Information, knowledge, and awareness: a column on resources for real estate analysts and valuers.
This column is about resources available in a variety of publications, presentations, and websites that are helpful to appraisers and real estate market analysts. In this edition of Resource Center, let's take a look at some recent information source material for valuers and users of appraisals.
New in the Lum Library
The Appraisal Institute's Lum Library (http://www.myappraisalinstitute.org/library/) continues to expand its collection of interesting and helpful materials with the addition of a new book published by the American Institute of Certified Public Accountants (AICPA).
The AICPA's Guide to Intangible Asset Valuation by Robert F. Reilly, CPA, and Robert P. Schweihs, ASA, is not for accountants only. It's designed as an introduction to intangible assets and intellectual property, and a reference source for nonappraisers as well as business entity appraisers. It is intended to be useful to people interested in "accurate valuation and economic analysis of intangible assets." This impressive 700+ page work is a gold mine of information, ideas, terms, and howtos. It reflects and describes the state-of-the-art, but fully recognizes the fact that theory and practice are continuously evolving.
For real estate appraisers, there are appraisal situations with the need to separate intangibles from tangible real property (and/or personal property), or non-realty from real property, particularly in the valuation of certain property types, including hotels and other lodging properties, resorts, entertainment and theme parks properties, various special design or special use properties, some restaurants, office and retail centers--the list may go on and on. Further, the reason for some real estate appraisals dictates a need for asset component separation for valuation. For example, real property taxes normally exclude personal property and intangibles, and many lenders--legally or by policy--can loan only on real property and must exclude non-realty and intangibles.
If you appraise commercial property, that involves the need to separate realty and non-realty components or interests, for guidance you may refer to (1) The Appraisal of Real Estate, 14th edition (especially pages 63-64 and pages 703-715); (2) the Uniform Standards ofProfessional Appraisal Practice, 2014-2015 edition (especially Definitions lines 87-89 page U-3, the Competency Rule, SR l-2(e), SR l-4(g), SR 2-3 Comment, SR 3-6, SR-7, SR-8, SR-9, SR-10, Statement 9, and Advisory Opinions 12, 20, 28, and 290); and (3) the Appraisal Institute's course Fundamentals of Separating Real Property, Personal Property, and Intangible Business Assets.
With the importance of separating realty and non-realty assets in many property types, an understanding of business valuation is important, whether or not the appraiser is valuing a business enterprise per se. The AICPA book Guide to Intangible Asset Valuation is, as others of similar nature, logically a part of due diligence and one of the reasonable commonsense things to do to help establish competency (real estate appraiser readers think USPAP) in separating intangibles from real property interests as well as valuation of intangibles. Some examples cited in the book as possible intangible or separable assets with fair value or market value include the below:
agreements and leases
brand names and logos
certificates of need
contracts and relationships
decor (themed parks, restaurants)
diversion rights (water and other)
franchise agreements and rights
going-concern value and immediate-use value
goodwill (institutional, personal, professional)
government contracts or subsidy programs
insurance in force
leasehold estates and interests
licenses (professional, business and others)
mineral and mining rights
property use rights
Real estate appraisers can see the overlap of terms and concepts even in this partial listing. And if you are interested in the specialty of business valuation, or involved with the separation of realty and non-realty interests or intangibles, this book could be an important part of your resource library.
This guide and reference provides the reader with the process of description, identification, and valuation of intangible and real or non-real property assets. The authors discuss the various basic types of intangible assets and how to identify them. They present guidelines for the valuation of these assets as well as models and examples, thus bridging a goodly share of the gap between theory and reality.
