Mastering the Sales Comparison

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A Mastering the Sales Comparison Approach in Property Valuations Making Relevant Comparisons and Defensible Adjustments to Argue an Effective Case to Assessors WEDNESDAY, SEPTEMBER 14, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: John Cocklereece, Jr., Director/Attorney, Bell Davis & Pitt, Winston-Salem Salem, N.C. Larry Mott, Consultant, Stancil & Co., Irving, Texas. Robert Slavin, Owner, Assessment Counseling Services, Westlake Village, Calif. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Mastering the Sales Comparison Approach in Property Valuations Seminar Sept. 14, 2011 Robert Slavin, Assessment Consulting Services John Cocklereece Jr., Bell Davis & Pitt Larry Mott, Stancil & Co.

6 Today s Program Fundamentals Of The Sales Comparison Approach [Robert Slavin] Slide 7 Slide 22 Use Of Sales Comparison In Business Personal, Real Property [John Cocklereece] Slide 23 Slide 30 Data Collection And Verification Techniques [Larry Mott] Slide 31 Slide 51 Case Studies [John Cocklereece and Larry Mott] Slide 52 Slide 76

7 Robert Slavin, Assessment Consulting Services FUNDAMENTALS OF THE SALES COMPARISON APPROACH

8 Your House As Seen By: Yourself 8

9 Your Lender 9

10 Your Buyer 10

11 Your Appraiser 11

12 Your Tax Assessor 12

13 What Type Of Appraisal? Fee simple, leased fee, liquidation value, etc. The jurisdiction dictates the type of appraisal required and its admissibility. An appraiser may need to be present. 13

14 Comparable Sales Analysis California Revenue and Taxation Code, Rule 2: (a) in addition to the meaning ascribed to them in the Revenue and Taxation Code, the words full value, full cash value, cash value, actual value and fair market value mean the price at which a property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other. 14

15 Arm s Length Transaction 15

16 Mass Appraisal 16

17 Mass Appraisal (Cont.) 17

18 Sales Comparison Approach This approach assumes a prudent tindividual id will pay no more for a property than it would cost to purchase a comparable substitute property. 18

19 Elements Of A Comparable Sale 19

20 Elements Of A Comparable Sale (Cont.) 20

21 Comparison To Income And Cost Approaches The income capitalization approach (often referred to simply as the income approach ) is used to value commercial and investment properties. In a commercial lincome-producing i property. this approach capitalizes an income stream into a value indication. This can be done using revenue multipliers or capitalization rates applied to a net operating income (NOI). 21

22 Comparison To Income And Cost Approaches (Cont.) The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is referred to by the abbreviation RCNLD (reproduction cost new less depreciation or replacement cost new less depreciation). In most instances, when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. 22

23 John Cocklereece Jr., Bell Davis & Pitt USE OF SALES COMPARISON APPROACH IN BUSINESS PERSONAL, REAL PROPERTY

24 Generalizations About Taxation Of Business Real And Personal Property Real property consists of land and all improvements thereon. Business personal property generally consists of tangible personal property, although in some jurisdictions, some types of intangible property may be taxable. Property is taxed at the state t level, l and property tax law differs from state t to state. It is important to know the differences or have knowledgeable counsel to advise one of the differences. Although each state s law contains nuances, there are broad similarities in the way most states tax business real and personal property, as confirmed by an informal survey of the National Association of Property Tax Attorneys ( 24

25 How Tax Assessors Generally Value Business Real Property North Carolina s system of assessment is representative of how most states tax business real property. Except for exempt and certain limited categories of real property, business real property is taxed at 100% of its fair market value. Each county handles assessment of real property within its boundaries. Each county is required to revalue real property at least once every 8 years, although it can do so more frequently. Many jurisdictions revalue on a 4- year cycle. In many other states, revaluations are done on an annual basis or some other revaluation cycle. 25

26 How Tax Assessors Generally Value Business Real Property (Cont.) The county s assessor is required to prepare a schedule of values (SOV), which serves as a mass appraisal guide to be used to revalue all real property within his jurisdiction. SOVs typically give lip service to the use of all three appraisal methods (i.e., cost, income and sales comparisons), but assessors in North Carolina typically rely on the cost approach in arriving at their assessments. Thus, the sales comparison approach may be little-used in arriving at the original assessed value of business real property. The sales comparison approach should be the principal i or secondary basis for the taxpayer s opinion of value, if he elects to appeal the assessed value of business real property. 26

