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0 (base period), 313
1,2,3 (future time periods), 313
26 CFR Regulations Section 20.2031-2(h), 429
29 CFR Part 2510, 275
101+ Practical Solutions for the Family Lawyer (Cohen), 391
Abbott, Ashok, 412
Above-grade room counts, 25
Absolute net leases, 143
Access:
in federal tax case valuations, 404
in industrial building appraisals, 167
in marital dissolution valuations, 483–484
Accounting:
accrual basis, 108, 307–308, 384
for machinery/equipment, 196–200
Accounting firms, rules of thumb for, 392
Accrual basis accounting, 108, 307–308, 384
Acquisition cost, 207
Acquisition value, 270
Active appreciation, 461–462
Active Wear, Inc. v. Parkdale Mills, Inc., 578n.26
Actual age, 24
Actual gross income, 101–103
Actual rent, 115
Ad valorem appraisals, 156
Adams v. United States, 414
ADDI&C, 418
Additions to residences, 34
Adequacy of consideration test, 430
Adequate knowledge, 400
Adjusted book value, 362, 363, 383
Adjusted net asset value (ANAV) method, 289–290, 383
example, 386–387
premises of value for adjustments in, 385–386
steps in, 384–385
Adjusted net worth method, 383
Adjusted sale prices, 30–31, 172–174
Adjustment(s):
of balance sheet values, 385–386
in business valuations, 356, 385–386, 550
in commercial appraisals, 106–107
in ESOP valuations, 497–498
in industrial building appraisals, 158–160, 162–171
in land appraisals, 66–68
for operating company with real assets, 550
in single-family residential appraisals, 22–33, 38–39
Administrative rulings, value in, 276
Advanced Communication Design, Inc. v. Follett, 444
Advisory opinions (USPAP), 254
Age:
actual, 24
effective, 216
Age-life method, 216–217
Agreements:
buy-sell (see Buy-sell agreements)
Air-conditioning, 29
ALI (American Law Institute), 444
Ambiguity, in definitions of value, 276, 277
American Greetings, 366
American Law Institute (ALI), 444
American Society for Testing and Materials (ASTM), 85
American Society of Appraisers, 215, 270
Amstead Industries, Inc., 512–513
ANAV method (see Adjusted net asset value method)
Andaloro v. PFPC Worldwide, Inc., 589–590n.16
Anderson v. Anderson, 600n.66
Annualized expected rate of growth or decline, 339
Annuities, discounted present value of, 315
Annuity method, 100
Anticipation principle, 97
Apartment complexes:
actual gross income for, 101–103
effective gross income for, 105–107
excerpts of appraisals for, 113–118
expenses for, 111–112
potential gross income for, 103–105
Appliances, kitchen, 29
Appraisal(s):
accounting depreciation and, 199
defined, 251
functions of, 50–53
hypothetical, 8
liquidation, 8–9
retrospective, 8
Appraisal development and reporting process, 53
Appraisal form, 60
Appraisal Foundation, 261
Appraisal theory, 1–6
approaches to value in, 3–6
in everyday life, 1–3
Appraisal values, 7–10
Appraiser(s):
backup information from, 139
biases of, 1–2
certification of, 75–77, 255, 573–574
for charitable contributions, 420–421
contaminated property and liability of, 84
definitions of value from, 278–279
designation of, 78
education of, 78
independence of, 492–493
licensing of, 78
professional experience of, 77
qualifications of, 77–78, 401–402, 568–569
Appreciation, 421–422, 461–462
Approaches to value (see Valuation approaches)
Approval, for land use, 127–128
Arm’s-length negotiations, 377, 379
Arm’s-length transactions, 7, 404–405
Armstrong v. LaSalle Bank National Association, 512–513, 603n.8
Army Corps of Engineers, 83
Arneson v. Arneson, 478
Arsenic, 88
Arthur Young, 501–502
Asbestos, 88
Asking price (see Price)
Assemblage of assets, value as, 282, 385
Assessment information:
in land appraisals, 64–65
in single-family residential appraisals, 33–34
Asset buildup method (asset accumulation method), 383
Asset lists, 200–211
classifications for, 201–203
inventory on, 204
labels and nomenclature in, 207–210
in machinery and equipment appraisals, 195–196
noninventory supplies on, 203–204
process support equipment on, 204–205
reconciling, 200
source documents for, 206
Asset management, 547–548
Asset number, 207
Asset-based approach to business valuation, 383–388
about, 383
breakup value in, 387
conditions for use of, 387–388
defined, 287
discrete vs. collective revaluation in, 383–384
for ESOPs, 501
example of, 386–387
in federal tax cases, 407–409
in marital dissolution cases, 482
methods in, 289–290
of operating company with real assets, 520, 559–565
premises for adjusting balance sheet values in, 385–386
procedures in, 292
steps in, 384–385
Asset-based lending, 200, 206, 245
Assets:
appreciation of, 461–462
manufacturing, 146–148
marital, 461–466
off-balance sheet, 384–385
tangible, 383–384
in valuation of operating company, 542
value as assemblage of, 282, 385
Assignment, description of, 522
ASTM (American Society for Testing and Materials), 85
Audits, asset list, 196
Augoshe v. Lehman, 602n.79
Authorities on value, 273–279
Auto repair shops, 392
Backup information, 139
Balance sheet(s):
adjusting values on, 385–386
and book value, 270–271
defined, 293–294