In the text, definitions and concepts of market value, use value, investment value, insurable value, and ad valorem value will all be very familiar to real estate appraisers--the underlying premise and essence of the definitions are in basic harmony with real estate appraisal's accepted terminology and concepts. Real estate appraisers also will identify with the concepts and definitions of highest and best use, value in exchange, value in [continued] use, cost approach, market approach, and income approach, and other similar familiar points. Real estate appraiser's will note the comment, "Valuation is not an exact science, and neither, it turns out, is accounting." (p. 407)
The text also addresses the term fair value, which is used by the International Accounting Standards Board, the Financial Accounting Standards Board, and in IRS guidelines, material, and regulations. Generally, as pointed out on page 75 of the text,
There are two different sets of definitions for "fair value." The first definition typically applies in a forensic analysis setting.... The second definition of fair value typically applies in a financial accounting context ... fair value is defined as "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
The authors note that "alternative premises of value" are required in valuation; these underlying premise points include the following:
1. Value in continued use as part of going-concern
2. Value in place, but not in current use in the production of income
3. Value in exchange in an orderly disposition
4. Value in exchange as part of a voluntary liquidation
5. Value in exchange as part of an involuntary liquidation
While real estate appraisers are generally most familiar with the third and fourth type listed, any of these may be part of a separation of interests (real estate versus non-realty), so some serious thought about the intended use of the appraisal and its purpose is necessary. Intended use of the appraisal is critical. Further, special considerations are discussed for valuations prepared for accounting, litigation, taxation, financing, bankruptcy, and as a single asset or as an assemblage of assets.
The AICPA Guide to Intangible Asset Valuation includes extensive examples, illustrations, and checklists. For example, checklists of sources and questions-to-ask are included in the chapter titled "Valuation Data Gathering and Due Diligence Analysis." Other checklists and data sources are presented for strategic and competitive analysis, SWOT (strengths, weaknesses, opportunities, threats) analysis, and appraiser due diligence. Extensive information covering structuring the intangible asset analysis assignment (Chapter 10) is part of the material. The intangible asset valuation process is the meat of Chapter 11. These chapters, and particularly Chapter 34 on reporting the results of the intangible asset analysis, include suggestions on reporting the premise, data, analysis, and conclusions.
Highest and best use analysis (HABU) for real property and non-realty intangibles, are parallel with real estate highest and best use concepts and tests (legal, permissibility, physical possibility, financial feasibility and maximum productivity). The HABU for the intangible asset--independently considered or as a component of a total asset or total property package--is an underlying foundation for the appraisal and functional relationships in the property package.
The valuation approaches are familiar to real estate appraisers. Each approach is succinctly presented in its own chapter, each with a follow-up chapter with illustrative example applications. In the cost approach, the concepts of replacement and reproduction costs, and depreciation and obsolescence are familiar. In the market approach (parallel to real estate appraisers' sales comparison approach), the term CUT Data (i.e., Comparable Uncontrolled Transaction Data) is used--a concept essentially the same as real estate appraisers' notions of arm's-length, normal market, sales transactions. Concepts of comparison adjustments and unit of comparison will be familiar to real estate appraisers. The approach is expanded in concept to view three primary intangible asset valuation methods: (1) sales comparison, (2) relief from royalty, and (3) comparable profit margin. Each is discussed in Chapter 16, with illustrative examples in Chapter 17.
The income approach also will be familiar to real estate appraisers. The basic procedure presented is as follows: estimate intangible asset income, estimate duration or projection period, estimate the appropriate capitalization rate, then apply in the appropriate valuation model. Income sources and expenses differ, of course, depending on the particular intangible asset. Also, incremental income analysis may be appropriate in some situations. There are several nuances presenting a learning curve for real estate appraisers, including royalty rate analysis and profit split analysis. Measures of economic income and alternative measures of income are discussed before the income approach chapter moves on to estimating the forecasting or projection period and estimating the capitalization rate. Yield capitalization and direct capitalization are both examined.
Differences between discrete and collective valuation of intangible assets are discussed along with differences between intangible asset valuation and business valuation. The income approach chapters have examples and illustrations.
Reconciliation of diverse value indications from different methods makes up Chapter 20, "Valuation Synthesis and Conclusion." The next chapters examine FASB ASC 820 and fair value accounting, and FASB ASC 805 and acquisition accounting, as they relate to valuation. While the topics may sound of interest only to accountants, the materials covers definitions and concepts of fair value, including fair value hierarchy, premiums, and discounts.
