up in real estate may allow an owner to build at higher assessments, but in some cases it is re- density than would normally be permit- ported in purchase price allocations that ted. That benefit is intangible in nature, are submitted as part of a property tax but it is a part of the real property. Simi- appeal. Goodwill is defined in The Dic- larly, a property may have favorable air tionary of Real Estate Appraisal (Appraisal rights. By their very nature, air rights are intangible; however, their ownership is Institute 2015) as follows: part of the bundle of rights. 1. Unidentifiable intangible assets The distinction is important because, 2. The amount by which the acquisi- in many cases, real estate appraisers and tion price exceeds the fair value assessors are required to exclude the of identified assets value of intangible assets in estimating real property value. However, intangible 3. That intangible asset arising as a assets that should be excluded are those result of name, reputation, cus- that are separate from real property. tomer loyalty, location, products, and similar factors not separately

19 identified (American Institute the assessment on the basis the price of Certified Public Accountants included intangible assets, which are et al. 2015) not assessable under California law. The hotel appealed the assessment, claiming 4. That intangible asset arising as a it erroneously included $16,850,000 result of elements such as name, worth of nontaxable intangible assets, reputation, customer loyalty, including $14,150,000 of goodwill. location, products and related During the board hearing, the taxpayer’s factors not separately identified appraiser explained the calculation of and quantified. (ASA 2009) goodwill as follows: As the second definition above sug- … from an accounting perspective ... gests, goodwill appears only after there is some type of premium being paid all other assets have been separately or value being asserted to a property based identified and quantified. It is usually on whether it is the flag [i.e., brand], attributed to an entity’s name, reputa- whether it’s the location, whatever it tion, or similar factor that has not been might be. We think there’s something separately identified. It is probably worth there. So essentially that’s how we got noting the term goodwill has also been that [$14,150,000], because again it’s used in the past to describe business a residual with all the other numbers value. Similar to the term blue sky, it was combined, and deducted off the purchase used generically to describe the value of price. (SHC Half Moon Bay, LLC v. a business. This is an incorrect applica- tion of the term. Although goodwill is County of San Mateo 2014) somewhat ambiguous, it represents only one potential component of a going- The assessor valued the hotel using the concern and should not be confused Rushmore approach and argued that any with the overall value of a business. value attributed to goodwill had been ac- Goodwill exists only as part of a business counted for within the management fee. or going-concern. If the real property The court ruled that the Rushmore ap- being appraised or assessed is not being proach did not go far enough in removing valued as a going-concern, then good- intangible assets, but it did agree with the will is not relevant to the assignment. assessor that the deduction of the man- For most properties, assessors need only agement and franchise fees did, however, value the sticks and bricks, so intangible exclude the intangible asset of goodwill. value, going-concern value, and goodwill Typically, the issue of goodwill arises are irrelevant. For some property types, for assessors when properties are pur- however, estimating the value of the real chased and the price has been allocated. property requires consideration of the For accounting purposes, goodwill has going-concern. This occurs when revenue no basis unless it is purchased as part of from the business is used to estimate the a business. In the purchase of a business, value of the real property. In addition, value is usually assigned to goodwill when sale price sometimes includes consid- the price has been allocated to all other eration for both real property and an known assets, and there is still some ongoing business. In those cases, intan- amount of the purchase price remaining. gible value may exist and that intangible Although goodwill is a valid intangible value could include goodwill. asset, it is often an elusive characteristic The issue of goodwill arose in the of a going-concern and difficult to isolate assessment appeal of the Ritz Carlton and value (even for business appraisers). Half Moon Bay Hotel in California. In Because goodwill is not specifically iden- that case, the hotel had sold in 2004 for tified and courts have ruled the value of $124,350,000, and the taxpayer appealed goodwill is reflected in a management

20 fee, it is safe to say that applying the vacant. They suggest if there is a lease in management fee technique in an income place, the property is encumbered and approach effectively removes any good- therefore cannot be fee-simple. In other will value in the estimate of real property. words, unencumbered is equated with being vacant. This is a misinterpretation Go-Dark Valuation of the definition of fee-simple and not There is no official definition of go-dark aligned with market behavior. Buyers, valuation, but it basically means as if va- sellers, brokers, appraisers, and lenders cant. In this theory, a property is assumed treat fee-simple interest as a property to be vacant, even if it is fully occupied leased at prevailing market rents and and rents are stabilized. The value is occupancy. If a property is suffering estimated via the income approach by from high vacancy, a lease-up adjustment including the cost to lease up the prop- might be appropriate, but if the property erty to full stabilization, assuming market is fully occupied, an adjustment for lease- rent. The technique is sometimes used in up is not necessary. purchase price allocations to estimate the In a case involving an owner-occupied value of leases-in-place—an intangible office building in Kansas, the taxpayer asset for financial reporting purposes. argued the property should be valued as Although the go-dark valuation might vacant, even though it was fully occupied. be appropriate for accounting purposes, The court rejected that approach and it is not used in estimating the fee-simple called it a “suspension of reality,” saying, value of the real property. Fee-simple This Court understands that it may ownership includes all rights and ben- be proper appraisal practice to include efits in a property, free of encumbrances a lease-up discount in addition to a such as above- and below-market leases. stabilized vacancy allowance in cases A property’s occupancy is a condition of where the property is experiencing a below the property that should be recognized, stabilized vacancy position. This is not as noted, no differently from its physi- such a case, however, as the evidence cal condition. Assuming a property is here indicates the subject property’s vacant when it is actually occupied is a highest and best use is its actual use hypothetical condition that results in as a fully owner-occupied facility. liquidation value. The Appraisal of Real Applying a lease-up discount in this tax Estate cautions appraisers about this ap- appeal would require a suspension of proach, stating, reality and an acceptance of conditions A lender or other client may request a not borne out by the evidence. While value opinion for real property as if it Williams appropriately applied a lease- were not occupied by the business, which up discount in the income approach is commensurate with the liquidation in appraising this fully occupied premise, although the highest and best property based upon extraordinary use is continued operation as a going- assumptions and hypothetical conditions concern. In those cases, the value of the prescribed by his client, Chase Bank, real property as if it were not occupied by no such extraordinary assumptions or the business should be treated as a hypo- hypothetical conditions are called for thetical condition to avoid misleading the under Kansas property tax law. (In the user of the report. (Appraisal Institute Matter of the Equalization Appeals 2013, 715) of Yellow Equipment and Terminals, Inc. et al. 2012) Some practitioners argue that because some definitions of fee-simple include Fee-simple value does not require a the word unencumbered, the value should property to be vacant, because there be estimated assuming the property is is no market support for that premise.

21 Although a go-dark valuation might and recognized appraisal methods.’ The be an appropriate business valuation business enterprise value theory is not a approach, it is a not an appropriate generally recognized appraisal method. technique in real property appraisal to Also, ‘It is undisputed that this method achieve fee-simple value. was designed in the late 1980s by a group of shopping mall owners in cooperation The Business Enterprise Value Approach with real estate appraisers and real estate In the property tax assessment context, professors in a group called SCAN (shop- the term business enterprise value (BEV ) ping center assessment network).’ (Merle approach, also known as the TAB (tangible Hay Mall v. Board of Review 1997) assets backing) approach and the BEA approach, refers to a method of valuing In a case involving the assessment of real property in which intangibles are a 1.2-million-square-foot training center involved. This method is not described (WXIII/Oxford-DTC Real Estate, LLC v. in any current real estate appraisal or Board of Supervisors of Loudoun County business appraisal texts. 2004), a Virginia court embraced the The BEV approach first emerged in BEV approach (calling it the Course the property tax arena in the 1990s. A 800 approach). The BEV approach was series of articles and court cases emerged argued again in the assessment of the involving the proper treatment of in- Saddle Brook Marriott in New Jersey in tangibles in shopping centers, malls, 2005. In that case the taxpayer’s apprais- and hotels. In the early days, the BEV er suggested the Rushmore approach approach represented the broader ar- used by the assessor required additional gument that some properties included adjustments to completely remove any intangible value, including regional intangible value. Those adjustments malls. An example can be seen in a case included an additional deduction for involving the Merle Hay Mall in Des the value of personal property, Marriott Moines, Iowa, in which the court de- flag, goodwill, and start-up costs. The scribed the BEV theory as follows: court rejected those adjustments, stating: Under this theory, the value of a prop- In the present case, the adjustments pro- erty such as a mall necessarily includes posed to the Rushmore method have both certain intangibles such as the worth of theoretical and empirical aspects. In other the business organization, management, words, they are made for stated reasons, the assembled work force, working capital, and they rest on particular data. In order and legal rights such as trade names, for any adjustment to have persuasive franchises, and agreements, that have force in a factual finding of value, it been assembled to make a business a vi- should rest on cogent reasoning and be able entity. (Merle Hay Mall v. Board of founded on reliable data. These proposed Review 1997) adjustments, on the whole, are not per- suasive either for theoretical or empirical The mall owner argued the value of reasons. (Chesapeake Hotel LP v. Saddle these intangible assets should be removed Brook Township 2005) from the mall’s assessment. The Iowa Su- preme Court rejected the BEV theory in In an interesting case involving the part because it had not been embraced by Wolfchase Galleria Mall in Memphis, the appraisal community, stating, Tennessee, the administrative judge There is another reason to reject the mall’s reversed his own prior decision after business enterprise value theory. Iowa learning the Appraisal Institute did not Code section 441.21(2) requires that any endorse the BEV approach used by the valuation methods used must be ‘uniform taxpayer’s appraiser. The confusion