market value-based, 385
time periods for data on, 363
in valuation of operating company with real assets, 532–535, 542–543
Ballas v. Ballas, 602n.81
Balsamides v. Protameen Chemicals, Inc., 445
Band of investment method, 100
Banks, mitigation, 83
Barton v. Barton, 599n.55
Base period (0), 313
Bausano v. Bausano, 461
Beauty salons, 392
Bedrooms, 25
Below-market sales of industrial buildings, 171–172
Bertuca v. Bertuca, 601n.66
Best use (see Highest and best use)
Biases, appraisers’, 1–2
Bishop, David, 459
BNE Mass. Corp. v. Simms, 590n.20
Bobrow v. Bobrow, 468–469
Bohl v. Bohl, 601n.73
Boilerplate, 11
Book value:
on balance sheets, 293–294
and depreciation, 197
of equity, 363
on financial statements, 297
of invested capital, 361–362, 373–374
of operating company with real assets, 542
per share, 298
tangible vs. total, 298
and weighted average cost of capital, 343
Borruso v. Communications Telesystems International, 449
Bowen v. Bowen, 479
Breakup method, 290
Breakup value, 387
“Bridging the Gap Between Public and Private Market Multiples” (Goeldner), 580n.6
Brooks & Larson, P.S., 474
Brown v. Arp and Hammond Hardware Co., 446
Brown v. Brown, 600n.64
Building residual technique, 100
Buildings:
commercial (see Commercial appraisals)
general-use, 121, 122, 129–130, 138
industrial, 119–126 (See also Industrial building appraisals)
measurements of, 122–123
residential (see Single-family residential appraisals)
Build-to-suit improvements, 144
Buildup method, 100
Buildup model, 329–333
Built-in gain tax liability, 564–565
Built-up method, 100
Bunkers v. Bunkers, 596n.32
Burden of proof, in federal tax cases, 402–403
Business Brokers Glossary, 272–273
Business Corporations Act, 275
Business property values, 163–164
The Business Reference Guide (Tom West), 391–393
Business valuation, 285–309
approaches to (see Valuation approaches)
and cash vs. accrual basis accounting, 307–308
economic income for, 299–306
expense concepts for, 299
financial statements for, 293–298
net cash flow in, 306–307
rules of thumb for, 389–396
terminology, 293
(See also specific topics)
Business valuation approach, 4
Business Valuation Directory (Business Valuation Resources), 382
Business Valuation Resources, 382
Buy, offers to, 379–380
Buyers, consideration for, 400–401
Buy-sell agreements:
defined, 472
in federal tax case valuations, 428–431
and goodwill, 470
in marital dissolution valuations, 472–477
in market approach to business valuation, 288–289, 380
procedures for valuations using, 292
Buzanell v. Miller, 601n.69
c (see Capitalization rate(s))
C1-C6 condition ratings, 16–17
Calculator method, 131–133
California Business and Professions Code, 471
California Corporations Code 2000, 279
Canada, fair market value in, 261, 443
Capacity:
of machinery/equipment, 179, 208–209
Capital:
return on, 220
weighted average cost of, 313, 341–344
(See also Invested capital)
Capital asset pricing model (CAPM):
beta in, 334–336
and buildup model, 329
estimating discount rates with, 333–338
example of, 337–338
in federal tax cases, 408
size premium in, 337
specific company risk adjustment in, 337
Capital expenditures, 306, 555
Capital gains, trapped-in, 418–420, 450, 479–482
Capital recapture, 100
Capital structure, 297, 343, 356
Capitalization, 188, 196 (See also Direct capitalization)
Capitalization methods:
assumptions in, 314–315
capitalization of excess earnings method, 470
DCF method vs., 312
in income approach for business valuation, 288, 314–316
midyear discounting convention in, 347–349
yield capitalization method, 100, 287
constant growth, 322, 325–327, 340
constant income, 316–317
estimating terminal values with, 325–327
income capitalization growth model, 317–319
for operating company with real assets, 551
Capitalization rate(s) (c):
in capitalization method, 315–316
concept of, 338–339
determining, 99–100
and direct capitalization, 98–99
elements in, 339
estimating, 339–340
for industrial building appraisal, 154–156
and market multiples, 369–371
mortgage equity, 109
and reserves for replacements, 111
in valuation approaches, 286
Capitalized cash flow models, 316–319
Capitalized equipment, 197, 206
Capitalized future economic method, 6
CAPM (see Capital asset pricing model)
Caracci v. Comm’r, 401–402
Carports, 29
Carter, Jimmy, 249
Case law:
definitions of value in, 277–278
on ESOP valuations, 499–513
on federal tax valuations, 397
intrinsic value in, 269–270
marketability and minority discounts in, 447
Cash, market value of invested capital and, 360
Cash basis accounting, 108, 307–308
Cash equivalent prices, 390–391
Cash equivalents, 360
Cash flow:
seller’s discretionary, 300–301, 390
Cash flow models:
capitalized, 316–319
in income approach for business valuation, 316–327
Cash flow to equity, 305–306, 552–555
Cash flow to invested capital, 304–305
Cash value, 261 (See also Fair market value)
Cavalier Oil v. Harnett, 445
Central Trust Company v. United States, 399, 400, 431–432
Certification (of appraiser):
in land appraisals, 75–77
for operating company with significant real assets, 573–574
