TO: FROM: RE: All Interested Parties Rick Baumgardner, Chair Appraisal Practices Board Concept Paper Valuation Issues in Separating Tangible and Intangible Assets Date: September 9, 2013 Background Those who have followed the work of the Appraisal Practices Board (APB) since its creation are aware of the APB s continued effort to offer voluntary guidance on recognized methods and techniques in areas of interest. Since the creation of the APB, we have received repeated requests to offer guidance on the important issue of valuing tangible and intangible assets in appraisal assignments. These requests for the APB to address this issue have come from practicing appraisers, users of appraisals, various regulatory agencies across the country, as well as other stakeholders. The Board is aware of diversity in methods and techniques currently used in the valuation of property that includes both tangible and intangible components. The APB is also aware of the perception that some methods and techniques may be in conflict with one another. It is the intent of APB to begin a dialogue as a means of identifying these methods and techniques, discuss their similarities and differences, and offer voluntary guidance as to which methods and techniques may be appropriate. It is important to note that it will always be the appraiser s duty to apply appropriate appraisal methods and techniques to produce credible assignment results. At this stage, the APB is requesting feedback from all stakeholders. Comments Based on this background, the APB is seeking your input on the issues discussed in this concept paper. All interested parties are encouraged to comment in writing to the APB before the deadline of October 31, 2013. Respondents should be assured that each member of the APB will thoroughly read and consider all comments. When commenting on various aspects of this concept paper, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any other issues which the APB should consider. Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 1
Written comments on this concept paper can be submitted by mail, email or facsimile. Concept Paper Valuation Issues in Separating Tangible and Intangible Assets. Mail: Email: Appraisal Practices Board The Appraisal Foundation 1155 15 th Street, NW, Suite 1111 Washington, DC 20005 APBcomments@appraisalfoundation.org Facsimile: (202) 347-7727 IMPORTANT NOTE: All written comments will be posted for public viewing, exactly as submitted, on the website of The Appraisal Foundation. Names may be redacted upon request. The Appraisal Foundation reserves the right not to post written comments that contain offensive or inappropriate statements. If you have any questions regarding this document, please contact Staci Steward, Practices Administrator with The Appraisal Foundation, via e-mail at staci@appraisalfoundation.org or by calling (202) 624-3052. TABLE OF CONTENTS Section Issue Page 1 General Comments 3 2 Important Terms 3 3 Governmental Influence of Separating Tangible and 4 Intangible Assets 4 Property Types 5 5 General Discussion Questions 6 Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 2
Section 1- General Comments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 The valuation of real estate that includes income from sources other than the real property continues to be a point where there is a diversity of practice among well-informed appraisal practitioners. There are a number of methods and techniques that have the support from some of the brightest minds in the appraisal profession, which are perceived to be in conflict with one another. This divergence in methodology has caused some stakeholders to question the integrity of our profession in the valuing of such properties. The purpose of this concept paper is to outline the issues that surround the methods and techniques available, and to bring to the attention of appraisers issues they must be aware of in order to provide credible assignment results. This concept paper is intended to solicit insight into the points of view that may be at odds, and allow for consideration of the development of a Valuation Advisory designed help the well-informed appraiser to choose the method applicable to their particular appraisal problem, and reach a market-supported conclusion. Many have framed the issue in the context of the valuation of hotels and motels. The APB s voluntary guidance will not be limited to the hotel-motel issue, but rather about recognized methods and techniques as applied to a variety of properties where a part of the assignment may include the need to separate tangible and intangible assets. As you will note, the sections below pose questions of the appraiser, client, regulator, or member of the public with knowledge or an opinion on this issue. The APB welcomes all comments and answers to the questions below on this concept paper as it will help us frame the issues for future guidance on these complex and changing issues. Questions: 1. For what reasons might an allocation of intangible values be needed by a client? 2. How do you obtain the competency to make the allocations? Section 2 Important Terms Part of the problem with valuation issues in separating tangible and intangible assets can be traced to the lack of common terms and definition used among the professionals currently engaged to perform these types of assignments. These include real property appraisers, business appraisers, personal property appraisers, accountants and others. The adoption by each of these professionals of a different term or definition for what, in many cases, is the same thing, has caused part of the difference in opinion on how to value these assets. This is not a complete list, but examples of important terms include: 34 35 36 Going Concern Business Value Goodwill Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 3