22 originated because of an Appraisal The Court finds that the [taxpayer’s Institute course titled, “Separating Real appraiser’s] approach includes and Personal Property from Intangible impermissible adjustments to the Business Assets” (Course 800). In its Rushmore approach, which were either earlier decision, the court mistakenly duplicative or not supported by the market assumed that techniques taught in place. Consequently, the Court must the course were endorsed by the reject [taxpayer’s appraiser’s] appraisal Appraisal Institute. Similar to the Saddle as his theories and methodologies are Brook decision, this case illustrates the academic constructs unsubstantiated importance of market acceptance of an by the market. Respondent’s appraisal appraisal methodology. In making that closely reflects the Rushmore methodology, point, the court said, which is market driven and tested. (RRI The administrative judge finds that the Acquisition Company, Inc. v. Supervisor Essex House must initially be re-examined of Assessments of Howard County 2006) because one of indethe key findings that was the basis for the decision has been These cases are not an exhaustive shown in this appeal to be incorrect. In list. There have been others that have particular, page 7 of the initial decision both rejected and embraced the BEV and order stated that [taxpayer’s apprais- approach. The courts have mostly dis- er’s] methodology had been endorsed by the allowed the BEV approach for various Appraisal Institute. The administrative reasons. In its current form, the BEV judge finds the proof in this case estab- approach is essentially the Rushmore lished that the Institute is impartial with approach with start-up costs, assembled respect to the particular methodology that workforce, and return on FF&E adjust- should be utilized for separating real and ments. Previous comments and court personal property from intangible business cases related to start-up costs and as- assets. (In Re: Wolfchase Galleria Ltd. sembled workforce are relevant. Partnership v. Shelby County 2005) As the court in the Red Roof Inn case described, the Rushmore approach has Despite the setback from the Merle been “market driven and tested.” Un- Hay Mall case in the late 1990s, mall like the Rushmore approach, the BEV owners continued to pursue property approach has not been embraced by tax reductions based on intangible value market participants. This shortcoming is into the late 2000s. In a case involving the significant, and appraisers and assessors Maine Mall in Portland, Maine, the court should be cautious about supplanting the rejected arguments based on intangible actions of market participants with aca- value, stating, demic concepts and unproven theories. In other words, the reductions for the val- Excess Earnings and Parsing Income ues of certain assets taken by GGP based Methods on the PGH Consulting, LLC appraisal report under the BEV and TAB theories In Section 3, the management fee meth- were inappropriate because all of such od (Rushmore approach) for excluding values are inextricably intertwined with intangibles in an income approach was the value. (GGP-Maine Mall, LLC v. explained and endorsed. There are City of South Portland 2008). other income approach methods for addressing intangibles, including the In a case involving a Red Roof Inn excess earnings method and parsing hotel in Jessup, Maryland, the court income method. These methods are rejected the BEV approach on the basis known by other names, including the that it was academic in nature, stating, excess profits method, formula method,

23 and proxy rent method. Regardless of method to determine the value of a law the name, the approaches are similar. firm’s goodwill in a partnership dispute. The going-concern’s income is allocated In Marriage of Hall (1984), the court to the real property, personal property, allowed the use of the excess earnings and intangible assets. method (among other methods) to es- The excess earnings method was tablish the goodwill value of a physician’s developed the U.S. Department of the practice in a divorce. Treasury in 1920 when breweries and dis- Although the excess earnings method tilleries had to determine lost goodwill is relatively simple, it does have its short- value due to prohibition (IRS Appeals comings and critics. In fact, the IRS has & Revenue Memorandum 34). In 1968, suggested that it should be used only as the IRS reaffirmed the excess earnings a last resort, stating, “it should not be approach with IRS Revenue Ruling 68- used if there is better evidence available 609. From an accounting perspective, from which the value of intangibles can the excess earnings method is often used be determined” (IRS Revenue Ruling to estimate the value of goodwill. 68-609). Despite this disclaimer, the ex- The steps required to perform the cess earnings method is still used today excess earnings approach are as follows: (primarily by business appraisers). 1. Estimate a company’s total earnings. In the text Going Concern Valuation, the authors comment on some of the 2. Estimate the value of the compa- difficulties in applying the excess earn- ny’s tangible assets (often based ings method: on financial statements or other The Excess Profits technique is applicable techniques) to all types of property; however, valuing 3. Multiply the tangible asset value the components is extremely difficult and by a rate of return to calculate complex. Doing so requires the real estate the earnings attributable to the appraiser to have the knowledge and ex- company’s tangible assets. perience in personal property appraising, business valuation, and some knowledge 4. Subtract the tangible asset earn- in accounting practices. Personal prop- ings from total earnings to arrive erty appraising experience is needed to at excess earnings. value the equipment, not to mention other 5. Divide the remaining excess earn- items. Accounting experience is needed to ings by an appropriate capitalization formulate the correct income and expense rate to calculate the value of good- statements, as well as to normalize those will and other intangible assets. statements. Business valuation knowl- Interestingly, one of the first steps in edge and experience is needed in order the excess earnings method is to estimate to develop the business component capi- the value of the tangible assets, free of talization rate. Lastly, it is exceptionally any intangible value. That is exactly the difficult to develop market-based returns goal of most assessors in estimating the on the individual components. (Wilson market value of real and personal prop- and Wilson 2012, 90). erty. Presumably, an assessor could stop at that step since the aim of most assessors A variation of the excess earnings is a market value free of intangible value. method is the parsing income method. The courts have allowed the use of the In this method, the total revenue of the excess earnings method, particularly in going-concern is allocated to real proper- divorce cases or partnership buyouts. ty, personal property, and any intangible In Dixon v. Crawford, McGillian, Peterson assets. The steps in performing the pars- & Yelish (2011), the court accepted the ing income method are as follows:

24 1. Allocate a going-concern’s net The courts have generally rejected the income between real property, parsing income method for property tax personal property, and intangible purposes. In a case involving the assess- assets. ment of a Marriott Hotel in Saddlebrook, New Jersey, the court rejected the pars- 2. Apply separate capitalization ing of the income approach from both rates to the net income of each a theoretical and an empirical perspec- component to arrive at a value tive (Chesapeake Hotel LP v. Saddle Brook estimate for each component, Township 2005). In a British Columbia real property, personal property, court decision, the court struggled with intangible assets. the income parsing method because the The Appraisal Institute addresses the court found it difficult to attribute a ho- parsing income method in The Appraisal tel’s superior revenue per available room of Real Estate, stating, (RevPAR) solely to intangible value. In When using the parsing income method, that case, the court commented on the it is critical to ensure that any allocation challenge of isolating the intangible of the income and expenses correctly iden- revenue, saying, tifies the contribution of the income to the We question how the appraisers can be total assets from tangible and intangible sure how much of the RevPAR differen- personalty. If the allocation is not done tial enjoyed by the Empress over the other properly, it is unlikely that the residual eight hotels is related to the character and value of the value for any asset class will quality of the land and improvements, be correct. (Appraisal Institute 2013) and how much is related to brand or business goodwill. (Fairmont Hotels v. The parsing income method does Area 01 2005) have its challenges. For example, there is often little market evidence for rates of The excess earnings and parsing in- return for tangible assets of a going-con- come methods have a theoretical basis, cern or a supportable capitalization rate but unfortunately the data necessary to for the intangible assets. The Appraisal perform them correctly are often lack- Institute noted this and other challenges ing. Although these methods are valid of applying the parsing income method when performed correctly, they are not by describing what critics have said about the preferred income approach method the approach: recommended by this committee. Critics state that this methodology is flawed because the identification of an 6. Summary appropriate capitalization rate to convert In most U.S. jurisdictions, intangible the residual income to different asset assets are not taxable as part of a real classes can be difficult. This method has property assessment. For that reason, also been criticized for using a percentage assessors must ensure the value of deduction from income to quantify the intangible assets is excluded. This is value of both the franchise and residual particularly important when properties intangibles. Further criticism is leveled at sell with intangible assets included in a the deductions for a return on the various sale price or when business income is components of the going concern, which used in an income approach to value create an opportunity for double-counting a property. In those cases, the property unless caution is exercised by the ap- typically constitutes a going-concern, praiser. (Appraisal Institute 2013) which includes land, buildings, personal property, and potentially intangible

25 assets. This guide highlights many 4. An intangible asset should be property types that potentially include legally transferrable. intangible assets, such as hotels, senior Intangible assets may be intertwined care facilities, and properties with with the real estate, making it difficult valuable trade names and franchises. to value them independently. This There are typically two circumstances four-part test can assist the assessor in in which assessors come across intangible determining whether an intangible asset assets. In the first instance, a property is actually something the assessor should sells as a going-concern, such as a hotel consider. If an asset doesn’t possess all with a franchise agreement in place or a four characteristics, then it probably is restaurant with a well-known name sold not an intangible asset. as part of the real estate. In the second, In addition to property tax, there are revenue from a business is used to value many reasons intangible assets need to real property in an income approach. be identified and valued separately from Various professions are involved in other assets, including for accounting identifying and valuing intangible as- purposes, business-related purposes, sets. Accountants, consultants, corporate and real estate purposes. The most com- finance executives, business appraisers, mon purposes are for accounting and assessors, and real estate appraisers may financial reporting. The techniques all come into contact with intangible accountants use to identify and allocate assets. The methods used for estimating intangible assets are established by the the value of intangible assets can vary FASB, the IASB, and the IRS. The classi- widely depending on who is perform- fication and methods used for estimating ing the valuation and allocation and the and allocating intangible value for ac- purpose for deriving the value estimate. counting purposes are not necessarily the This variation in methods has resulted same as those for property tax purposes. in a disconnect between how buyers and In fact, even the type of value typically sellers perceive the value of intangible estimated for accounting purposes (fair assets, how accountants report intangible value) is different from that for property assets, and how assessors, taxpayers, tax purposes (typically market value). and property tax professionals measure There are numerous methods for intangibles. Often the methods used by estimating and allocating the value of accountants and other financial profes- intangible assets. The reason there are sionals are different and not appropriate so many methods is the many different for property tax assessments. professionals who estimate intangible Assessors are often challenged with value. Business appraisers and accoun- determining whether something even tants use methods that tend to value rises to the level of an intangible asset. To the intangible asset independently. The help determine whether something is an skill and knowledge required to apply intangible asset, the following four-part those methods are typically those of a test can be applied: professional business appraiser or ac- 1. An intangible asset should be countant. However, there are methods identifiable. for estimating the value of real property that effectively exclude the value of in- 2. An intangible asset should have tangible assets. These are the methods evidence of legal ownership, that is, most appropriate for assessors who seek documents that substantiate rights. to simply exclude the value of intangible 3. An intangible asset should be assets, not directly value them. capable of being separate and The cost approach is one of the easiest divisible from the real estate. approaches for ensuring any intangible