USPAP on, 255
Champion v. Champion, 487
Chao v. Hall Holding Co., Inc., 507–509, 511
Charges, noncash, 299
Charitable contributions, 420–422
Charles S. Foltz v. U.S. News & World Report, Inc., 500–501
“Check the box” regulations, 589n.10
Chemical refineries, 120
City light views, 23
Class S construction, 175
Cleanup, contaminated property, 87, 89
Clear span, 123
Closely held companies, fair market value for, 400–401
COGS (total cost of goods sold), 543–544
Cohen, Harriet, 391
Collateral, 200
Collection losses, 106, 141–142
Collective revaluation, 383–384
Collier v. Collier, 600n.65
Columbia Management Co. v. Wyss, 446
Commercial appraisals, 97–118
direct capitalization in, 98–108
excerpts from, 113–118
expenses in, 108–112
hypothetical, 8
income approach for, 97–118
Commercial loans, 251
Commercial value, 167–168
Community property states, 471–472, 594n.4
CommutAir, 505–507
Company analysis, 526–549
Company background, 526
Company buyouts, 204
Company description, 523–524
Company headquarters, 124, 164
Company size risk adjustment, 558
Company source document list, 567–568
Company supplied costs, 136
Comparable company method, 288
Comparable properties:
adjusted sale prices of, 30–31, 172–174
industrial buildings as, 139
rental data from, 148–150
Comparable sales, 33, 163, 236–244
Comparable sales approach, 4
for commercial property, 116–118
and guideline transaction method, 288
(See also Sales comparison approach)
Comparative analysis, market multiples from, 371–373
Comparative sales approach, 353–357
Competency, disclosure of, 59
Competitors, 527–528
Compliance statement, 59–62
Compounding, 314
Comprehensive Outdoor Recreation Plans, 80
Concessions, 20, 21, 106–107, 144–145
Concrete tilt-up buildings, 122
Concurrency, 42
Condition:
in industrial building appraisals, 125, 164, 176
in machinery and equipment appraisals, 227–228
in single-family residential appraisals, 16–17, 24–25
Condominiums, 26
Conglomerates, 387
Connecticut, 483–484
Consideration, in ESOP valuations, 490–491
Constant growth capitalization model, 322, 325–327, 340
Constant income capitalization model, 316–317
Construction date, 176
Construction details, 179–184
Construction type, 122
Contaminated property, 79, 84–91
and appraiser liability, 84
cost to cure, 89
environmental assessment reports for, 85–87
with legal vs. illegal contamination, 90
stigma associated with, 89–90
types of, 84–85
Continental Training Services, Inc., 504–505
Contingent conditions, statement of, 569–573
Contingent liabilities, 422
Contract rent, 102
Contractor profit, 136
Contracts, leaseback, 145–146
Contractual definitions of value, 275–276
Control premiums, 355
in ESOP valuations, 495–496, 500
in federal tax cases, 417
in shareholder/partner disputes, 447–450
Controlling interest valuations:
invested capital for, 355–356
in market approach to business valuation, 354–355
premises of value for, 283
sales as equity multiple for, 363
weighted average cost of capital in, 343
Controlling interests, lack of marketability discounts for, 413–414
Conway v. Conway, 594–595n.18
Cost(s):
acquisition, 207
of capital (see Discount rate)
company supplied, 136
to cure contaminated property, 89
of equity, 556–558
excess operating, 214, 218–220
fast-track, 235
financing, 109
from green field, 136
indirect/soft, 134–135, 232–233
in industrial building appraisals, 134–137
of money, 248
(See also Replacement costs)
Cost approaches (in general):
uses of, 6
value formula for, 4
Cost approach to economic obsolescence, 220
Cost approach to industrial building appraisals, 128–137
in appraisal excerpt, 187, 188
appropriate use of, 129–130
costs included in, 134–137
data sources for, 130–131
methods in, 131–134
with special-use buildings, 121
Cost approach to machinery and equipment appraisals, 210–245
example of, 221–245
excess operating costs in, 218–220
reproduction and replacement cost in, 212–215
with sales comparison approach, 221–245
and technological obsolescence, 215
Cost centers, 207
Cost of Capital Yearbook and Quarterly Updates (Morningstar), 336, 343
Cost segregation studies, 109, 205
Cost structures, 363
Costing services, 130–131
Cost-to-cure method, 217–218
Court opinions:
definitions of value in, 277–278
on rules of thumb, 394–395
Covenants not to compete (noncompete agreements), 390, 471, 477
Cowardin, L. M., 82
Crane capacity, 179
Crescent/Mach I Partnership, L.P. v. Turner, 590n.16
Crosetto v. Crosetto, 602n.80
Current assets, 561
Current liabilities, 543
Current use, in industrial building appraisals, 176
Custom-built homes, 24
Customers, in business valuation, 526–527
Customized machines, 209
Cutsinger v. Cutsinger, 599n.57
d (see Debt)
Damage, severance, 94
Data, industrial building appraisal, 130–131, 138–139
Date:
construction, 176
effective, 254–255
of sale, 21–22
Daylight basements, 28
DCF method (see Discounted cash flow method)
Debt (d):
changes in, 307
in income approach, 313
long-term, 543
and net cash flow, 307
pretax, 313
and weighted average cost of capital, 343
