Separating Intangible Value in Valuation of Billboards & Other Property Clark R. Calhoun Partner Alston & Bird LLP Los Angeles, CA Clark.Calhoun@Alston.com Joe Torzewski Direction, Valuation Stout Advisory Services Houston, TX jtorzewski@stoutadvisory.com
The Problem What approach do you use if the property includes elements of both taxable property (either taxable real or personal property) and nontaxable intangible property? 2
Valuation of Billboards Estimate the projected billboard advertising net revenue and effective gross income (business income). Allocate the percentage of billboard advertising income to the real property (based on market supported revenue sharing data). Deduct stabilized vacancy, credit loss, and operating expenses to determine net operating income associated with the real property. Apply a tax-adjusted overall capitalization rate to the net operating income of the real property to determine the indicated market value of the real property components. Allocate the indicated market value of the real property between the billboard structures and the billboard permit, which is considered an intangible item. After allocating value to the billboard permit, the resulting value reflects the market value of the real property ascribed with the billboard structures. 3
Valuation of Hotels Rushmore Approach Net Income Less - Business Component Management Fee Residual Intangibles Personal Property Component Reserve for Replacement Value of FF&E in place Lennhoff Approach Net Income Less Business Component Management Fee Residual Intangibles Business Start-up Costs Personal Property Component Reserve for Replacement Value of FF&E in place Return on FF&E 4
Valuation of Hotels, Cont. Adjusting for Residual Intangibles Competent Management Adjustment Adjust for differences in REVPAR Adjust for differences in Expense Ratios Adjust for Brand Contribution Business Start-up Costs Pre-opening sales and marketing Constant start-up mode Assemble and train work force Constant turnover Software and licensing expenses Constant updates and upgrades to software/licensing 5
Valuation of Hotels, Cont. - FF&E Deductions Rushmore Approach Capitalize reserve for replacement amount using adjusted cap rate. Add value of FF&E in place. Lennhoff Approach Capitalize reserve for replacement AND return on FF&E using adjusted cap rate. Add value of FF&E in place. 6
Valuation of Hotels, Cont. Which approach is correct? Depends on location of your property Precedent set? Generally accepted methodology? Is there a better approach? 7
Valuation of Ice Rinks Sales of vacant ice arenas are difficult to come by and often national in scope. Income being generated through operations results in going concern value. Cost approach provides value of the real estate components. In many cases going concern value is less than the cost approach conclusion. Must deduct economic obsolescence from cost approach to get accurate value. 8
Valuation of Ice Rinks Example Toronto, Ontario Going Concern Value $20,000,000 RCN Plus Land Less Physical Deterioration $40,000,000 Deduction for Obsolescence $20,000,000 South Carolina Income Approach $7,600,000 RCN Plus Land Less Physical Deterioration $7,700,000 Deduction for Obsolescence $0! 9
Valuation of Golf Courses Primary methodology is the Income Capitalization Approach. Revenue Direct Costs Operating Expense = Going Concern Value Going Concern Value Personal Property Intangibles = Value of Real Property 10
Valuation of Golf Courses Example Estimate Revenue Golf Income Clubhouse Income (food and beverage) Pro Shop Income Other Income Estimate Direct Costs Food Operations COGS Pro Shop Operations COGS 11
Valuation of Golf Courses Example, Cont. Estimate Operating Expenses Payroll Repairs & Maintenance Utilities Equipment Reserves Golf Carts Equipment Reserves Golf Maintenance Building and FF&E Reserve Advertising Insurance Professional & Consulting Fees Office & Miscellaneous Expenses 12
Valuation of Golf Courses Example, Cont. Estimation of Personal Property Value Most often reported but can be estimated via MVS Estimation of Intangibles Liquor Licenses Derived from license type and market comps Staff in Place Estimate # of weeks to train/52 Apply % to estimated annual salary of employees Other potential intangibles Reputation, customer lists, management systems, management contracts and non-competes, supplier relationships, golf professional agreements, and tournament contracts. 13
State-Specific Authorities 14