26 value is excluded in an assessment. It is higher revenues and higher intangible very familiar to assessors and appraisers, value. Poor management results in lower and the data necessary to complete the revenues and lower intangible value. approach are readily available. The cost Taxpayers and their representatives approach is often criticized because have suggested the presence of in- depreciation/obsolescence may be dif- tangible assets due to other sources, ficult to estimate and market participants including a skilled and assembled work- do not always use the cost approach in force, business start-up costs, goodwill, making pricing decisions. Although the and leases-in-place, among others. These cost approach may have weaknesses, it is intangible assets are often applicable in often the simplest approach for assessors the accounting world but are not neces- and appraisers to apply, and it is free of sarily valid for real property valuation. influences from going-concern or other Similarly, some alternative approaches intangible assets. have been suggested for isolating intan- The sales comparison approach can gible value, such as go-dark valuation, also be applied in estimating the value which assumes a property is vacant for of real property that potentially includes purposes of estimating the value of leases- intangible assets. The most common in-place. Again, this is a valid accounting technique is the market survey method. approach, but it is not suggested for esti- Conducting market surveys includes sale mating the value of real property. verification and review of public finan- The identification and valuation of cial reports, purchase price allocations, intangible assets have been debated for and other documents in which buyers many years in the appraisal and assessment and sellers have reported the price paid community. This guide is intended for real estate, versus personal property to assist assessors in understanding and intangibles. Sale verification can and addressing intangible assets in determine whether the allocation was property tax valuation. Although many considered in the pricing decision. practitioners have proposed various The income approach can also be methods for estimating and allocating utilized to ensure intangible value is intangible asset value, ultimately the excluded from an estimate of the value real estate marketplace determines of the real property. The management whether intangibles are included or fee approach is based on the concept excluded in verified sale prices of real that intangible value arising from property transactions. The cornerstone a going-concern can be measured of developing an accurate market value by capitalizing the management fee is for the appraiser/assessor to verify necessary to compensate a third party the components of the price with a to run the business. Critics of the knowledgeable party to the transaction. management fee approach argue that If in the verification process the buyer, simply capitalizing the management fee seller, or another knowledgeable and franchise fee (or including them participant indicates little or no value as operating expenses) does not go far was allocated to intangibles, then the enough to capture all the intangible appraiser should acknowledge that. value. Proponents of this approach If the appraiser assumes a different say that, because the management fee allocation from what was agreed upon is based on a percentage of revenue, at the time of sale, then the appraiser is good management is rewarded with likely not estimating market value.

27 Acknowledgments References This guide was completed through the AEI Net Lease Fund v. Erie County, 2008 dedicated efforts of an ad hoc committee Ohio 5203 (Ohio 2008). comprising American Institute of Certified Public Mark Kenney, MAI, SRPA, MRICS, Accountants, American Society of Ap- MBA praisers, Canadian Institute of Chartered Business Valuators, National Association Peter F. Korpacz, MAI, CRE, FRICS of Certified Valuation Analysts, and the Mark R. Linné CAE, MAI, SRA, AI- Institute of Business Appraisers. 2001. GRS, CDEI, FRICS International Glossary of Business Valuation Toni Viens, MAI, SRA Terms, June 8. http://www.nacva.com/ content.asp?contentid=166 (accessed Gaylord A. Wood, Jr., JD, CMA December 29, 2016). Tim Wilmath, MAI, SRA American Sheds, Inc. v. County of Los The committee worked closely with Angeles, No. B111513. California Court Mary Odom, MLS, Director of Library of Tax Appeal. 11 Aug. 1998. Services, who provided significant as- American Society of Appraisers (ASA). sistance and support. 2009. “ASA Business Valuation Stan- dards.” Reston, VA: ASA. https://www. Policy Statement appraisers.org/docs/default-source/ This guide is being provided to the IAAO discipline_bv/bv-standards.pdf?sfvrsn=0 membership to assist in identifying in- (accessed December 28, 2016). tangible assets and exclude them from Appraisal Institute. 2013. The Appraisal of real property assessments. This guide was Real Estate, 14th ed. Chicago: Appraisal developed by the IAAO Special Com- Institute. mittee on Intangibles for informational Appraisal Institute. 2015. The Dictionary purposes only. The statements made or of Real Estate Appraisal, 6th ed. Chicago: opinions expressed by the authors of Appraisal Institute. this report do not necessarily represent a policy position of IAAO. The guidance Bainbridge, R.E. 2012. Convenience Stores in this paper is also not meant to replace and Retail Fuel Properties: Essential Appraisal state and local laws or court decisions. Issues, 2nd ed. Chicago: Appraisal Institute. There are many ways to value and Belanger, E. 2015. “Hollywood Casino allocate intangible assets. This guide Appeals Bangor’s Rejection of $36 Mil- addresses the techniques that are ap- lion Tax Abatement,” BDN Maine plicable for the most common situations Network, July 2. http://bangordaily- encountered by assessors. Selected alter- news.com/2015/07/02/news/bangor/ native methods are discussed in Section hollywood-casino-appeals-bangors-re- 5, Special Topics. However, there are jection-of-36-million-tax-abatement/ many other methods not covered that (accessed December 3, 2016). may be valid or applicable for certain Boise Cascade Corporation v. Department of properties. This guide briefly addresses Revenue. TC 3018, 46. Oregon Tax Court. the treatment of intangible value for 12 OTR 263; 1991 Oregon Tax Lexis 35. telecommunications, railroads, and 17 June 1991. public utility properties. For those and other complex properties, an assessor BRE Prime Properties, LLC v. Borough of Has- or appraiser would be wise to research brouck Heights. Docket Nos. 005271-2010 additional guidance and methods that go & 005644-2011. Tax Court of New Jersey. beyond the scope of this guide. Committee on Opinions. 12 Sept. 2013.

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29 Glenpointe Associates, et al., Plaintiffs, v. of the Director of Property Valuation Township of Teaneck, Defendants. 10 N.J. of the State of Kansas. 79 276 Kan. 672 Tax 380 (1989) Tax Court of New Jersey. (2003) P.3d770. Supreme Court of Kan- 08 Mar. 1989. sas. 07 Nov. 2003. Gold Creek Cellular of Montana Limited In the Matter of the Equalization Appeals Partnership v. Department of Revenue, 310 of Yellow Equipment & Terminals, Inc., P.3d 533 (Mont. 2013). Yellow Transportation, Inc., YRC, Inc. for the Years 2007 & 2008 in Johnson Grand Haven Investment, LLC, Petitioner, County, State of Kansas Court of Tax v. Spring Lake Township, Respondent. Appeals. Docket Nos. 2007-5812-EQ & Michigan Tax Tribunal No. 364917. 31 2008-5829-EQ. 12 Jan. 2012. Oct. 2012. In Re: Wolfchase Galleria Ltd. Partnership v. GTE Florida v. Todora, 854 So.2d 731 (Fla. Shelby County. Tennessee State Board of App. 2 Dist. 2003). Equalization. Initial Decision and Order. Hardage Hotels, LLC, Complainant, v. 16 Mar. 2005. Lisa Pope, Assessor, Platte County, Missouri, Kinnard, W., Jr., and G. Beron. 1984. Respondent. 2007 Appeal No. 06-79089. Which Value? Of What? To Whom? Presen- State Tax Commission of Missouri, 14 tation given at the IAAO Legal Seminar, Sept. 2007. New Orleans, Louisiana, March 2, 1984. Hecht (West Flagler Associates, Ltd.), Ap- Kinnard, W., Jr., E. Worzala, and D. pellants, v. Dade County, Florida, County Swango. 2001. “Intangible Assets in an Manager, Tax Collector, and Comptroller of Operating First-Class Downtown Hotel,” the State of Florida, Appellees. No. 69-429. The Appraisal Journal 69 (1): 68–83. District Court of Appeal of Florida, Third District. 234 So.2d 709 (1970). 28 Apr. Lennhoff, D., and H. Reichardt. 2011. 1970. “Hotel Valuation Myths and Misconcep- tions Revisited,” Property Tax Valuation Heritage Cable Vision v. Board of Review, 457 Insights Winter: 85–93. N.W.2d 594, 598 (Iowa 1990). Linus Oakes, Inc., an Oregon nonprofit corpo- Hilliard City Schools, Board of Education, ration, fka Parkway Medical Buildings, Inc., Appellant and Cross-Appellee, v. Franklin Plaintiff, v. Department of Revenue, State County Board of Revision et. al., Appellees; of Oregon, Defendant and Douglas County K.D.M. & Associates, LLC, Appellee and Assessor, Intervenor. Oregon Tax Court, Cross-Appellant. (Ohio Board of Tax Ap- Regular Division, Property Tax. Case No. peals. Nos. 2007-M-277 and 2007-M-278). 4234 Opinion. 20 Jul. 2000. Aff’d. Per Curiam. 128 Ohio St.3d 565, 2011-Ohio-2258. Livingston Mall Corp., Plaintiff, v. Livings- ton Township, Defendant. 15 N.J. Tax Court Hirsh, L.A. 2016. Golf Property Analysis of New Jersey. 01 Apr. 1996. and Valuation. Chicago: Appraisal In- stitute. Los Angeles SMSA Limited Partnership, Plaintiff and Appellant. v. State Board of Humble Oil and Refining Company, Peti- Equalization et al., Defendants and Appel- tioner-Respondent, v. Borough of Englewood lants. Docket No. B056146. Court of Cliffs, Respondent-Appellant. 135 N.J. Su- Appeals of California, Second District, per. (1975) 26, 342 A.2d 560. Superior Division Five. 11 Cal. App. 4th 768 Court of New Jersey, Appellate Division, (1992) 14 Cal. Rptr. 2d 522. 12 Nov. 1992. 02 Jul. 1975. Aff’d Per Curiam. 71 N.J. 401,365 A.2d 929 (1976). Marina District Development Co., LLC, Plaintiff, v. City of Atlantic City, Defendant. In the Matter of the Appeal of Colorado Tax Court of New Jersey. Committee on Interstate Gas Company from a Decision Opinions. 18 Oct. 2013.