Debt collection loss, 106, 141–142
Debt management, 546–547
Debt-free cash flow (DFCF), 303, 361
Debt-free net income (DFNI), 302, 361
Decks, 29
Decline, annualized expected rate of, 339
Declining markets, land values in, 42–43
Deductions (Summary Appraisal Report), 61
Default withdrawal and dissolution provisions, 589n.10
Deferred maintenance, 179
Deffenbaugh v. Deffenbaugh, 595n.18
control premiums in, 447–449
discounts in, 445
entire fairness concept in, 450–453
minority shareholder oppression in, 437
shareholder dispute litigation in, 440–441
strategic buyer valuation in, 443
Delaware Block Method, 440–443
Dental practices, 392
Department of Labor (DOL), 275, 491, 495–496, 499
Departures from Standard 1 (USPAP), 255
Depository institutions, 247
Depreciation:
accounting, 196–199
applying, 215–218
in commercial appraisals, 109–110
in cost approach, 4, 128–129, 212–218, 220
defined, 212
in industrial building appraisals, 128–129, 131
in machinery and equipment appraisals, 212–218, 220, 233
and obsolescence, 128–129
order of, 218
physical, 128, 213–214, 218–219, 233
in valuation of operating company with real assets, 542
Design, residence, 23
Designation, appraiser’s, 78
Desmond, Glenn, 389
DFCF (debt-free cash flow), 303, 361
DFNI (debt-free net income), 302, 361
Diluted net income per share, 304
Dimensions, industrial building, 177
Direct capitalization:
and capitalization in business valuation, 288
in commercial appraisals, 98–108
concept of, 98–99
effective gross income in, 105–107
formula for, 101
income factor in, 101–105
and income information accuracy, 107–108
in industrial building appraisals, 122, 151–154
methods of determining capitalization rate, 99–100
Direct dollar method, 217–218
Disaggregation method, 290
Disclosure(s):
of competency, 59
of gifts, 403–404
in land appraisals, 59–62
Discount rate(s) (k), 327–338
from buildup model, 329–333
from capital asset pricing model, 333–338
and capitalization rate, 339
concept of, 327–328
estimating, 329–338
for fixed-income securities, 329
for operating company with real assets, 555–559
risk-free rate and premium for risk in, 328
Discounted cash flow (DCF) method, 6, 287
capitalization vs., 312
in federal tax cases, 408
prevalence of, 311
in shareholder and partner disputes, 442
(See also Discounting)
Discounted cash flow models, 319–327
for limited life investments, 319–321
and methods of estimating terminal values, 325–327
for operating company with real assets, 559
with terminal values, 321–325
Discounted economic income method, 6, 552
Discounting, 314
Discounting method:
DCF method vs., 312
in income approach to business valuation, 287, 313–314
midyear discounting convention in, 349–350
for operating company with real assets, 551
Discounts:
blockage, 415
in ESOP valuations, 495–497
in federal tax case valuations, 409–417
for 50 percent interest, 413
fundamental, 373
key person, 415–416
in marital dissolution valuations, 478–479
marketability, 355, 409–414, 478–479, 496–497
minority interest, 355, 412–415, 478–479, 495–496
for nonvoting stock, 416–417
in shareholder and partner dispute valuations, 443–447, 450
in Summary Appraisal Report, 61
for trapped-in capital gains, 418–420
Discrete revaluation, 383–384
Discretionary earnings, 300–301, 361, 390
Dispersions, of market multiples, 374
Dissenters’ rights actions:
control premiums in, 449
state precedents on, 454
timeliness of actions in, 455
Dissenting stockholder statutes, 437
Dissenting stockholder suits:
Delaware Block method for, 440–442
market value and fair value in, 380, 439–441
strategic buyer valuation in, 443
Dissolution statutes, 264
Distressed sales, 7
Divorce, valuations for (see Marital dissolution valuations)
Doft & Co. v. Travelocity.com, Inc., 449
DOL (see Department of Labor)
Donahue v. Donahue, 599n.57
Donahue v. Rodd Electrotype Co., 438
Done Deals, 381
Double net leases (net net leases), 142
Double-dipping, 471–472, 484–487
Dry fire prevention sprinklers, 125
Due diligence, in ESOP valuations, 503
Duff & Phelps Risk Premium Report, 331
Dugan v. Dugan, 464
Dunn v. Dunn, 602n.81
E (expected economic income), 312
Early suppression fast response (ESFR) systems, 125
Earning capacity, 466, 470–471, 484
Earnings:
in business valuation, 299
discretionary, 300–301, 361, 390
Earnings before interest, taxes, depreciation, and amortization (EBITDA), 301, 326, 361
Earnings before interest and taxes (EBIT), 301, 326, 361
Earnings power, 520
Eave height, 122
EBIT (see Earnings before interest and taxes)
EBITDA (see Earnings before interest, taxes, depreciation, and amortization)
Economic income, 6, 299–306, 312, 552
Economic life, 216–217
Economic obsolescence (external obsolescence):
cost approach to, 220
defined, 233
and excess operating costs, 219–220
in industrial building appraisals, 129, 137
in machinery and equipment appraisals, 214–215, 233
sales comparison approach to, 219–220
Economic outlook, 549
Economic rent (market rent), 103, 115, 154–156
EDGAR (Electronic Data Gathering and Retrieval) system, 359, 382