37 38 39 40 41 42 43 44 45 46 47 48 Tangible Asset Intangible Asset Furnishings, Fixtures & Equipment (FF&E) Market Value of Total Assets of the Business Net Operating Income Economic Profit Capitalized Economic Profit Residual Intangible Assets Management Fees Stabilized Income Direct Capitalization Yield Capitalization 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 Questions: 1. What are some other frequently used terms that need to be identified and defined for use in the separation of tangible and intangible assets? 2. Examples of tangible property include personal, real, FF&E, and inventory. What are some other examples of tangible property? 3. Examples of intangible property include copyrights, trade name, patents, contracts, work force, know-how, manufacturing method, and customer lists. What are some other examples of intangible property commonly found in the types of properties? 4. What sources do you consider to be the best for terms and definitions? (a) Please provide as much information on the source(s) that you can. Section 3 Regulatory Influences on Separating Tangible and Intangible Assets There are several regulatory influences that impact this issue. Two that most appraisers should be aware of are the Uniform Standards of Professional Appraisal Practice (USPAP) and the December 2010 Interagency Appraisal and Evaluation Guidelines (if the appraisal is performed for one the applicable agencies). While there are other statutes or rules that may impact the separation of tangible and intangible assets, these two affect all credentialed real property appraisers: 1. USPAP Standards Rules 1-2(e) and 1-4(g) require appraisers to identify and consider the effect on value of any personal property, trade fixture, or intangible items that are not real property but are included in the appraisal. (a) How does this apply to the separation of tangible and intangible assets? 2. Page 9 of 45, December 2010 Interagency Appraisal and Evaluation Guidelines Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 4
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 Be based upon the definition of market value set forth in the appraisal regulation. Each appraisal must contain an estimate of market value, as defined by the Agencies appraisal regulations. The definition of market value assumes that the price is not affected by undue stimulus, which would allow the value of the real property to be increased by favorable financing or seller concessions. Value opinions such as going concern value, value in use, or a special value to a specific property user may not be used as market value for federally related transactions. An appraisal may contain separate opinions of such values so long as they are clearly identified and disclosed. (a) Are there any other sections of the Interagency Appraisal and Evaluation Guidelines that are applicable to the separation of tangible and intangible assets for appraisals performed for agencies that use this document? (b) What are some other important Federal or State regulations that could impact valuation issues in separating tangible and intangible assets? Section 4 Property Types As stated, this is a concept paper on a variety of assignments involving real property that may require recognition of non-real estate generated income and possible separating of tangible and intangible assets. Some of these properties include: 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 Hotels-Motels Regional malls Shopping centers & other retail Convenience stores with gas Assisted living facilities Nursing homes Surgical centers Hospitals Mining operations Landfills Billboards Certain retail properties Car washes Marinas Golf courses 103 104 105 This is not intended to be an all-inclusive list; rather, it is intended to spur additional thought about the issue. Questions: Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 5
106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 1. What are some other types of properties that appraisers should be aware of that might have both tangible and intangible components of valuation? 2. Are there allocation factors common to all these properties or is each unique? 3. Can some of the properties be put into groups by property type or does each one have such unique features that they must be commented on separately? 4. Would some form of matrix or decision tree be helpful on these properties? Such a matrix could list the issues and methods available for consideration and reference where to go to find information on these methods. 5. What factors, if any, would be helpful to an appraiser in making decisions as to what method(s) to consider in the separation of tangible and intangible assets? 6. In what areas is the diversity of practice concerning methods and techniques the greatest? (a) Please explain your answer. Section 5 General Discussion Questions This section will present several statements, questions, and ideas concerning the issues of this concept paper. The purpose of this section is not to lead participants to a conclusion, rather to stimulate a frank and open discussion of issues and techniques, and how the appraiser makes decisions to produce credible assignment results. 1. If an appraiser chooses a specific method based on what is better for the client, does that mean they have made a choice that is biased toward the client? 2. If the varieties of methods available are applied correctly, should the assignment results be the same or within close proximity of each other? 3. Should any method chosen by the appraiser be reflective of market participants? 4. Should these types of properties be valued the same way under any circumstances, no matter the scope of work? 5. If the appraiser chooses one method or technique over the other, based on results, has the appraiser become an advocate for the client s needs? Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 6
138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 6. Are hotels/motels so unique that they have to be considered separate from the other types of properties outlined in this paper? 7. Should management fees always be considered in the appraisal of real property to remove any components of intangible value? (a) Please provide rationale for opinion. (b) What other expense items should always be considered in the appraisal of real property to remove components of intangible value? Please provide rationale for your opinion. 8. Is the biggest part of this issue that we have no conclusive definition of the term going concern? 9. Should courses on this issue present all methods available that result in credible assignment results? (a) Provide rationale for your opinion. 10. Are there any other questions that we should be asking in this concept paper? 11. If we move forward with a Valuation Advisory, would you be interested in serving as a Subject Matter Expert (SME) for the APB? (a) Please provide your contact information if you would want to be considered. Concept Paper Valuation Issues in Separating Tangible and Intangible Assets 7