30 Marriage of Hall, 692 P.2d 175 (Wash. 1984). Reilly, R., and R. Schweihs, 1999. Valuing Marriott Corporation, Appellant, v. Board Intangible Assets. New York: McGraw-Hill. of County Commissioners of Johnson County, RRI Acquisition Company, Inc., vs. Supervisor Appellee. No. 78,393. Court of Appeals of of Assessments of Howard County. Memo- Kansas. 22 Jan. 1999. randum Order No. 03-RP-HO-0055. Menard, Inc. v. City of Escanaba, No. Maryland Tax Court. 10 Feb. 2006. 325718 Tax Tribunal City of Escanaba, Rushmore, S. 1992. Hotels and Motels: A LC No. 00-441600; 14-001918-TT (2016). Guide to Market Analysis, Investment Analy- Meijer Stores LP, Appellant and Cross-Ap- sis, and Valuations. Chicago: Appraisal pellee, v. Franklin County Board of Revision Institute. et. al., Appellees and Cross-Appellees; Lick- SHC Half Moon Bay, Plaintiff and Appel- ing Heights Local School District Board of lant, v. County San Mateo, Defendant and Education, Appellee and Cross-Appellant. Respondent. Court of Appeal of the State Supreme Court of Ohio. No. 2008-1248. of California, First Appellate District, 22 Jul. 2009. Division Five. A137218. San Mateo Merle Hay Mall v. Board of Review, Iowa County Superior Court No. CIV499595. Supreme Court. 564 NW 2d 419, 1997. 22 May 2014. Metropolitan Dade County v. Tropical Park State ex rel. N/S Associates by JMB Group Inc., 231 So.2d 243 (Fla. 3rd DCA 1970). Trust v. Board of Review of the Village of Greendale. 164 Wis. 2d 31 (1991) 473 N.W. Minnetonka Country Club Association, Inc., 2d 554. Court of Appeals of Wisconsin. Petitioner, vs. County of Hennepin, Respon- 23 Jul. 1991. dent. 1993 File Nos. TC-13977, TC-16678. Minnesota Tax Court, County of Hen- Tellatin, J. 2009. The Appraisal of Nursing nepin, Fourth Judicial District, Regular Facilities. Chicago: Appraisal Institute. Division. 20 Dec. 1993. The Appraisal Foundation (TAF). 2016. Montana Secretary of State. 2015. Ad- “USPAP Frequently Asked Questions.” In ministrative Rules of the State of Montana, Uniform Standards of Professional Appraisal 42.22.101, Definitions (12), December Practice, 2016–2017 ed. Washington, DC: 14. http://www.mtrules.org. TAF. Mt. Bachelor, Inc. and Mt. Bachelor Lodging, U.S. Can. Hospitalities, LLP, Petitioner, v. Inc., Respondents. v. Department of Revenue, City of Romulus, Respondent. Michigan State of Oregon, Appellant. 539 P.2d 653 Tax Tribunal No. 328350. 29 Sept. 2009. (1975) Supreme Court of Oregon, In U.S. Small Business Administration, Of- Banc. 05 Sept. 1975. fice of Financial Assistance. 2016. Lender Nelson, R., and J. Messer. 1989. “Valu- and Development Loan Programs, SOP 50 10 ation of a Pari-Mutuel Racetrack,” 5(B), Subpart C, Chapter 3, Section II, Appraisal Journal 57 (2): 147. October 1. https://www.sba.gov/sites/ default/files/sops/serv_sops_50105b_0. Newark Morning Ledger v. United States pdf (accessed July 25, 2016). (91-1135), 507 U.S. 546 (1993). Waste Management of Wisconsin, Inc., Plain- Prudential Insurance Company of America, tiff-Appellant-Petitioner, v. Kenosha County Plaintiff, v. Township of Parsippany-Troy Board of Review and Richard E. Ellison, Hills, Defendant. 16 N.J. Tax 58 (1995) Defendants-Respondents. 184 Wis. 2d 541 Tax Court of New Jersey. 28 Jun. 1995. (1994) 516 N.W.2d 695 Supreme Court Redding Life Care, LLC, Plaintiff, v. Town of Wisconsin. No. 92-2951. 9 Jun. 1994. of Redding, Defendant. Judicial District Wellmark v. Polk County Board of Review, of New Britain. Superior Court of Con- Iowa Supreme Court, no. 14-0093, Feb- necticut, 23 Feb. 2011. ruary 12, 2016.

31 Wilmath, T., and P. Alesandrini, 2015. View.” Presentation given at the Ap- “Thinking Outside the Big Box,” Fair and praisal Institute Annual Conference, Equitable 13 (11): 3–17. Orlando, Florida, June 26. Wilson, L., and R. Wilson. 2012. Going WXIII/Oxford-DTC Real Estate, LLC v. Concern Valuation. iUniverse. Board of Supervisors of Loudoun County, Wood, G., Jr., 1999. ”Business Enterprise 64 Va. Cir. 317 Circuit Court of Virginia, Value—A Taxing Jurisdiction Attorney’s Loudoun County, Virginia. No. 29368. 5 Apr. 2004.

32 Appendix A. Selected Property Types and Intangible Assets

This appendix discusses various property types in relation to intangible value. In determining whether a property type is likely to have intangible assets associated with it, three questions must be answered. First, in the valuation of the property, is the rent derived from a business or from the real estate? Second, is the property typically bought and sold as a going-concern or real property alone? Third, if there is an intangible associated with a property, does it pass the four-part test to rise to the level of an asset?

Amusement and Theme Parks Auto Dealerships and Auto Repair These property types rarely sell, but when Facilities they do, it is possible the sale was part of Auto dealerships are typically special- a going-concern transaction in which the purpose properties designed and built buyer purchased both the business and specifically for the sales and repair of the real property. Sale verification can automobiles. These properties are gener- help the appraiser or assessor determine ally owner-occupied and purchased for exactly what was included in the price. their utility, rather than their ability to generate rental income. When occupied Apartments new auto dealerships sell, they often in- Apartment properties derive their rev- clude land, buildings, personal property, enue from space rental. When these inventory, and intangible assets. The properties sell, the price is typically intangible assets can include sales and based on the ability of the real estate to service franchise agreements, noncom- generate rent. These properties are not pete agreements, and other intangible typically considered going-concerns that assets depending on the property. The include a business. For this reason, there appraiser should exercise caution in is typically no intangible value for the valuing these facilities, because franchise appraiser or assessor to consider. agreements are typically not assumable In some cases, property owners have as a matter of right by a buyer of a deal- argued that rent subsidies represent ership. an intangible value. In a case involving Business appraisers value auto an apartment complex with subsidized dealerships using methods such as a Section 8 rents, the court rejected that price-to-earnings multiple. Cash flows argument, stating, generated by the sale and service of auto- Here what was taken into account in mobiles are a primary factor in business reaching true cash value was the rental valuation of these properties. However, subsidy provided by the federal govern- real estate appraisers and assessors gen- ment. This subsidy was no more intangible erally ignore the business income and than the actual rents paid by the tenants. focus on the tangible assets. All three A review of the regulatory agreement does valuation approaches can be applied to not reveal any use restrictions on the rental auto dealerships; however, if improved subsidies, beyond their use as a method sales are used, the appraiser should care- for making mortgage loan and other fully verify these sales to determine what payments due MSHDA [Michigan State was included in the price. Housing Development Authority]. The Auto repair facilities (outside a dealer- substance of the subsidy as it pertains to ship) can also be valued using all three the project was rental income. (Dowagiac approaches, depending on the availabil- Limited Dividend Housing Association. ity of data. In some cases, these facilities v. City of Dowagiac 1987) are part of a national chain. Tire centers

33 are also included in this category. These use. In addition, many big-box stores properties can sell as a going-concern place deed restrictions on their future or while under lease. If the contract use, which exclude competing market rent exceeds market rent, the value of participants from purchase or lease. the leasehold estate is negative and the These issues complicate the sales com- value of the leased-fee estate exceeds the parison and income approaches. Big-box value based on market rent. Meanwhile, chains acquire most of their properties the sum of the value of the two interests by purchasing land and constructing equals the value of the fee-simple estate. improvements. Those actions are best There is no intangible value. reflected in the cost approach. The cost approach inherently excludes encum- Big-Box Stores brances such as leases and also excludes A big-box store is a physically large retail intangible value that may result from establishment typically occupied by a cor- above-market sale prices. porate chain, such as Walmart, Target, The Ohio Supreme Court acknowl- Home Depot, Lowe’s, and others. These edged that fact in a court case involving chains typically develop their stores in a the assessment of a Meijer store, stating, built-to-suit arrangement and sometimes Indeed, the owner by purchasing the sell them in sale-leaseback transactions. land and constructing the building They can be appraised and assessed us- evidences a market need for such a prop- ing all three approaches. erty. Therefore, the costs of purchase and Big-box stores do not sell as going- construction evidence that a prospective concerns but often sell as leased-fee purchaser was willing to pay at least the investment properties. Leased-fee sale costs of the property as newly constructed. prices can exceed fee-simple value (Meijer Stores LP v. Franklin County when the rent being paid by the tenant Board of Revision 2009) is above market or the investor seeks benefits above and beyond the value Sometimes, taxpayers and their agents of the sticks and bricks. Above-market argue that big-box stores suffer from leases are treated as an intangible in the functional obsolescence, as reflected by accounting world. In most jurisdictions, the sales of dark stores (often with deed the legal requirement for assessment restrictions in place). In a very recent is fee-simple market value. Under this case concerning the assessment of a premise, market rent is utilized—not Menard’s big-box store, the Michigan actual rent. So whether above-market Court of Appeals recognized the impact leases are classified as intangible assets is of restrictions on big-box stores when it usually irrelevant. The same can be said rejected the sales comparison approach for below-market leases, which in the in which restricted dark stores were used. assessment world are typically ignored The court also rejected the functional in favor of market rent. obsolescence argument, stating, For big-box stores, all three ap- There was no evidence in the record of proaches to value can be applied. Sales any deficiency in the subject premises that of big-box stores usually take three would inhibit its ability to properly func- forms: sale-leasebacks in which investors tion as an owner-occupied freestanding purchase occupied stores, investor-to- retail building. The functional obsoles- investor purchases, or sales of vacant cence to which Menard refers appears to stores, often called dark stores. Sale- be the fact that, due at least in part to leaseback transactions are complicated self-imposed deed restrictions that pro- by leased-fee issues, and dark store sales hibit competition, such freestanding retail are problematic because they typically buildings are rarely bought and sold on represent a different highest and best