Your understanding of intangible assets is expanded in chapters discussing categories of intangible assets, such as marketing-related, customer-related, artistic-related, contract-based, and technology-based intangibles. Checklists and examples are also provided, covering categories of intangibles, including valuation of contracts, customers, data processing, human capital, licenses and permits, technology, engineering, and goodwill.
Goodwill as an intangible asset is found in several parts of the book, but two full chapters are specifically devoted to goodwill considerations. There are several accepted definitions of goodwill; these are discussed in the text along with several alternative, commonly used, definitions. Interpretations of goodwill are usually either residual-based or income-based, with the latter generally used by analysts and valuers. Further, there are three types of goodwill: institutional (resulting from a business enterprise), professional practice, and celebrity. Methods are reviewed involving the analysis of goodwill as a separate intangible asset.
Recommendation: For a variety of reasons, real estate appraisers increasingly need to separate intangibles and non-realty from real property interests in their valuations. This book can offer valuable insights and ideas in the pursuit of appropriate and applicable techniques for separation of real property, personal property, and intangible assets. (1)
Other Publications and Resources
You also may want to check out the perspectives offered by the following other resources.
Understanding Business Valuation: A Practical Guide to Valuing Small--to Medium-Sized Businesses, Fourth Edition
by Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS (American Institute of Certified Public Accountants)
Another new AICPA text of interest to valuers is Understanding Business Valuation: A Practical Guide to Valuing Small--to Medium-Sized Businesses, fourth edition, by Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS. (Trugman is also the author of AICPA's Understanding Business Valuation, a course used as part of the CPA Continuing Professional Education series.)
This fourth edition of the text addresses statistics for business valuation and economic damage analyses as well as forecasting techniques for valuation of business. The discounts and premiums section of the text discusses types of discounts and quantification techniques for calculating or estimating discounts for marketability, including using the Black-Scholes option pricing model. It is recommended for appraisers involved in intangible asset separation and valuation.
As an added bonus, the text has an accompanying CD-ROM that includes sample reports and a comprehensive bibliography.
Recommendation: This is a well-accepted and popular volume, as evidenced by its longevity and updating--it is now in its fourth edition. This book would be of particular interest to appraisers expanding their practice into business valuations as a specialty. It can be purchased at http://www.cpa2biz.com.
Emerging Trends in Real Estate 2014
(Urban Land Institute and PricewaterhouseCoopers)
Emerging Trends in Real Estate 2014 is a 100-page publication from the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC). This is the 35th edition of a highly regarded trends and forecasting series based on surveys and research involving "personal interviews with and surveys from more than 1,000 of the most influential leaders in the real estate industry. The "Emerging Trends" publications are available for the Americas, Asia-Pacific, and Europe; only the Americas edition is addressed here.
In Emerging Trends in Real Estate 2014 for the Americas, the overview statement, "The real estate recovery will gain momentum in 2014," sets the tone of the report. The first chapter is about real estate emerging from recession, and addresses some of the key drivers of the real estate economy for 2014. The next chapter covers real estate capital Rows, debt and equity capital sources. Chapter 3 highlights particular geographic markets to watch with market rankings and prospects; it includes highlighted demographics, employment, investment prospects, and some specifics on the top-20 metro markets including an interesting buy-hold-sell graph showing the results of the survey-of-experts research. Ratings, and brief comments, are also shown for 51 North American metro areas, summarizing the survey responses.
The fourth chapter discusses survey responses by major property type; i.e., industrial/distribution, hotels, apartments, offices, and retail. Each is addressed with investment prospects and development prospects, with a breakdown of each major property type into components. Each category is addressed in some depth as to characteristics, trends, and outlook.
The graphs are excellent and helpful throughout the report, reminding those of us writing appraisal and business reports that a picture is indeed worth a whole bunch of words. Read through Emerging Trends in Real Estate 2014, and you'll probably get some good ideas for simple, effective, hard-hitting graphs or charts in your own reports.