27 North Carolina Case Law Re: Business Real Property North Carolina case law follows general appraisal theory in holding that all approaches to value can be used to determining fair market value, but the most reliable method varies depending on the type of real property being appraised. For income-producing property, the income approach is the most reliable method, and the sales comparison approach should be used as a secondary substantiating method. For owner-occupied properties or those that are otherwise not incomeproducing, the sales comparison approach is the most reliable method of determining fair market value. The cost approach should be relied upon only for newly constructed real property or for special-purpose real property where the other approaches are difficult to apply. 27

28 How Tax Assessors Generally Value Business Personal Property There is probably more variation among the various states as to the taxation of business personal property. In fact, certain states elect not to tax such property at all (e.g., Iowa, New Hampshire, and New York) In North Carolina, the manner in which business personal property is assessed and taxed might be best described as a modified cost approach. Many other states use the same methodology. First, the taxpayer lists its business personal property at its original cost. Then, the assessor utilizes trending/depreciation schedules to depreciate the original i cost to determine the assessed value. In North Carolina, those trending/depreciation schedules are developed and published by the Department of Revenue. 28

29 Challenging A Tax Assessment Of Business Personal Property If the assessed value of business personal property is challenged, North Carolina assessors frequently argue that they followed the Department of Revenue s suggested guidelines and therefore met their burden. Case law is clear, however, that following the Department of Revenue procedure does not necessarily produce fair market value. The taxpayer is entitled to prove true value by any means possible. In my experience, the best way to show that the modified cost approach does not produce fair market value is by the use of a sales comparison approach, which obviously requires that a resale market exists for the type of business personal property under appeal. 29

30 Summary Assessors do not typically utilize the sales comparison approach to develop their assessments of either real property or business personal property. However, the sales comparison approach is a vital tool in challenging an assessment. Where real property is income-producing, the sales comparison approach should be used as a secondary method of appraisal used to substantiate the results of the income capitalization approach. Where real property is not income-producing, the sales comparison approach should be used as the primary method of appraisal, unless the property is new or highly specialized. With respect to business personal property, the sales comparison approach should be used where an adequate resale market exists for such property. 30

31 Robert Slavin, Assessment Consulting Services Larry Mott, Stancil & Co. DATA COLLECTION AND VERIFICATION TECHNIQUES

32 Comparable Sales Approach Methods Guideline publicly traded company method Appropriate for a marketable, minority ownership interest, using the premise of value in continued use 1 Guideline merged and acquired company method (transaction method) Indication of transaction prices of major ownership interest, usually controlling ownership interests 2 Refinery, chemical plant, pipeline, manufacturing plant Provides better comparable market data for real property valuations 1 Pratt, Shannon P., Robert F. Reilly, Robert P. Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 4 th ed., McGraw-Hill, 2000, p Ibid

33 Availability Of Data Data availability based on type of industry Transaction activity minimal or substantial Public and private companies 33

34 Researching Comparable Transactions: Public Companies Public companies operating in the industry Emphasis of integrated companies may be in a different business segment of the industry. 34

35 Sources Of Data: Public Companies Web sites for industry related companies 35

36 Sources Of Data: Public Companies (Cont.) Investor relations Events and presentations SEC filings Industry fundamentals 36

37 Sources Of Data: Public Companies (Cont.) SEC Filings Form 10-K 37

38 Sources Of Data: Public Companies (Cont.) Form 10-K acquisition and divestiture section in the notes to the financial statements 38

39 Sources Of Data: Public Companies (Cont.) SEC filings Form 8-K Reports major transactions o o Transaction details Company presentations 39

40 Sources Of Data: Public Companies (Cont.) Conference call transcripts t 40

41 Sources Of Data: Public Companies (Cont.) Investment t banking reports 41

42 Sources Of Data Industry news Trade journals 42

43 Sources Of Data Major news sources 43

44 Sources Of Data (Cont.) Sources for large company Sources for middle-market and transactions 3 smaller company transactions 4 Mergerstat Review Pratt s stats Merger & Acquisition Done deals Sourcebook Bizcomps Merger Yearbook IBA market database Mergers & Acquisitions magazine 3 Ibid Ibid

45 Industry Standards d And Metrics Industry understanding di to determine comparability factors Percent of replacement cost new Dollars-per-complexity barrel (refinery) Transaction EBITDA multiple Other transaction multiples Revenues, tangible book value Dollars-per-square foot Geographic considerations (see map insert) U.S. Refining Centers 45