34 the market for use as such but are instead Car Washes sold to and bought by secondary users Car wash properties, both full-service who are required to invest substantially and coin-operated, are typically sold in the buildings to convert them into other based on the potential income generated uses, such as industrial use. (Menard, by the going-concern. Typically a price Inc. v. City of Escanaba 2016) includes the real estate, the personal property, and the business. If a car wash Many of the issues concerning big-box has a successful location with a steady store valuation are discussed in an article customer base, revenues are likely to be titled, “Thinking Outside the Big Box” high, resulting in value to the business. (Wilmath and Alesandrini 2015). In that If the car wash is closed or not being article, the authors address many com- managed well, the value of the business mon appeal issues, including the threat may be zero. to brick-and-mortar stores from online When the sale of a property is based retailing, the smaller store prototypes, on the income generated by a going- leased-fee versus fee-simple sales, dark concern, as with a car wash, rather than store sales, and highest and best use. on the rent paid by tenants, such as an office building or shopping center, Bowling Alleys there is a potential for business value. Bowling centers and other entertain- When valuing a car wash, the appraiser ment properties are often bought and or assessor should consider the cost ap- sold as going-concerns. After the bowl- proach, because it inherently excludes ing boom of the 1960s, the industry any business or intangible value. Sales struggled through a long decline. Chang- of car wash properties should also be ing demographics hurt the industry as considered, with careful verification to families moved away from urban areas determine whether there was any busi- where bowling centers previously existed ness value included in the transaction. to the suburbs. The number of bowling It is more likely the value of a car wash centers dropped from its peak of more business is inextricably intertwined with than 12,000 in the mid-1960s to fewer the value of the real property because than 5,200 nationwide today. To reverse the business cannot be sold separate and the declining trend, many bowling apart from the real estate. center owners have added new features such as computerized lights-and-music Casinos systems and upscale bowling lounges, Like hotels, casinos are sometimes val- which cater to young adults and corpo- ued based on the amount of revenue rate functions. These boutique bowling they generate. In Las Vegas, home of centers feature sophisticated lighting many casinos, state law mandates the use and audiovisual systems, comfortable of the cost approach. However, in other seating, enhanced architectural designs, jurisdictions, such as Atlantic City, the in- and high-quality food and drinks. come approach is the preferred method These properties sometimes sell as of valuation. When the income approach going-concerns. Given the declining is used, it is necessary to exclude any in- state of the bowling industry, a price tangible value that may exist as a result premium for intangible value is unlikely. of the going-concern. Sale verification can determine whether One casino operator, Penn National the property sold with the business and Gaming, Inc., operates 26 facilities in 17 how much, if any, may have been allo- states. In 2013, it spun off its real estate cated to intangible business value. assets into a REIT, Gaming and Leisure Properties, Inc. Of significance is the

35 fact that Penn National retained all its can be applied to convenience stores or casino licenses; hence no intangible was gas stations. The cost approach is desir- transferred to the REIT. This did not able because it includes only the value of stop its subsidiary, HC Bangor LLC, from the real property. The sales comparison challenging the City of Bangor, Maine’s, approach may be complicated by the in- assessment as improperly including the clusion of a business, personal property, value of intangibles, such as the gaming or inventory. The income approach can license (Belanger 2015). also be challenging because valid rental In a 2013 court case involving the data may be difficult to find. property tax assessment of the Bor- gata Casino, the New Jersey Tax Court Corporate Headquarters approved the use of the Rushmore ap- In some cases, corporate headquarters proach by the taxpayer’s appraiser for transfer in sale-leaseback transactions, excluding intangibles (Marina District in which a corporation sells its head- Development Co., LLC v. City of Atlantic quarters but remains as a tenant. Some City 2013). argue that investors pay a premium in this type of transaction because of the Convenience Stores/Gas Stations creditworthiness of the tenant and that Often convenience stores and gas sta- premium represents intangible value. tions sell as a going-concern in which Others contend the quality of the loca- the sale price includes land, building, tion and the superior characteristics personal property, inventory, and a of the land and improvements attract business. Sometimes the real property the creditworthy tenant and reflect alone sells in a sale-leaseback transac- real property, not intangibles. There is tion, which can be complicated by the nothing improper about considering a terms of the lease and may or may not sale-leaseback transaction between un- be arm’s-length. However, in some cases related parties, each seeking to benefit convenience stores and gas stations sell their own interest. The seller wants to as land and improvements only. Sale maximize the purchase price, while the verification can determine what was purchaser seeks to minimize it; the seller included in the price. wants to minimize the rent paid to the The potential inclusion of business buyer, while the buyer seeks to maximize value in a convenience store valuation it (AEI Net Lease Fund v. Erie County 2008). was noted in the Appraisal Institute’s Careful sale verification can determine text on convenience store valuation, in whether the quality of the tenant caused which the author stated, the buyer to pay an above-market price Many real estate appraisers are unfamil- for the property. iar with business valuation. … However, When REITs purchase corporate office it is critical for the convenience store buildings, they often allocate the fair appraiser to recognize that the value of value of intangibles to leases-in-place, a convenience store may include values above- or below-market leases, or both. other than that of the real property. These allocations are typically done (Bainbridge 2012) after the pricing decision for financial reporting or accounting purposes and Branded convenience stores in good are permitted under accounting and IRS locations can be very successful and pro- rules. But leases-in-place and above- or duce significant amounts of revenue. It below-market leases are not valid intan- is often difficult to determine how much gible assets in estimating the market success is due to location or reputation value of the fee-simple interest. Above- or and brand. All three approaches to value below-market leases do not create an in- tangible asset; they create leased-fee and

36 leasehold interests. (Refer to Section 5, Accountants treat above-market leases as Special Topics, under the heading “Go- an intangible asset. In most jurisdictions, Dark Valuation.”) the legal requirement for assessment The Iowa Supreme Court examined is fee-simple market value. Under that the proper way to value an office campus premise, market rent—not contract property in a property tax case involving rent—is utilized. So whether above- the 600,000-square-foot corporate head- market leases are classified as intangible quarters of Wellmark in Des Moines. assets is irrelevant. The same can be said In that case, the court considered for below-market leases, which in the arguments pertaining to functional ob- assessment world are typically ignored solescence, intangibles, and the proper in favor of market rent. approach to value these types of prop- For drugstores, all three approaches erties. Ultimately, the court rejected to value can be applied. Drugstore arguments related to intangibles and chains acquire most of their properties functional obsolescence and embraced by purchasing land and constructing the cost approach as the appropriate improvements. Those actions are best valuation methodology, stating, reflected in the cost approach. A Florida Based on our de novo review of the record, judge acknowledged that fact in a court we conclude that the cost approach pro- case involving the assessment of CVS vides the best mechanism for determining stores, saying, market value. There is no dispute that It is logical that, should a drug store the building is appropriate as a corporate chain decide what to pay for one of these headquarters for an insurance company. properties, the drug store would look to There is also no dispute that the actual the costs involved in building a new store cost of the building was in the neighbor- on a competing corner. As noted by [CVS hood of $150 million and that there had representative], CVS itself weighs the costs been very little physical deterioration of and benefits of building their own stores the structure as of the date of the assess- when it comes to the decision to acquire ment. Courts have often applied the cost an existing store or chain of stores. (CVS approach in determining the value of Corporation Divisions and Affiliates v. a single-tenant corporate headquarters Rob Turner, Property Appraiser for Hill- property when comparable sales were not sborough County, Florida, et al. 2013) available. (Wellmark v. Polk County Board of Review 2016) The market and income approaches can also be applied to drugstores; how- Drugstores ever, sales of operating drugstores are Modern drugstores are typically occu- typically leased-fee transactions that may pied by chains such as Walgreens, CVS, require an adjustment to arrive at fee- and Rite Aid. These chains typically simple prices. The income approach can develop their stores in a built-to-suit ar- also be applied if actual lease rates for rangement and sometimes sell them in operating drugstores can be obtained. sale-leaseback transactions. They can be appraised or assessed using all three Fitness Centers approaches. Fitness centers are often sold as a going- Drugstore properties do not sell as concern. All three valuation approaches going-concerns, but they often sell as can be applied to fitness centers and leased-fee investment properties. Leased- similar sports-related facilities. The cost fee sale prices can exceed fee-simple approach is appealing because it iso- value, typically when the rent being lates only the value of the real property. paid by the tenant is above market. The sales comparison approach may be

37 complicated by the inclusion of business value of the real estate, intangible assets value and personal property. The income related to the going-concern must be approach can also be difficult because of considered. the lack of reliable rental data. In the Appraisal Institute’s text on appraising golf courses, the authors Funeral Homes offer several methods for dealing with Funeral homes can sell as real property, intangible assets. Suggested techniques a going-concern, or both. Many consider include the excess profits technique, them special-purpose property. Often analysis of sales of golf course business when these properties sell, the price opportunities, the residual/segregated includes the land, buildings, personal value technique, and the management fee property, and intangible value. The in- technique, among others (Hirsh 2016). tangible value can arise from the trade Similar to hotels, any value of intan- name, prepaid funeral deposits, or both. gible assets in going-concern appraisals Often funeral homes are located in can be measured in the income ap- buildings that have been converted from proach by applying a management fee a different use, such as dwellings, office appropriate for running the business; buildings, and stores. this effectively removes any intangible All three approaches can be applied value in the income approach. In the to funeral homes, although reliable sale sales comparison approach, consid- comparables and lease comparables are eration should be given to each golf scarce. In valuing the real property, the course’s revenue-generating capability. most reliable approach to value may be The cost approach can be applied to the cost approach. golf courses. However, the golf industry is in transition, because fewer courses Golf Courses are being developed and the number of golfers is declining. The replacement When golf courses sell, the price often cost of a golf course may not reflect the includes land, buildings, personal prop- fee-simple market value without consid- erty, and often the business. The sale eration for obsolescence. Although golf prices of golf courses are typically driven courses may sell as going-concerns, the by their ability to generate income. If declining nature of the industry casts the going-concern of the golf course is doubt on significant intangible value able to generate a profit, the price will associated with these properties. likely exceed that of one that does not. The difficulty for assessors is develop- ing approaches to value that reflect the Hotels, Resorts, and Bed & different course types (private, semipri- Breakfast and Other Lodging vate, public) and the various sources of Facilities income present in golf course operations Property types most commonly associ- (golf cart rental, pro-shop income, mem- ated with intangible assets are lodging berships, greens fees, and so on). facilities. These property types often uti- All three approaches to value can be lize intangible assets to allow the real and applied to golf courses. The income personal property to achieve its highest approach is used most by market partici- and best use. For example, management pants in setting prices for golf courses. and franchise agreements are often nec- However, revenue can vary dramatically essary for a lodging property to compete depending on the type of course and the in the market. services offered. If the revenues from the As described in Section 3, the Rush- going-concern are used to estimate the more approach has been widely accepted