Education (of appraiser), 78
Effective age, 216
Effective date, 254–255
Effective gross income (EGI), 105–107
Effective gross income multiplier (EGIM), 150–151
Eisenberg v. Comm’r, 418
Electrical power, superadequacies in, 147–148, 166
Electronic Data Gathering and Retrieval (EDGAR) system, 359, 382
Emergency Wetlands Resource Act of 1986, 80–81
defined, 91–92
“larger parcel” for, 93–96
rules regarding, 92–93
Employee benefit plan expenses, 497
Employee Retirement Income Security Act of 1974 (ERISA), 274, 490–491, 511, 513
Employee stock ownership plan (ESOP) valuations, 489–514
adequate consideration in, 490–491
case law on, 499–513
control premiums/minority interest discounts in, 495–496
DOL definitions of value for, 275
financial statement adjustments for, 497–498
independence of appraiser for, 492–493
IRS audit guidelines on, 493–495
lack of marketability discounts in, 496–497
prevalence of, 513–514
and repurchase liability, 498–499
requirement for, 491–492
Employee stock ownership plans (ESOPs), 489–490
Employees, in business valuation, 529–530
Energy-efficient items, 29
English v. Atromick Int’l, Inc., 592n.41
Enhanced earning capacity, 471
Enterprise goodwill (practice goodwill), 462–463, 468–469
Enterprise value, 271–272
Entire fairness, 450–453
Entrepreneurial profit, 135–136, 187
Entry price, 265
Environmental assessment reports, 85–87
Environmental issues, 42, 79 (See also specific issues)
Environmental liabilities, 422
Environmental regulations, economic obsolescence and, 214–215
Equipment:
accounting principles for, 196–200
expensed, 200
for operating company with real assets, 564
valuation of, 223–245
(See also Machinery and equipment appraisals)
Equities:
capitalization rates for, 339–340
discount rates for, 329–338
Equity (e):
adjusted book value of, 363
cost of, 556–558
defined, 292
gross cash flow to, 302
in income approach to business valuation, 313
net cash flow to, 305–306, 552–555
valuation of invested capital vs., 291–292, 340–344, 355–356, 552
in valuation of operating company with real assets, 543
Equity multiples, 362–363, 369, 375–378
Equity procedure, 551
Equity risk premium, 330–331, 336, 557
ERISA (see Employee Retirement Income Security Act of 1974)
Ernst & Young, 468–469
Escalators, lease, 154
ESFR (early suppression fast response) systems, 125
ESOP Association, 517
ESOP valuations (see Employee stock ownership plan valuations)
ESOPs (employee stock ownership plans), 489–490
Estate of Adams v. Comm’r, 415
Estate of Bennett, 404–405, 414
Estate of Berg, 401
Estate of Blount v. Comm’r, 429
Estate of Borgatello v. Comm’r, 419
Estate of Brookshire, 406
Estate of Bruce v. Comm’r, 404
Estate of Cidulka, 426–427
Estate of Cloutier, 413
Estate of Davis v. Comm’r, 418, 585n.100
Estate of Dunn v. Comm’r, 419, 432–433
Estate of Fleming v. Comm’r, 413
Estate of Freeman v. Comm’r, 587n.150
Estate of Furman v. Comm’r, 416
Estate of Gallo, 365, 407, 410
Estate of Gimbel v. Comm’r, 411
Estate of Green v. Comm’r, 414
Estate of Heck v. Comm’r, 407
Estate of Jameson v. Comm’r, 408–409
Estate of Jelke v. Comm’r, 410, 414, 419
Estate of Josephine Thompson v. Comm’r, 402, 403
Estate of Jung, 424–426
Estate of Kaufman v. Comm’r, 405
Estate of Klauss v. Comm’r, 422
Estate of Lauder v. Comm’r (Lauder II), 429–430
Estate of Lehmann v. Comm’r, 408
Estate of Leichter v. Comm’r, 406
Estate of Maggos v. Comm’r, 417
Estate of Mitchell v. Comm’r, 416, 422
Estate of Mueller v. Comm’r, 431
Estate of Noble v. Comm’r, 423–424
Estate of Renier v. Comm’r, 416
Estate of Smith v. Comm’r, 587n.150
Estate of Thompson v. Comm’r, 401, 414
Estate of Trompeter v. Comm’r, 428
Estate of True v. Comm’r, 430
Estate of Watts, 407–408
Estate of Welch v. Comm’r, 419
Estate of Wright v. Comm’r, 417
Estate taxes, 398
Estimated useful life, 209
Estimated value, industrial building, 131–134
Estimation:
of capitalization rates, 338–340
of discount rates, 327–338
of terminal values, 325–327
Estuarine wetlands, 82
Evidence, adequacy of, 483
Ex situ remediation, 87
Excess earnings method, 290
defined, 384
economic income levels in, 303, 306
in marital dissolution cases, 470, 484
procedures in, 292
valuing goodwill with, 470
Excess land (surplus land), 158–160
Excess operating costs, 214, 218–220
Exchange, value in, 9
Executive summary(-ies), 11–12, 48
Exit price, 265
Expected economic income (E), 312
Expected growth, 370–371
Expenditures, capital, 306, 555
Expense(s):
accuracy of information about, 107
for business valuation, 299
with changing use of land, 127–128
in commercial appraisals, 108–112, 114
employee benefit plan, 497
in industrial building appraisals, 140–148
management, 110
on operating statements, 108–110
property tax, 146
reserves for replacements, 110–111
in Summary Appraisal Report, 60
Expert evidence, 483
External obsolescence (see Economic obsolescence)
Extraordinary circumstances, 444–445
Eyler, Gary L., 504–505
Fair cash value, 592n.41
defined, 260–262
and depreciation, 199
for eminent domain takings, 92–93