46 Data Verification i Review transaction data to determine applicable price for the comparable asset 46

47 Data Verification i (Cont.) Purchase price Assets included 47

48 Data Verification i (Cont.) Data provides price and industry metrics $/bpd $/complexity barrel EBITDA multiple 48

49 Data Verification: Adjustments For Other Assets Included In Transaction Tesoro purchase price allocation of the Los Angeles assets purchased: NOTE C ACQUISITIONS Los Angeles Assets On May 10, 2007 we acquired a 100 Mbpd refinery and a 42 Mbpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell branded retail stations (128 are company-operated) located throughout Southern California (collectively, the Los Angeles Assets ) from Shell Oil Products U.S. ( Shell ). We will continue to operate the retail stations using the Shell brand under a long-term agreement. 5 5 Tesoro SEC Form 10-K, filed February 20, 2008, pp. 74,

50 Data Verification: Adjustments For Other Assets Included In Transaction (Cont.) Determination of the refinery value (comparable asset value) 50

51 Comparable Transactions Database Refinery Transactions Database Buyer Total Refinery Transaction Allocated Dollars- Refinery Price Refining Purchase Purchase Per- Replacement as a Percent Transaction Capacity Pi Price Pi Price Complexity Complexity Cost of freplacement Earnings (MB/D) (MM$) (MM$) Factor Barrel (MM$) Cost Multiple Year 1 Transaction , Transaction , Transaction , Transaction , Year 2 Transaction ,000 2, , Transaction , Transaction ,000 1, , Transaction Transaction Year 3 Transaction , Transaction , Transaction , NOTE: Transactions are for example only and are not representative of actual transactions. 51

52 Robert Slavin, Assessment Consulting Services John Cocklereece Jr., Bell Davis & Pitt Larry Mott, Stancil & Co. CASE STUDIES

53 Business Real Property Case Study 1: Hickory Chair In the Matter of Appeal of the Lane Company Hickory Chair Division Furniture manufacturing facility containing approximately 575,000 square feet was situated on approximately ate 10.5 acres. The original portion o of the facility was built in the 1920s, with multiple additions over the years. The facility was still in use. The tax assessor used the income capitalization approach to value the facility at approximately $3.8 million. The taxpayer s appraiser relied solely on the sales comparison approach and valued the facility at approximately $2 million. The Property Tax Commission i determined d that t the facility was worth $2 million, and the North Carolina Court of Appeals agreed. 53

54 Business Real Property Case Study 1: Hickory Chair (Cont.) The taxing jurisdiction argued that its assessor had correctly applied its SOV in arriving at the assessed value. The Court of Appeals held that, although use of the SOV showed an objective process in the valuation procedures as a whole, it did not prove that the valuation of a particular property is correct. The taxpayer s appraiser determined, and the court so held, that use of the income approach to value a property such as this was improper because it did not reflect the motivations of buyers and sellers. Further, the cost approach was not appropriate because of the difficulty in accurately determine depreciation and obsolescence in a facility of this age. Thus, the sales comparison approach was the only appropriate p appraisal method to value buildings of this character. 54

55 Business Real Property Case Study 2: Parkdale In the Matter of Appeal of Parkdale America Two textile manufacturing facilities, one containing approximately 465,197 square feet and situated on approximately 15 acres, and the other containing i approximately 356,737 square feet situated t on approximately 9 acres. Both were originally constructed in the early 20 th Century with subsequent additions over the years. Both were still in use. The tax assessor used the cost approach to value the facilities at $6,776,160 and $3,620,080, respectively. The taxpayer s appraiser relied solely on the sales comparison approach and valued the facilities at $906,000 and $625,000, respectively. None of the taxpayer s comparable sales were still in use at the time of their sales. 55

56 Business Real Property Case Study 2: Parkdale (Cont.) The Property Tax Commission upheld the assessed value. Although not part of the commission s order, it was clear from the hearing of the matter that the commission did not consider the taxpayer s comparable sales as relevant because they were not of facilities that were still in use. This decision came despite un-contradicted testimony that facilities like these were at the end of their useful lives and would never be sold as operating facilities. The commission s decision has been appealed, and the matter was remanded on technical missteps. The substantive issues raised on appeal lhave yet tto be considered. d 56

57 Business Real Property Case Study: Observations Considering Hickory Chair and Parkdale, the sales comparison approach should be used to determine the fair market value of older owner-occupied manufacturing facilities. However, care should be taken to select comparables which are in the same operating state (either operating or not) as the subject property. 57

58 Business Personal Property Case Study: IBM In the Matter of Appeal of IBM Credit Corporation IBM challenged the taxing jurisdiction s valuation of 40,779 items of leased computer equipment. e Using the North Carolina Department of Revenue s guidelines, the tax assessor assessed the equipment at approximately $144 million. IBM contended that North Carolina statutes mandated that the equipment be valued at fair market value, and that the Department of Revenue schedules as applied to the equipment did not produce such value. Before the North Carolina Property Tax Commission, IBM s evidence included a written appraisal report and the testimony of Robert Zises of NACOMEX U.S.A., who was admitted as an expert in the appraisal of computer equipment. 58