Chapter 5, "Emerging Trends in Canada," and Chapter 6, "Emerging Trends in Latin America," provide similarly good coverage.
Recommendation: Be sure to take a look at this collective opinion about the 2014 trends and outlook. It is the result of a massive survey research and well presented. It is especially helpful for readers in one of the major metropolitan areas shown, but also good for understanding the market in terms of experts' opinions. It's free and worth your time! Take note of not only the text, but the graphics as well. To view and download a copy, visit: http://www.uli.org/research/centers-initiatives/ center-for-capital-markets/emerging-trends-in-realestate/americas/. You can also see prior editions of "Emerging Trends" from 2004 to 2013 at the same website--useful to analyze how they turned out.
Right of Way Articles
The International Right of Way Association's magazine Right of Way offers a number of recent articles of particular interest to valuers, including the following.
"Appraising Railroad Corridors: Misconceptions About Across-the-Fence Methodology, "by John Sehmick, Right of Way (March/April 2013): 31-35. This article looks at some underlying value concepts in corridor valuation, the across-the-fence methodology, and assumed minimum valuation. It also presents two case studies to illustrate possible problems in corridor valuation methodologies.
"Valuing an Encroachment," by Michael Wolff, Right Way (September/October 2013): 15-17. This article addresses value equivalency in a case study involving an encroachment where the property involved did not have any standalone value
To read and download these and other Right of Way articles, visit http://www.irwaonline.org/eweb/dynamicpage.aspx?webcode=2010s
Real Estate Crowdfunding Information
The topic of real estate crowdfunding has been receiving a lot of attention. The Australia and New Zealand Property JournaFs September 2013 issue has timely articles to enhance your perspectives, and among them is "Crowdfunding: The Future of Urban Renewal and Property Investment?" available at http://issuu.com/idgau/ docs/anzpj_september2013_combined_lo
Crowdfunding is a relatively new take on a traditional source of funding for real estate development. It aggregates and funnels money from individual investors to project developer. The modern twist is that crowdfunding uses the Internet to attract investors to pool money online to purchase individual properties. This opens investments to many more people than a traditional real estate syndication but is subject to SEC regulations.
For more on the probable future of crowdfunding in real estate, take a look at the following articles:
* "Crowdfunding's Latest Invasion:
Real Estate" http://www.forbes. com/sites/groupthink/2013/04/19/ crowdfundings-latest-invasion-real-estate/
* "Are Crowdfunding Deals Safe Real Estate Investments?"
* "Real Estate Crowdfunding: Why It's a Big Deal" http ://www.inman.com/2013/11/25/ real-estate-crowdfunding-why-its-a-big-deal/
* "Investing in Real Estate Will Be Revolutionized By Crowdfunding"
* "New SEC Rule Means Real Estate Crowdfunding"
* "Real Estate's New Frontier: Crowdfunding" http://www.cnbc.com/id/101054808
The next column will cover notable aspects of the fourteenth edition of The Appraisal of Real Estate So, be sure to read the "Resource Center" column in the Spring issue of The Appraisal Journal.
If you have comments or additional resources that you have found of benefit in print form or on the Internet, please contact me at DanSwango@Yahoo.com. Your thoughts and suggestions are always appreciated.
(1.) For current appraisal information from the Appraisal Institute on this topic, see The Appraisal of Real Estate, 14th edition, Chapter 35.
by Dan L. Swango, PhD, MAI, SRA
Dan Swango, PhD, MAI, SRA, CRE, FRICS, is president of Swango Real Estate Counseling and Valuation International, Tucson, Arizona. He is experienced in valuation and consulting involving equity investment, debt security, risk reduction, profit optimization, estate planning and settlement, buy/sell opportunities, and eminent domain. Swango is an instructor and communicator with domestic and international experience. He is namesake of the Appraisal Journal's Swango Award, past Editorial Board chair and Editor-in-Chief of The Appraisal Journal and a current member of the Appraisal Journal Review Panel.
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|Title Annotation:||RESOURCE CENTER|
|Author:||Swango, Dan L.|
|Date:||Jan 1, 2014|
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