and estate/gift taxes, 398
estimation of, 262
fair value vs., 266
in federal tax case valuations, 398–401
and goodwill, 467
and intrinsic value, 269–270
investment value vs., 267
in marital dissolution valuations, 458–461, 467
of operating company with real assets, 523
premises of value under, 282–283
and rules of thumb, 391
tax court standards on, 399
Fair value:
defined, 262–267
for financial reporting, 264–267
in IFRS 3, 578n.16
in shareholder/partner disputes, 437, 439–440, 444–446, 453–454
under state statutes, 262–264
Fair value standard, 263
Fairness:
entire, 450–453
Family law courts:
covenants not to compete in, 477
double-dipping in valuations for, 484
fair value standard in, 458, 459
market value of goodwill paradox in, 472
trapped-in capital gains in, 479–480
Family limited partnerships, 409
Fannie Mae (Federal National Mortgage Association), 13, 14
Fannie Mae Form 1004:
abbreviations for, 18
about, 13–14
above-grade room count on, 25
actual age on, 24
adjusted sale prices of comparable properties on, 30–31
basement and finished rooms below grade on, 28
date of sale on, 21–22
design/style on, 23
energy-efficient items on, 29
fireplaces/woodstoves on, 29
functional utility on, 28
garages/carports on, 29
gross living area on, 26–28
heating and cooling systems on, 28–29
kitchen equipment on, 29
location and proximity on, 17, 19–20
outbuildings on, 29–30
porches, patios, and decks on, 29
quality of construction on, 15, 23–24
sales and financing concessions on, 20–21
site on, 22
view on, 23
FASB (Financial Accounting Standards Board), 264–267
Fast-food franchises, 393
Fast-track costs, 235
Federal funds rate, 247
Federal government, eminent domain rules of, 92, 93
Federal Home Loan Mortgage Corporation (Freddie Mac), 13, 14
Federal Housing Administration (FHA), 20, 251
Federal Housing Finance Agency (FFHA), 14
Federal National Mortgage Association (Fannie Mae), 13, 14
Federal Reserve Bank, 248
Federal statutes, value in, 274
Federal tax case valuations, 397–433
access to sites, management, and records for, 404
appraiser qualifications in, 401–402
approaches to value in, 405–409
arm’s-length transactions in, 404–405
burden of proof in, 402–403
buy-sell agreements in, 428–431
charitable contributions in, 420–422
contingent liabilities in, 422
disclosure of gifts in, 403–404
discounts in, 409–417
fair market value in, 398–401
premiums in, 417
and pressure to settle tax disputes, 433
subsequent events and information in, 423–428
trapped-in capital gains in, 418–420
weighting of valuation results in, 431–433
Fee simple sales, 161–162
FFHA (Federal Housing Finance Agency), 14
FHA (Federal Housing Administration), 20, 251
Fiduciaries, in ESOP valuations, 502, 503
Fifth Amendment, 92
Financial Accounting Standards Board (FASB), 264–267
Financial information, in federal tax valuations, 423–424
Financial ratio analysis, 544–548
Financial reporting, fair value for, 264–267
Financial statements:
for business valuation, 293–298, 531–541
and ESOP valuations, 497–498
interim, 294
levels of preparation for, 295, 296
time periods for data on, 363–364
(See also specific statements)
Financially feasible (criteria), 10, 126
Financing concessions, 20
Financing costs, 109
Finish details, in industrial building appraisals, 179–184
Finished rooms below grade, 28
Fire prevention sprinklers, 125
Fire sprinklered area, 178
Fireplaces, 29
Fixed asset list, 195 (See also Asset list)
Fixed-income securities, 329
“Fixer-uppers” (fixers), 25
Fixtures, in land appraisals, 62
Flex spaces, 126, 127, 141–142, 169–170
Floors, industrial building, 123, 165, 176
FO (see Functional obsolescence)
Forced liquidation, value as, 8, 282, 386
Forecast periods, 324–325
Form 71A (Freddie Mac), 111–112
Form 1004 (see Fannie Mae Form 1004)
Form 5500 (IRS), 493
Fred Weber, 447–448
Freddie Mac (Federal Home Loan Mortgage Corporation), 13, 14
Freddie Mac Form 71A, 111–112
Frederick’s of Hollywood, 415
Free cash flow to equity, 305–306
Free rentals, 106
Freeway access, 167
From green field (costs), 136
Frontage, industrial buildings’, 168
Functional obsolescence (FO):
and excess operating costs, 219
income approach to, 219
in industrial building appraisals, 128–129, 148, 185
in machinery and equipment appraisals, 214, 233
technological vs., 215
Functional problems, industrial buildings with, 126, 167
Functional utility, 28, 179, 185
Fundamental analysis, 268–269
Fundamental discounts, 373
Fundamental value, 268–270
Fundamentals of Industrial Valuation, 234
Future time periods (1,2,3), 313
g (see Growth)
GAAP (see Generally accepted accounting principles)
Garages, 29
Gary L. Eyler v. Commissioner, 504–505
Gaskill v. Robbins, 596n.32
General equity risk premium, 557
General ledger, reconciling asset list to, 200
Generally accepted accounting principles (GAAP), 196, 263, 307
General-use buildings, 121, 122, 129–130, 138
General-use properties, 119
Georgia, 455
Gesoff v. IIC Industries, Inc., 452–453
Gholl v. eMachines, Inc., 589n.16
Gifts, disclosure of, 403–404
GIM (gross income multiplier), 150–151