59 Business Personal Property Case Study: IBM (Cont.) Zises maintained a database of transactional sales observations covering a period in excess of 10 years and reflecting secondary sales (brokerage sales) of computers and computer related equipment. Utilizing i this sales information, Zises developed depreciation tables that he in turn applied to the original purchase price of the subject equipment to determine that its fair market value was approximately $96 million. The taxing jurisdiction s expert testified that the Department of Revenue s depreciation guidelines were not based on actual market sales and purchases. 59

60 Business Personal Property Case Study: IBM (Cont.) The North Carolina Property Tax Commission initially upheld the assessed value of the equipment. On appeal, the North Carolina Court of Appeals reversed and remanded the matter back to the commission on procedural grounds. On remand, the commission once again upheld the assessed value and IBM appealed again. The Court of Appeals reversed and remanded a second time, explaining that the commission failed to explain and justify its upholding of a value determined by the Department of Revenue guidelines despite contradictory evidence based in actual sales. On remand for a second time, the commission again upheld the assessed value, and IBM is once again appealing. 60

61 Business Personal Property Case Study: IBM - Observations Challenging the typical use of a depreciated original cost methodology requires considerable work and cost. IBM likely spent considerable monies for the NACOMEX report and the testimony of its expert. Litigating the dispute will require at least three trips to the North Carolina Court of Appeals. Despite the strength of your comparable sales evidence, it may be impossible to overcome the taxing jurisdiction s reliance on the North Carolina Department of Revenue schedules. At the very least, it will require substantial (perhaps overwhelming) evidence that the standard depreciation schedules do not result in fair market value. On appeal to any state hearing body, there will be substantial resistance to overturning the value indicated by the standard depreciation schedules. 61

62 Case Study: Refinery Industry understanding to determine comparable sales Review the universe of transactions and select relevant sales Refinery Transactions Database Buyer Total Refinery Transaction Allocated Dollars- Refinery Price Refining Purchase Purchase Per- Replacement as a Percent Transaction Capacity Price Price Complexity Complexity Cost of Replacement Earnings (MB/D) (MM$) (MM$) Factor Barrel (MM$) Cost Multiple Year 1 Transaction , Transaction , Transaction , Transaction , Transaction Year 2 Transaction ,000 2, , Transaction , Transaction ,000 1, , Transaction Transaction Transaction , Year 3 Transaction , Transaction , Transaction , NOTE: Case study assumes no previous sales of the subject property. 62

63 Case Study: Refinery (Cont.) Understand adjustments made to total transaction price Refining industry adjust for inventory, pipelines, terminals and retail included in transaction Refinery Transactions Database Buyer Total Refinery Transaction Allocated Dollars- Refinery Price Refining Purchase Purchase Per- Replacement as a Percent Transaction Capacity Price Price Complexity Complexity Cost of Replacement Earnings (MB/D) (MM$) (MM$) Factor Barrel (MM$) Cost Multiple Year 1 Transaction , Transaction , Transaction , Transaction , Year 2 Transaction ,000 2, , Transaction , Transaction ,000 1, , Transaction Transaction Year 3 Transaction , Transaction , Transaction ,

64 Case Study: Refinery (Cont.) Basis of comparison indices used in the industry Sales price as a percent of replacement e cost new (RCN) Sales price-per-complexity barrel EBITDA multiple Regression analysis 64

65 Case Study: Refinery Benchmark Analysis Compare subject property to most similar transactions Similar operating capacity, configuration, crude capability and product yield (crude supply and product markets) Refinery Transactions Database - Benchmark Analysis Refining Replacement Type of Products Capacity Complexity Cost Crude Fuel Oil Buyer (MB/D) Factor (MM$) Processed Gasoline Diesel and Other Year 1 Transaction ,500 Medium 55% 35% 10% Transaction ,000 Light 60% 30% 10% Transaction ,400 Heavy 60% 35% 5% Transaction ,500 Medium 50% 35% 15% Year 2 Transaction ,000 Heavy 60% 35% 5% Transaction ,000 Light 60% 30% 10% Transaction ,000 Med/Light 60% 30% 10% Transaction Light 60% 30% 10% Transaction Light 50% 25% 25% Year 3 Transaction ,500 Medium 55% 35% 10% Transaction ,000 Heavy 60% 35% 5% Transaction ,250 Light 45% 35% 20% Subject Refinery ,600 Medium 52% 33% 15% 65