38 by the courts, has been embraced by most a case involving a landfill in Kenosha, assessment jurisdictions, and reflects ob- Wisconsin, the courts gave consider- servable and verifiable market behavior able weight to the ability of the land to in the transaction market. For lodging generate landfill revenue and assumed properties and casinos, the Rushmore competent management would obtain approach is the recommended method the proper permits (Waste Management for excluding intangible value from real of Wisconsin, Inc. v. Kenosha County Board property valuations. of Review 1994). Although the permit was considered an intangible asset and Industrial Properties excluded from the assessment, the land The many types of industrial properties was valued assuming the presence of range from distribution warehouses to the permit. mini-storage facilities. Most represent A California court made a similar rul- the general industrial category in which ing in a landfill case, noting, they are bought and sold based on their In short, in a real property case, intan- ability to generate rent, with little if any gibles associated with the realty, such as intangible value. However, in some rare zoning, permits, and licenses, are not real cases, specialized industrial properties property and may not be taxed as such. may be sold as a going-concern with the However, insofar as such intangibles af- business included in the purchase price. fect the real property’s value, for example This usually involves company buyouts or by enabling its profitable use, they may mergers. These situations are rare, but sale properly contribute to an assessment of verification can determine whether any fair market value. (American Sheds, Inc. nonrealty items were included in a price. v. County of Los Angeles 1998)

Landfills Marinas A landfill operation includes real estate When marinas sell, the price typically to store waste, operating permits and includes land, buildings, personal prop- contracts, waste transport equipment, erty, and often the marina business. Sale and management to run the business. prices are typically driven by the marina’s Together these components make up a ability to generate income. The value going-concern. The right of a business of marinas is often determined by the to store waste on a site typically requires revenue generated by the various profit a nontransferable permit from a govern- centers of a marina—boat repair, dry ment agency, and those rights typically storage, slip rental, gasoline and retail do not run with the land. That permit sales, and other services. The operation could be considered an intangible asset. of a marina requires expertise, and its Although the permit itself should be ex- success is dependent on competent cluded in estimating the fee-simple value management. of the real property, the assumption of All three approaches to value can be its existence under highest and best use applied to a marina. The income ap- of the property is permitted. proach is used most often by market It seems contrary to estimate value participants when purchasing a marina, utilizing landfill revenue only achiev- by using revenues from the various profit able by virtue of a nontransferable centers. If the revenues from the busi- permit, when the value of the permit ness are used to estimate the value of the itself must be excluded from value. The real estate, intangible assets related to courts have recognized this paradox in the going-concern must be considered. cases involving landfill assessments. In

39 Mobile Home Parks and RV Parks When REITs purchase office build- Mobile home parks and RV parks derive ings, they often allocate the fair value of their revenue from space rental. When intangibles to leases-in-place, above- or these properties sell, the price is typically below-market leases, or both. These al- based on the ability of the real estate to locations are typically done for financial generate rent. These properties are not reporting or accounting purposes after typically considered going-concerns that the pricing decision and are permitted include a business. For this reason, there under accounting rules. But leases-in- is typically no intangible value for the place and above- or below-market leases appraiser or assessor to consider. are not valid intangible assets in esti- mating market value of the fee-simple Movie Theaters interest. Above- or below-market leases do not create an intangible asset; they Movie theaters can be categorized create leased-fee and leasehold interests. into traditional, multiplex, megaplex, drive-ins, and IMAX. Movie theaters are typically valued using the rent for the Racetracks facility, not the revenue from ticket sales. Horse- and dog-racing facilities typically In some cases it may be possible a buyer consist of the track itself, a clubhouse or purchased a going-concern, instead grandstand, barns, and other support of the real estate alone. In most cases, areas. A racetrack can be valued as a movie theaters are sold as real estate going-concern by utilizing the actual only. Sale verification can indicate what revenues from operations (including was included in a sale price. gambling revenues, often called the handle) the facility generates. Racetracks Office Buildings can also be valued as real property only, with the focus on the land and improve- Office buildings are bought either for ments. Often racetracks are valued as a investment purposes or for owner occu- going-concern; then the total value is pancy. When these properties sell, they allocated to the land, building, personal sell either for their ability to generate property, and intangible value. In their rent or, in the case of owner-occupied text about the valuation of pari-mutuel properties, their ability to provide utility. racetracks, Nelson and Messer cite the In some cases, single-occupant of- cost approach as the best way to allocate fice buildings and corporate campus the real property value, noting, properties sell in a sale-leaseback trans- action, in which a corporation sells the A racetrack is basically a business property property and remains as a tenant. Some (a going-concern) with strong real estate argue the sale price in a sale-leaseback foundations, but it is also one with con- transaction may be influenced by the siderable risks. … Appraisers are generally creditworthiness of the tenant. The ar- called on to allocate various aspects of the gument suggests that a price premium enterprise value. One method of allocat- paid to obtain a creditworthy tenant is ing value is to go to a conventional cost intangible value. Others contend the approach. (Nelson and Messer 1989) quality of the location and the superior characteristics of the land and improve- In a court case involving the West ments attract the creditworthy tenant Flagler Kennel Club in Miami, Florida, and reflect real property, not intangibles. the court upheld the assessor’s income Careful sale verification can determine approach value because the appraiser whether the quality of the tenant caused made an allowance for the pari-mutuel the buyer to pay an above-market price license (Hecht v. Dade County, Florida et for the property. al. 1970). In a Florida case involving

40 the Tropical Park horse track, the court value of the real property is measured by considered the pari-mutuel license in- the rent for the property. Regional malls, tangible property, stating, shopping centers, and other retail prop- The trial court simply found that the erties derive their income from rent paid income or profit of the race track business by tenants, not from business income. was not assignable to the real estate but Even though successful shopping centers rather to the intangible rights which have and regional malls are operated by busi- been granted the owner by the state in the nesses, their value is measured by their form of a license to conduct pari-mutuel ability to generate rent. Further, the ab- wagering. We think there is evidence to sence of intangibles in mall transactions support this conclusion. (Metropolitan is well documented by appraisers who Dade County v. Tropical Park Inc. 1970) routinely value regional mall properties. A Wisconsin court recognized the Regional Malls and Shopping nuance that intangible assets must be separable from the real estate in its rul- Centers ing on the assessment of the Southridge Arguments for the presence of intangi- Mall. In that case, the court stated, ble assets in shopping centers and malls Southridge Mall’s raison d’etre—namely, include superior management, optimal the leasing of space to tenants and related tenant mix, cart and stroller rental in- activities such as trash disposal, baby come, monopoly value, above-market stroller rentals, etc.—is a transferrable rent, percentage rents, start-up costs, and value that is inextricably intertwined others. The courts have mostly rejected with the land and ‘all buildings and arguments related to intangible value in improvements thereon, and all fixtures retail properties (Merle Hay Mall v. Board and rights and privileges appertaining of Review 1997; Eden Prairie Mall, LLC v. thereto,’ sec. 70.03, Stats., just as the County of Hennepin 2009; State ex rel. N/S transferrable value of a farm—the grow- Associates by JMB Group Trust v. Board of ing of crops—is inextricably intertwined Review of the Village of Greenview 1991). In with the property from which the farm a court case involving the Merle Hay Mall operates. (State ex rel. N/S Associates by in Des Moines, Iowa, the court stated, JMB Group Trust v. Board of Review of Further, the business enterprise value con- the Village of Greenview 1991) cept seems to be used almost exclusively in tax assessment cases; it is not used in In essence, malls, shopping centers all mall appraisals. Significantly, one and similar properties comprise land, appraiser who had used the theory several buildings, and personal property. In- times in tax assessment cases testified come is generated by renting space and that he had never used it when a mall other services, which are tied to the real requested an appraisal for the purpose property. In some cases, market partici- of obtaining a mortgage loan. Appar- pants may be willing to pay above-market ently, no assessor in Iowa applies this prices for creditworthy tenants, but in theory, and there is no uniformly accepted almost every case, there is no intangible methodology to do so. (Merle Hay Mall value associated with retail properties v. Board of Review 1997) when market rent is used to value the property. For hotels, senior care properties, and some other property types, the value of Restaurants the real property is often based on the Restaurants, both fast food and full revenue generated by the business oc- service, often sell as going-concerns cupying the real estate. This is not true that could include intangible value. In for most retail properties, in which the

41 fact, restaurant businesses often sell property, not the business income. There independent of real estate. The most are exceptions to this, such as restaurants common intangible asset associated located within full-service hotels, whose with restaurants is the business name. contributory value is often estimated us- A well-run restaurant with a popular ing food and beverage revenue. following can achieve a level of success that similar properties do not enjoy. That Senior Care Facilities success can translate into an intangible Senior care facilities include nursing asset. However, success is often achieved homes, assisted living facilities, inde- through the efforts of specific owner- pendent living facilities, and continuing ship or management and cannot be care retirement communities (CCRCs), transferred to a new buyer or successor. among others. These properties differ Similarly, the identity of a restaurant is from typical multi-family properties, be- often tied to its location. When apprais- cause they offer services over and above ing the property as a going-concern, an the real estate. Services can include appraiser should be mindful that not all beauty salons, cleaners, medical services, success is transferable. transportation, meals, and so on. These Business appraisers value restaurants services are provided by the business using EBITDA multipliers and other operating inside the real estate. methods in which revenue is based on Senior care facilities are often bought business receipts. Real estate appraisers and sold based on the revenue from value restaurants using all three ap- business operations, which can include proaches and in the income approach a combination of rental income and ser- utilize revenue based on the rental of the vices income. Included in the price are property. In reality, both techniques can real property, personal property, intan- be applied to the same property—one ar- gible assets associated with the business, riving at the value of the business and the and licenses and permits that allow the other at the value of the real property. facility to operate. For example, nursing Sometimes a restaurant in a full-service homes require a certificate of need. hotel may achieve revenues significantly The Appraisal of Nursing Facilities ad- higher than typical food and beverage dresses the need to allocate the value revenue for most hotel restaurants. That between tangible and intangible assets difference may be attributed to brand or as follows: reputation, but may not be something a The methods for allocating the going- new hotel owner can achieve through lo- concern of a health care facility are the cation alone. A comparison of food and subject of an on-going debate. There is beverage revenue as a percentage of total no sure, single technique to separate the revenue should be made against bench- real estate value from the value of the marks published in industry reports. business enterprise. The cost approach All three approaches can be used to may be the best indicator of the value of value restaurants, although market par- the tangible assets. This is especially true ticipants rarely use the cost approach. when the facility is newer. However, the When restaurants sell as a going-concern, cost approach is ineffective when the total with real property, personal property, and value of the business or going-concern is intangible value, verification should assist less than the value indicated from the cost the appraiser or assessor in determining approach. (Tellatin 2009) how much of the price was allocated to real property. If the income approach is In the case of CCRCs, the courts have used to value the real property, revenue leaned heavily on the cost approach be- should be based on the rental of the cause of the complexities of the income