Goeldner, Richard W., II, 580n.6
Going-concern premise:
adjusting balance sheet values on, 385
ANAV method on, 289
in federal tax cases, 406
in industrial building valuations, 163–164
in marital dissolution valuations, 461
Going-concern value, 271, 282, 470, 523
Golden v. Golden, 594n.4
Goldman Financial Group, Inc., 508
Goodwill:
distinguishing personal from enterprise, 468–469
and double-dipping, 471–472
and earning capacity, 466, 470–471
as marital asset, 463–468
in marital dissolution valuations, 460–472
methods for valuing, 469–470
and noncompete agreements, 471
personal, 462–463, 468–469, 484
proof of existence of, 466–467
and rules of thumb for valuation, 394
Gordon, Noah J., 581n.1
Gordon growth model:
equity capitalization rates from, 340
midyear convention for, 348–349
modified, 350
present value from, 317–319
terminal value from, 322
Government approval, for land use, 127–128
Government incentives, 168–169
Government policies:
and property values, 247–251
on wetlands, 80–81
Government regulations, land appraisals and, 42
Graham v. Graham, 464
Great Utilities Doctrine, 418
GRM (gross rent multiplier), 150–151
Grocery stores, 393
Gross adjustment, 30
Gross income, 152
actual, 101–103
effective, 105–107
potential, 103–105
Gross income multiplier (GIM), 150–151
Gross leases, 142
Gross living area, 26–28, 33–34
Gross rent multiplier (GRM), 150–151
Ground floor area, 177
Groundwater, contaminated, 88
Groundwater sampling, 86
Growth (g):
annualized expected rate of, 339
and capitalization rate, 339, 340
constant growth capitalization model, 322, 325–327, 340
expected, 370–371
in income approach to business valuation, 312
income capitalization growth model, 317–319
and market multiples, 370–371
(See also Gordon growth model)
Guideline companies:
market multiples relative to, 373–374
number of, 366
sales of publicly traded, 356–357
selection of, 364–366
source data on, 358–359
and specific company risk adjustment, 332
time periods for financial statement data of, 363–364
weights for WACC from, 344
Guideline company method, 406–407
Guideline public companies, 358–359, 363–364
Guideline public company method, 288, 415
Guideline transaction method, 288
Hall Chemical Co., 508
Hanson v. Hanson, 464, 473, 600n.64
Hayes v. Omstead & Associates, Inc., 446
Heated floor space, 177
Heating, ventilation, and air-conditioning (HVAC) systems, 123–124, 165–166
Heating and cooling systems, 28–29
Heavy industrial use zoning, 168
Height:
eave, 122
ridge, 122
as superadequacy, 128–129, 147, 148
wall, 178
Held v. Held, 597n.45
Henry v. Champlain Enterprises, 505–507
Herron v. Herron, 598n.51
Hertz v. Hertz, 473
Hess v. Comm’r, 405, 407, 415, 432
defined, 10–11
in industrial building appraisals, 126–128, 186
USPAP on, 255
Hintmann v. Weber, 447
History, machinery/equipment, 209
H&L Investments, 480
Holbrook v. Holbrook, 465, 473, 597n.39
Hold harmless clauses, 91
Holding companies, 408–409, 447–448
Horizon risk, 330
Houlihan, Lokey, Howard, & Zukin, 506, 510, 511
Hoverson v. Hoverson, 461
Howard v. Shay, 501–502
Hutchens Non-Marital Trust v. Comm’r, 430–431
HVAC (heating, ventilation, and air-conditioning) systems, 123–124, 165–166
Hybrid companies, 405
Hybrid method (see Excess earnings method)
Hybrid premise, ANAV on, 289–290
Hydric soils, 81
Hydrology, 81
Hydrophytic vegetation, 81
Hypothetical appraisals, 8
Hypothetical buyers, 401
Hypothetical conditions, USPAP on, 255
Hypothetical sellers, 401
IBA Market Database, 381, 391, 396
IFRS 3, 578n.16
Illegal contamination, 90
Illinois:
shareholder and partner disputes in, 438, 440, 444
Improvements:
build-to-suit, 144
to general-use buildings, 121
in industrial building appraisals, 125, 163, 164, 167
modifications to comparable sales for, 163
In re Marriage of Belt, 478–479
In re Marriage of Bidwell, 602n.81
In re Marriage of Czapar, 601n.69
In re Marriage of Fleege, 460, 464–465, 473
In re Marriage of Herlitzke, 598n.51
In re Marriage of Hoak, 479
In re Marriage of Jorgensen, 478
In re Marriage of Keener, 602n.79
In re Marriage of Monaghan, 597n.45, 599n.57
In re Marriage of Ondrasek, 473
In re Marriage of Reiling, 479
In re Marriage of Slater, 474
In re Matter of Overbey, 598n.50
In re PNB Holding Co., 590n.16
In re United States Cellular Operating Co., 590n.16
In re Valuation of Common Stock of McLoon Oil Co., 590n.20
In situ remediation, 87
Incentives, government, 168–169
Income:
accuracy of information about, 103, 107–108
in business valuation, 299
constant income capitalization model, 316–317
debt-free net, 302
in direct capitalization method, 151, 152
discounted cash flow models and projections of, 325
economic, 6, 299–306, 312, 552
from operations, 544
(See also Gross income; Net income)
Income, rate, value (IRV) formula, 5, 101, 151
Income approaches (in general):
defined, 229
uses of, 5–6
value formula for, 4–5
Income approach to business valuation, 311–350
capitalization in, 314–316
capitalized cash flow models in, 316–319
defined, 287
discounted cash flow models in, 319–327