66 Case Study: Refinery Benchmark Analysis (Cont.) Use similar il transactions ti and industry indices to develop values for the subject property, based on simplified methods of measuring a refinery s relative size, capability and income potential Refinery Transactions Database - Benchmark Analysis Buyer Transaction Weighting Refinery Complexity Barrel Analysis Replacement Cost Analysis Allocated Purchase Refining Dollars- Per- Implied Value of Replacement Refinery Price as a Percent Implied Value of Price Capacity Complexity Complexity Subject Cost of Replacement Subject (MM$) (MB/D) Factor Barrel (MM$ (MM$) Cost (MM$ Year 1 Transaction 1 15% , Transaction 4 15% , Year 2 Transaction 8 20% 1, , Year 3 Transaction 12 50% , Subject Refinery ,

67 Case Study: Refinery EBITDA Analysis Indicator of value for a property that t recognizes specific differences in location, timing, configuration and complexity Refinery Transactions Database - EBITDA Analysis Total Refinery Transaction Allocated Refining Purchase Purchase Transaction Capacity Price Price Earnings Buyer Year 1 Transaction 1 (MB/D) 100 (MM$) 100 (MM$) 100 Multiple 2.0 Transaction Transaction Transaction Year 2 Transaction ,000 2, Transaction Transaction ,000 1, Transaction Transaction Year 3 Transaction Transaction Transaction Average 2.6 Median 2.5 Minimum 2.0 Maximum 3.5 Subject Property Projected EBITDA, MM$ 150 Implied Business Enterprise Value (EBITDA Multiple of 2.5), MM$

68 Case Study: Refinery Regression Analysis Considers refinery sales trends Correlation between refinery complexity and sales price Correlation between refinery replacement cost and sales price Y= * Subject Property Complexity Barrels^ Y=0.805 * Subject Property RCN^ Higher R-squared indicates a good ability to predict a value for the subject property. 68

69 Case Study: Refinery Conclusion Weighting of analyses Remove intangibles from implied value Comparable Sales Approach Results Weighting Value (MM$) Benchmark Analysis Percent of Replacement Cost 25% 376 Refinery Sales Price-Per-Complexity P it Barrel 25% 420 EBITDA Multiple Analysis 50% 375 Regression Analysis Percent of Replacement Cost 0% N/A Refinery Sales Price-Per-Complexity Per Barrel 0% N/A Subject Property Implied Business Enterprise Value 386 Less: Intangible Assets (33%) 128 Subject Property Tangible Asset Value 259 NOTE: Intangible assets are estimated to be 33% of the implied business enterprise value for this case study only, and are not meant to be representative of actual intangible assets. 69

70 Case Study: Refinery Lessons Learned For income-producing properties, market participants do look at comparable sales as a check to the income approach value. Actual transactions keep you in the real world. Arguments against comparable sales approach Number of transactions too low No one single refinery is a comparable, for various reasons. Need to understand the industry How do industry participants look at the industry? How do investment firms look at the industry? What metrics are used by industry participants? 70

71 Case Study: Crude Oil Pipeline Industry understanding to determine comparable sales Review the universe of transactions and select relevant sales NOTE: Case study assumes no previous sales of the subject property. 71

72 Case Study: Crude Oil Pipeline (Cont.) Compare subject property to most similar il transactionsti Crude oil pipelines and crude oil terminals Consider industry indices for comparable sales analysis Dollars per mile of pipeline Dollars per diameter inch mile EBITDA multiple 72

73 Case Study: Crude Oil Pipeline (Cont.) Pipeline industry indices do not represent benchmarks used in comparing pipeline pel e sales prices. Alternate method - direct comparisons to other pipelines Only an indicator of value Industry standard is EBITDA multiple 73

74 Case Study: Crude Oil Pipeline (Cont.) EBITDA multiples are relevant in the pipeline industry. SOURCE: Lehman Brothers MLP Quarterly Monitor, July 24, 2008 (highlighting added) 74

75 Case Study: Crude Oil Pipeline Conclusion EBITDA multiple Direct comparison for reality check Conclusion of value - $402 million NOTE: Intangible assets are estimated to be 33% of the implied business enterprise value for this case study only, and are not meant to be representative of actual intangible assets for a pipeline. 75

76 Case Study: Crude Oil Pipeline Lessons Learned For pipeline properties, market participants i t do look at comparable sales as a check to the income approach value. Compare to actual transactions to keep you in the real world EBITDA multiple is most useful. Arguments have been: Number of transactions too low No one pipeline is a comparable for various reasons size of pipe, length, location Need to understand the industry How do industry participants look at the industry? How do investment firms look at the industry? What metrics are used by industry participants? 76