42 approach for these property types. In a the real estate or the business is being court case in Oregon, the court noted valued, it is necessary to analyze the that newly built facilities are evidence number of skiers who patronize a facility. that investors base their decisions on the Resort demand will assist the appraiser cost approach, stating, or assessor in determining highest and Here, the objective is to value tangible real best use of the property. property, not going-concern or business The difficulty in separating the real value. A CCRC is a going-concern that estate from the ski resort business was provides many services for which income recognized by the Oregon Supreme is received. Consequently, there is some Court in the assessment of a ski resort danger of overvaluing or undervaluing on Mt. Bachelor near Bend, Oregon the real property due to inability to sepa- (Mt. Bachelor, Inc. v. Department of Revenue rate income for services from income for 1975). In that case, the court approved use of the property. ... The cost approach an income approach that included rev- eliminates this danger by avoiding any enue from ski lift tickets. going-concern value or value attribut- All three approaches to value can be able to services. It also eliminates the applied to ski resorts. If the revenues effects of management and management from the business are used to estimate policies that affect the income earned by the value of the real estate, consider- the property. Where the property is reason- ation for intangible assets related to the ably new construction, the cost approach going-concern must be considered. A can provide a good indication of a base ski resort is an income-producing busi- value. (Linus Oakes, Inc., fka Parkway ness intertwined with the real estate. It Medical Buildings, Inc. v. Department is often difficult to separate the value of of Revenue, State of Oregon, et al. 2000) the business from the real estate. Similar to hotels, any value to intangible assets All three approaches can be used to in going-concern appraisals can be value senior care facilities, although the measured in the income approach by courts have strongly favored the cost ap- applying a management fee appropriate proach for CCRC properties. When the for running the business; this effectively sale price of a senior care facility includes removes any intangible value. real property, personal property, and in- tangible value, verification should assist Telecommunications, Railroads, the appraiser or assessor in allocating the and Public Utilities purchase price. Telecommunications properties, rail- roads, and public utilities are sometimes Ski Resorts valued at a state level using a technique Ski resorts consist of land (including a called unit valuation or referred to as be- mountain slope), lodging facilities, ski ing centrally assessed. This method values lifts, equipment to groom the ski runs, an entire company and then allocates snowmaking equipment, and typically that value to multiple jurisdictions, a rental/retail shop. Ski lodges offer which can be local, countywide, or even various services that are part of a busi- statewide. Unit valuation methods are ness and not necessarily part of the real often applied in the assessment of com- property. munications, transportation (railroads When ski resorts sell, the price may and airlines), water, gas, wastewater, and include land, buildings, personal prop- electric utilities, as well as oil and gas erty, and often the business. Sale prices pipeline companies. of ski resorts are typically driven by their The unit approach is used to value these ability to generate income. When either types of property because it is considered

43 more efficient than attempting to value and public utility properties. For many the individual parts located in each industries, such as telecommunica- jurisdiction. The premise is that the tions, much of the value lies in personal individual assets, such as railroad tracks, property and intangible assets. These train cars, and train stations, have more properties are sometimes assessed lo- value as an integrated operating unit than cally. The real estate for these types of as separate assets and assessing them as a property can often be minimal in com- whole and then allocating them to each parison to the personal property and jurisdiction ensures uniformity. intangible assets. In these situations, the Because the entire business is valued, cost approach is the best approach since the unit valuation involves appraising it is the preferred approach for personal the going-concern and allocating that property and the cost approach inher- value to the various components of ently excludes intangible value. land, building, personal property, and A recent case from California ad- intangible assets. Valuing the intangibles dressed the issue of intangible assets in is what attracts the most appeals related the property tax assessment of the Elk to the value of these properties. The Hills Power Plant (Elk Hills Power, LLC v. going-concern value of these types of Board of Equalization et al. 2013). In that properties represents the individual case, the taxpayer argued that emission values of land, building, and personal reduction credits (ERCs) are intangible property but, because these properties assets that should have been excluded are valued as a going-concern, may in- from the company’s property tax assess- clude intangible assets. ment. An ERC is a credit earned by a A California court ruled in favor of the company when it reduces air emissions assessor in a property tax appeal involv- beyond what is required. It can be used ing the telephone company PacTel. In by the owner of a business or sold to oth- that case, the taxpayer argued that the er companies that need emission offsets. company’s license issued by the Federal Elk Hills had purchased approximately Communications Commission was an $10 million in ERCs to obtain the per- intangible asset that should have been mits it needed to build its power plant. excluded from the assessment. The The assessor had included the value of court stated, the ERCs in Elk Hills’ assessment, and What PacTel fails to appreciate suf- litigation ensued. The court rejected the ficiently is that although ‘intangible assessor’s reasoning that the ERCs were property’ is exempted from property taxa- taxable because they were necessary to tion, such property may enhance the put the taxable property to its produc- value of tangible personal property (Los tive use. The California Supreme Court Angeles SMSA Limited Partnership v. ruled that the ERC’s were intangible State Board of Equalization et al. 1992). property that should be excluded from the assessment. A property tax case involving the unit California law is interesting in that the approach occurred in Florida in the early state Assessors’ Handbook allows intangible 1990s. In that case, the court rejected the assets to be assumed in estimating the railroad’s argument that management value of tangible assets, but they must skills and quality of service delivered by be excluded from that value. The hand- its employees was an intangible value book states, that should have been excluded from The value of such intangible assets and the assessment (Florida East Coast Railway rights does not enhance and is not to be Company v. Department of Revenue 1993). reflected in the value of taxable property The unit approach is not always ap- (California State Board of Equaliza- plied to telecommunications, railroads, tion 1998, 159).

44 That distinction was important in All three approaches can be applied Elk Hills because clearly the company in a unit valuation approach. The cost needed the ERCs to build the power approach is typically applied in an ag- plant, and without them the power plant gregate method, versus an asset-by-asset would not be able to operate and would basis. Accounting book value is often used be virtually worthless. But the California as a substitute for replacement cost and Assessors’ Handbook and courts make a trended for time. In the income approach, clear distinction between assuming the some practitioners use the stock-and-debt presence of an intangible asset for a tan- method, which measures value using a gible asset to achieve its highest and best company’s stock. The income approach use, versus actually including the value of typically utilizes the capitalization of earn- that intangible asset in the assessment. ings to measure value in the unit approach.

45 Appendix B. Glossary

Permission to reproduce the following excerpts from The Dictionary of Real Estate Appraisal, 6th edition, was generously provided by the Appraisal Institute. The Appraisal Institute was not involved in the development, preparation, or review of “Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals.” The views and opinions expressed therein are not endorsed or approved by the Appraisal Institute as policy unless adopted by the Board of Directors pursuant to the Bylaws of the Appraisal Institute.