California California property tax law provides that the value of intangible property relating to the activities of a business may not enhance or be reflected in the value of the business's taxable property. Cal. Rev. & Tax Code 110 (d)(1). However, an exception to this general rule occurs where otherwise nontaxable intangible assets are necessary for the beneficial or productive use of taxable property. In that event, the value of the taxable property is determined assuming the presence of the necessary intangible assets, and the intangible assets may properly contribute to a fair market value assessment of the taxable property. Cal Rev. & Tax Code 110 (e). 15
California Billboards The siting, construction, and operation of billboard properties is regulated by the Outdoor Advertising Act (California Business Professional Code Section 5200, et seq.). By regulating (i.e., limiting) the number of billboard use permits, government has increased the value of existing billboard properties. The value resulting from the scarcity of billboard use permits should be attributed to the use permits and not to the billboard improvements. Cal. BOE Letter No. 2002/078. 16
California Billboards The billboard use permit is an intangible asset or right under Revenue and Taxation Code section 110(e) that is necessary for the beneficial and productive use of the billboard property. Since the use permit is an intangible asset or right that is not itself assessable, any increment of value attributable to the use permit must not be included in the taxable value of the billboard property. However, since a billboard use permit is necessary to put the land to beneficial and productive use as a billboard site, the land must be assessed and valued by assuming the presence of the use permit. Cal. BOE Letter No. 2002/078. 17
California Property Tax and The Right to Conduct a Business - The value of the right to conduct a cable business may be considered in assessing the value of the possessory interests in the use of a public right of way, which was taxable real property. Cty. of Stanislaus v. Assessment Appeals Bd., 213 Cal. App. 3d 1445 (Ct. App. 1989). - The value of the right to conduct a landfill business (i.e., landfill operating permit) in assessing the value of the landfill property did not violate Cal. Rev. & Tax Code. Am. Sheds, Inc. v. Cty. of Los Angeles, 66 Cal. App. 4th 384 (1998). 18
Georgia - Georgia imposes taxes upon all owners of nonexempt real and tangible personal property at the property's fair market value. Ga. Code Ann. 48-5- 1, 48-5-2(3), 48-5-6. - In determining the fair market value of real property, the tax assessor shall not include the value of any intangible assets. Ga. Code Ann. 48-5-2(3)(C); Ga. Comp. R. & Regs. 560-11-10-.02(x). 19
Georgia Property Tax and Intangible Property Morton v. Glynn Cty. Bd. of Tax Assessors, 294 Ga. App. 901, 903 (2008). Holding: Membership in club for owners of real property in development was intangible personal property and thus was not subject to taxation. However, enhanced value attributable to right to apply for membership could be included as part of real properties' fair market value, for purposes of property tax assessment, since increased value was benefit connected to real property itself, rather than intangible benefit such as goodwill. 20
New Jersey New Jersey exempts intangible personal property from local property tax. N.J. Rev. Stat. 54:4-1. 21
New Jersey Billboards Like California, New Jersey determined that billboard use permits are intangible assets that are necessary for the beneficial and productive use of billboard property. As an intangible asset, the use permit is not assessable as real property, and any value attributable to the use permit and sale of advertising should not be included in the assessed value of the billboard property. 22
New Jersey Billboards Unlike California, New Jersey does not explicitly provide that the billboard land must be assessed and valued by assuming the presence of the use permit. That is, New Jersey does not explicitly support that a billboard use permit is necessary to put the land to beneficial and productive use as a billboard site. 23
North Carolina Property Subject to Tax: real property, personal property and motor vehicles Taxable personal property consists of tangible personal property and all personal property that is not intangible and is not permanently affixes to real property. See N.C. Gen. Stat. 105-273(14). Intangible personal property (except for leasehold interest that is exempted in real property) is exempted from tax. See N.C. Gen. Stat. 105-275(31). 24