Air rights—The right to undisturbed estate into an operating business; can use and control of designated air space include initial operating losses, operat- above a specific land area within stated ing capital, advertising and promotions, elevations. Air rights may be acquired to assembling a workforce, training, etc. construct a building above the land or Certificate of Need—A written docu- building of another or to protect the light ment issued by a governmental body and air of an existing or proposed struc- (e.g., the State Department of Health) to ture on an adjoining lot. Air rights do an individual or organization proposing not always include developmental rights. to construct or modify a health facility, or Big-box store—A single-use store, typi- to offer a new or different service. cally between 10,000 and 100,000 square Condemnation—The act or process of feet or more, such as a large bookstore, enforcing the right of eminent domain. office supply store, pet store, electronics store, or toy store (ICSC 2012). Credit tenant—A tenant in a retail, of- fice, or commercial property with a long Blue sky—The process of qualifying an history in business, strong financial state- issue (e.g., a real estate syndication) ments, or a large market presence that under a state securities act. could be rated as investment grade by a Bundle of Rights theory—The concept rating agency. Because of the likelihood that compares property ownership to a of honoring their leases, credit tenants bundle of sticks with each stick repre- are considered less risky to lease to, and senting a distinct and separate right of developments with credit tenants as the property owner, e.g., the right to use anchors are considered less risky invest- real estate, to sell it, to lease it, to give it ments for lenders. away, or to choose to exercise all or none Deed restriction—A provision written of these rights. into a deed that limits the use of land. Business Enterprise Value—The value Deed restrictions usually remain in effect contribution of the total intangible assets when title passes to subsequent owners. of a continuing business enterprise such Eminent domain—The right of govern- as marketing and management skill, an ment to take private property for public assembled workforce, working capital, use upon the payment of just compensa- trade names, franchises, patents, trade- tion. The Fifth Amendment of the U.S. marks, contracts, leases, customer base, Constitution, also known as the takings and operating agreements. clause, guarantees payment of just com- Business start-up costs—Pre-opening ex- pensation upon appropriation of private penses necessary to turn completed real property.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z 46 Fair value—The price that would be 2. That intangible asset arising as a received to sell an asset or paid to trans- result of name, reputation, cus- fer a liability in an orderly transaction tomer loyalty, location, products, between market participants at the mea- and similar factors not separately surement date. (FASB) identified. (American Institute of Certified Public Accountants et al. Fee-simple estate—Absolute ownership 2001) unencumbered by any other interest or estate, subject only to the limitations 3. That intangible asset arising as a imposed by the governmental powers of result of elements such as name, taxation, eminent domain, police power, reputation, customer loyalty, and escheat. location, products and related factors not separately identified Financial Accounting Standards Board and quantified. (ASA 2009) (FASB)—The agency of the Financial Ac- counting Foundation that is responsible Hypothetical condition— for establishing financial accounting 1. A condition that is presumed to standards. be true when it is known to be Franchise—A privilege or right that is false. (Appraisal Institute 2015) conferred by grant or purchased by an 2. A condition, directly related to individual or a group of individuals; usu- a specific assignment, which is ally an exclusive right to furnish public contrary to what is known by the services or to sell a particular product in appraiser to exist on the effective a certain community. date of the assignment results, but Going-concern— is used for the purpose of analysis. 1. An established and operating Comment: Hypothetical conditions are business having an indefinite contrary to known facts about physical, future life. legal, or economic characteristics of the 2. An organization with an indefi- subject property, such as market condi- nite life that is sufficiently long tions or trends; or about the integrity of that, over time, all currently in- data used in an analysis. (TAF 2016–2017) complete transformations (trans- Intangible assets— forming resources one form to a 1. A nonmonetary asset that mani- different, more valuable form) fests itself by its economic proper- will be completed. ties. It does not have the physical Going-concern value—An outdated label substance but grants rights and for the market value of all the tangible economic benefits to its owner. and intangible assets of an established (IVSC 2013) and operating business with an indefi- 2. A nonphysical asset such as a nite life, as if sold in aggregate; more franchise, trademark, patent, accurately termed the market value of the copyright, goodwill, equity, min- going-concern or market value of the total eral right, security, and contract assets of the business. (as distinguished from physical Goodwill—Unidentifiable intangible assets) that grant rights and assets. privileges, and have value for the owner. (ASA 2009). 1. The amount by which the acquisi- tion price exceeds the fair value 3. An identifiable nonmonetary of identified assets. asset without physical substance.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z 47 An asset is a resource that is con- exposure in a competitive market trolled by the entity as a result under all conditions requisite to a of past events (for example, pur- fair sale, with the buyer and seller chase or self-creation) and from each acting prudently, knowl- which future economic benefits edgeably, and for self-interest, (inflows of cash or other assets) and assuming that neither is are expected. [IAS38.8] Thus, under undue duress. the three critical attributes of an 2. Market value is described, not intangible asset are: defined in the Uniform Standards • identifiability of Professional Appraisal Practice (USPAP) as follows: A type of value, • control (power to obtain stated as an opinion, that presumes benefits from the asset) the transfer of a property (i.e., a • future economic benefits right of ownership or a bundle of (such as revenues or re- such rights), as of a certain date, duced future costs). [IFRS under specific conditions set forth Foundation 2014]. in the definition of the term identi- fied by the appraiser as applicable Intangible property—Nonphysical assets, in an appraisal. including but not limited to franchises, Comment: Forming an opinion of market trademarks, patents, copyrights, good- value is the purpose of many real property will, equities, securities, and contracts appraisal assignments, particularly when as distinguished from physical assets the client’s intended use includes more such as facilities and equipment. (TAF than one intended user. The conditions 2016–2017) included in market value definitions Leased fee interest—The ownership in- establish market perspectives for develop- terest held by the lessor, which includes ment of the opinion. These conditions the right to receive the contract rent may vary from definition to definition specified in the lease plus the reversion- but generally fall into three categories: ary right when the lease expires. 1. the relationship, knowledge, Leasehold interest—The right held by and motivation of the parties the lessee to use and occupy real estate (i.e., seller and buyer); for a stated term and under the condi- 2. the terms of sale (e.g., cash, tions specified in the lease. cash equivalent, or other Market value—A type of value that is terms); and the major focus of most real property 3. the conditions of sale (e.g., ex- appraisal assignments. Both economic posure in a competitive market and legal definitions of market value for a reasonable time prior to have been developed and refined, such sale). as the following: Appraisers are cautioned to identify the exact 1. The most widely accepted compo- definition of market value, and its authority, nents of market value are incor- applicable in each appraisal completed for the porated in the following defini- purpose of market value. tion: The most probable price, USPAP also requires that certain items as of a specified date, in cash, or be included in every appraisal report. in terms equivalent to cash or in Among these items, the following are other precisely revealed terms, directly related to the definition of mar- for which the specified property ket value: rights should sell after reasonable A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z 48 • Identification of the specific • A reasonable time is allowed for property rights to be appraised. exposure in the open market; • Statement of the effective date • Payment is made in terms of of the value opinion. cash in U.S. dollars or in terms of financial arrangements com- • Specification as to whether parable thereto; and cash, terms equivalent to cash, or other precisely described • The price represents the normal financing terms are assumed as consideration for the prop- the basis of the appraisal. erty sold unaffected by special or creative financing or sales • If the appraisal is conditioned concessions granted by anyone upon financing or other terms, associated with the sale. specification as to whether the financing or terms are at, (12 C.F.R. Part 34.42(g); 55 Feder- below, or above-market interest al Register 34696, August 24, 1990, rates and/or contain unusual as amended at 57 Federal Register conditions or incentives. The 12202, April 9, 1992; 59 Federal terms of above- or below- Register 29499, June 7, 1994) market interest rates and/ 4. The International Valuation or other special incentives Standards Council defines market must be clearly set forth; their value for the purpose of interna- contribution to, or negative tional standards as follows: The influence on, value must be estimated amount for which an described and estimated; and asset or liability should exchange the market data supporting on the valuation date between a the opinion of value must be willing buyer and a willing seller described and explained. in an arm’s length transaction, af- 3. The following definition of mar- ter proper marketing and where ket value is used by agencies that the parties had each acted knowl- regulate federally insured finan- edgeably, prudently and without cial institutions in the United compulsion. (IVSC 2013) States: The most probable price 5. The Uniform Appraisal Standards that a property should bring in for Federal Land Acquisitions defines a competitive and open market market value as follows: Market under all conditions requisite to a value is the amount in cash, or fair sale, the buyer and seller each on terms reasonably equivalent to acting prudently and knowledge- cash, for which in all probability ably, and assuming the price is the property would have sold on not affected by undue stimulus. the effective date of the appraisal, Implicit in this definition is the after a reasonable exposure time consummation of a sale as of a on the open competitive market, specified date and the passing of from a willing and reasonably title from seller to buyer under knowledgeable buyer, with neither conditions whereby: acting under any compulsion to • Buyer and seller are typically buy or sell, giving due consider- motivated; ation to all available economic uses of the property at the time of • Both parties are well informed or the appraisal. (Interagency Land well advised, and acting in what Acquisitions Conference 2000) they consider their best interests; A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z 49 Personal property— that REITs with over 300 investors have to 1. The interests, benefits, and rights make their financial statements public. inherent in the ownership of tan- Residual techniques—Procedures used gible objects that are considered to capitalize the income allocated to by the public as being personal; an investment component of unknown also called tangible personal property. value after all investment components 2. Identifiable tangible objects that of known values have been satisfied; may are considered by the general be applied to a property’s physical com- public as being “personal”—for ponents (land and building), financial example, furnishings, artwork, interests (mortgage and equity, legal antiques, gems and jewelry, col- components (leased fee and leasehold lectibles, machinery and equip- interests), or economic components ment; all tangible property that is (income and reversion). not classified as real estate. (TAF Sale-leaseback—A transaction in which 2016–2017) real estate is sold by its owner-user, who simultaneously leases the property from Real estate— the buyer for continued use. Under this 1. An identified parcel or tract of arrangement, the seller receives cash land, including improvements, from the transaction and the buyer is if any. (TAF 2016–2017) assured a tenant. 2. Land and all things that are a Value in use—The value of a property natural part of the land (e.g., trees, assuming a specific use, which may or minerals) and things that have may not be the property’s highest and been attached to the land (e.g., best use on the effective date of the ap- buildings and site improvements) praisal. Value in use may or may not be and all permanent building attach- equal to market value but is different ments (e.g., mechanical and elec- conceptually. trical plant providing services to a building) that are both below and References above the ground. (IVSC 2013) American Institute of Certified Public Real Estate Investment Trust (REIT)—A Accountants, American Society of Ap- corporation or trust that combines the praisers, Canadian Institute of Chartered capital of many investors to acquire or Business Valuators, National Association provide financing for all forms of real of Certified Valuation Analysts, and the property. A REIT serves much like a Institute of Business Appraisers. 2001. mutual fund for real property. Its shares International Glossary of Business Valuation are freely traded, often on a major stock Terms, June 8. www.nacva.com/PDF/ exchange. To qualify for the favorable Glossary/pdf (accessed December 29, tax treatment currently accorded such 2016). trusts, 90% of the taxable income of American Society of Appraisers (ASA). a REIT must be distributed among its 2009. “ASA Business Valuation Stan- shareholders, who must number at least dards,” December 11. Reston, VA: ASA. 100 investors; no fewer than five investors https://www.appraisers.org/docs/ can own more than 50% of the value of default-source/discipline_bv/bv- the REIT during the last half of each standards.pdf?sfvrsn=0 (accessed Decem- taxable year. The U.S. Securities and ber 28, 2016). Exchange Commission (SEC) stipulates

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z 50 Appraisal Institute. 2015. Standards of Justice. https://www.justice.gov/sites/ Valuation Practice. Chicago: Appraisal default/files/enrd/legacy/2015/04/13/ Institute. www.appraisalinstitute.org/ Uniform-Appraisal-Standards.pdf (ac- professional-practice/ethics-and- cessed December 28, 2016). standards/standard-of-professional- International Council of Shopping appraisal-practice/ Centers (ICSC). 2012. ICSC’s Dictionary IFRS Foundation. 2014. “IAS 38 Intangi- of Shopping Center Terms, 4th ed. New ble Assets,” Technical Summary, January 1. York: ICSC. http://www.ifrs.org/IFRSs/Documents/ International Valuation Standards Coun- Technical-summaries-2014/IAS%2038. cil (IVSC). 2013. International Valuation pdf (accessed December 29, 2016). Standards 2013. London: IVSC. Interagency Land Acquisition Confer- The Appraisal Foundation (TAF). 2016– ence. 2000. Uniform Appraisal Standards 2017. Uniform Standards of Professional for Federal Land Acquisitions. Washington, Appraisal Practice (USPAP), 2016–2017 ed. DC. Chicago: Appraisal Institute in co- Washington, DC: TAF. operation with the U.S. Department of

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