North Carolina Billboards - Billboard structures in North Carolina are treated as personal property, and valued using the cost approach. - NCDOR rejected the income approach because the income realized from the sale of advertising space is business income that may be difficult to obtain and may include income components that should not be considered when determining the property tax valuation in North Carolina (i.e., intangible property income). 25
South Carolina South Carolina exempts intangible property from ad valorem taxation. S.C. Code Ann. 12-37-220 26
South Carolina Off-Premises Outdoor Advertising Signs - Billboard structures in South Carolina are treated as tangible personal property, and valued using the cost approach. S.C. Code Ann. 12-43-230(e)(1). - Section 12-43-230(e)(1) addresses sign permits and intangible property, and specifically provides that: Any sign permit required by local, state, or federal law must be considered as intangible personal property for ad valorem property tax purposes. 27
South Carolina Off-Premises Outdoor Advertising Signs - Section 12-43-230, also addresses how the sign site real property will be assessed: If the sign is one-quarter acre or less, and Leased from an unrelated third party, or the sign is owned by the owner of the site (who has filed a business personal property tax return), then The sign site real property will be assessed at its value before the lease or construction of the sign without regard to the structure, the lease, or the lease income, and no separate assessment may be issued for the sign company s lease or ownership interest. 28
Ohio For tax purposes, real property includes land itself, whether laid out in town lots or otherwise, all growing crops, including deciduous and evergreen trees, plants, and shrubs, with all things contained therein, and, unless otherwise specified in this section or section 5701.03 of the Revised Code, all buildings, structures, improvements, and fixtures of whatever kind on the land, and all rights and privileges belonging or appertaining thereto. Ohio Rev. Code Ann. 5701.02. 29
Ohio Property Tax and Goodwill Hilliard City Sch. Bd. of Edn. v. Franklin Cty. Bd. of Revision, 949 N.E.2d 1 (2011). Holding: Accounting entry for goodwill in operating a Hawthorn hotel did not establish the existence of a separable asset that is distinct from the hotel realty. 30
Ohio Property Tax and Licensing Warrensville Hts. City Sch. Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 47 N.E.3d 168 (2016). Holding: The Board of Tax Appeals reasonably and lawfully determined that the sales price did not establish the true value of racetrack. Evidence supported that $27,950,000 of the $43,000,000 purchase price of the racetrack could be attributed to obtaining the racing license for operating a racetrack (and $1,200,000 to equipment) and therefore, evidence supported that the track property was worth $13,800,000 as of the tax-lien date. 31
Minnesota For tax purposes, real property includes the land itself, rails, ties, and other track materials annexed to the land, and all buildings, structures, and improvements or other fixtures on it, bridges of bridge companies, and all rights and privileges belonging or appertaining to the land, and all mines, iron ore and taconite minerals not otherwise exempt, quarries, fossils, and trees on or under it. Minn. Stat. Ann. 272.03. 32
Minnesota Property Tax On Landfill Business Veolia ES Rolling Hills Landfill, Inc. v. Cty. of Wright, No. 86-CV-06-6446, 2007 WL 4845558 (Minn. Tax Nov. 21, 2007). Holding: Landfill permit should not be included in the value of the landfill real property. 33
Wisconsin Billboards Adams Outdoor Advertising, Ltd. v. City of Madison, 294 Wis.2d 441 (Wis.,2006). Holding: A billboard permit is a right or privilege appertaining to real property (and thus falls within the statutory definition of real property), rather than personal property for tax purposes. Accordingly, income attributable to billboard permits is properly included in a real property tax assessment, and not a personal property tax assessment. 34
Wisconsin Billboards Adams Outdoor Advertising, Ltd. v. City of Madison, 329 Wis.2d 270 (Wis.App.,2010). Although [billboard] permits fit the statutory definition of real property and although the permits have value, some portion of that value is apparently beyond the reach of the City s taxing authority. 35
Wisconsin Billboards Clear Channel Outdoor, Inc. v. City of Milwaukee, 893 N.W.2d 24 (2017). Holding: Billboard permits are taxable real property, and fit the statutory definition of real property. Though Wis. Stat. 70.32 does not expressly say how to value a billboard permit, it directs the assessor to methods discussed in the Wisconsin Property Assessment Manual, which includes incomegeneration of the property. 36
Questions? Thank you! 37