discounting in, 313–314
economic income levels in, 304–306
estimating capitalization rates for, 338–340
estimating discount rates for, 327–338
in federal tax cases, 408
independence of, 345–346
invested capital vs. equity in, 340–344
in marital dissolution cases, 482, 484
methods in, 287–288
midyear discounting convention in, 346–350
net cash flow in, 344–346
notations for, 312–313
for operating company with significant real assets, 550–559
procedures in, 292
Income approach to commercial appraisals, 97–118
about, 97–98
apartment complex example, 113–118
direct capitalization in, 98–108
expenses in, 108–112
Income approach to functional obsolescence, 219
Income approach to industrial building appraisals, 119, 137–160
in appraisal excerpt, 188–189
data analysis in, 150–160
data sources for, 138–139
expenses in, 140–148
with general-use buildings, 121–122
possible data problems in, 139
rental data in, 148–150
Income approach to land appraisals, 41, 156–160
Income approach to machinery and equipment appraisals, 195
Income approach to single-family residential appraisals, 39
Income capitalization approach, 4–5
Income capitalization growth model, 317–319
Income factor (direct capitalization), 101–105
Income multipliers, 150–151
Income shortfall analysis, 220
Income statements:
in business valuation example, 543–544
defined, 294
ESOP adjustments to, 497–498
of operating company with real assets, 536–539
Income taxes, 109–110
Increasing markets, land values in, 43–44
Independence:
of appraisers, 492–493
in ESOP valuations, 503
of income approach, 345–346
Indirect costs, 134–135, 232–233
Individual permits for wetlands development, 82
Industrial building appraisals, 119–194
avoiding bias in, 2
cost approach for, 128–137
excerpts from, 175–194
highest and best use market analysis in, 126–128
income approach for, 137–160
real property valuation example, 175–187
sales comparison approach for, 160–174
valuation methods for, 121–122, 187–191
value in use for, 9
Industrial buildings:
categories of, 119–121
characteristics of, 122–126
Industrial parks, 143–144
Industrial properties, contamination of, 84–85
Industrial use, 168
Industry overview, 221–222
Industry risk premiums, 332
Inflation, discount rate and, 328
Initial public offerings (IPOs), 504–505
Initial reviews (environmental assessments), 85–86
Insulation, industrial building, 123
Insurance:
key man, 476–477
nonoperating assets and proceeds from, 429–430
and triple net leases, 143
Insurance appraisals, 156
Intangible assets, 62, 271, 384
Integra rating analysis, 540–541
Intended use (of analysis), 52, 254, 523
Intended users (of analysis), 254, 523
Interest rate risk, 330
Interest valued, 53
Interim financial statements, 294
Internal Revenue Code (IRC):
on appraiser independence, 492–493
on burden of proof, 403
on buy-sell agreements, 429
on charitable contributions, 420
definitions of value in, 274
Section 754 elections, 420
Internal Revenue Manual (IRM), 493
Internal Revenue Service (IRS):
audit guidelines of, 493–495
burden of proof on, 402–403
definitions of value from, 276, 278
depreciation guidelines of, 197, 199
on disclosure of gifts, 403–404
ERISA enforcement by, 491
on fair market value, 398–399
on guideline company selection, 364–365
monitoring of ESOPs by, 499
pressure to settle tax disputes on, 433
(See also specific Revenue Rulings)
International Business Brokers Association, 272–273
Intrinsic value, 268–270
Inutility, 214
Invested capital:
book value of, 361–362, 373–374
cash flow to, 304–305
earned income levels and, 301–302
on financial statements, 296–297
market value of, 355, 360, 373–374
net cash flow to, 304–305
return on, 373–374
total, 355–356
valuation of equity vs., 291–292, 340–344, 355–356, 552
Invested capital multiples, 360–362, 368, 375–377
Investment value:
defined, 267–268
in Delaware Block Method, 441
in marital dissolution valuations, 458–459
in shareholder and partner disputes, 442
and strategic/synergistic value, 272
IPOs (initial public offerings), 504–505
IPR&D, 578n.23
IRC (see Internal Revenue Code)
IRM (Internal Revenue Manual), 493
IRS (see Internal Revenue Service)
IRS Form 5500, 493
IRV formula (see Income, rate, value formula)
Iterative processes, 344
Jacobs, Jack B., 451
Jahn v. Kinderman, 444
Johnston v. Johnston, 599n.57
Jumbo industrial buildings, 170–171
Jung Corp., 424–426
k (see Discount rate(s))
Kaiser v. Kaiser, 601n.69
Kansas, 446
Kapp v. Kapp, 600–601n.66, 600n.65
Keach v. U.S. Trust Co, 509–511
Keane v. Keane, 487
Key employee compensation, 530
Key person discounts, 415–416
Key persons, buy-sell agreements involving, 476–477
Kitchen equipment, 29
Known and knowable financial information, 423
Kohler, Frederic C., 402
Kohler v. Comm’r, 401–404
Kricsfeld v. Kricsfeld, 597n.45
Kroy, Inc., 503–504
Lack of control discounts, 444–447 (See also Minority interest discounts)
Lack of marketability discounts (see Marketability discounts)
Lacustrine wetlands, 82
Land:
approval for change of use in, 127–128
excess/surplus, 158–160
highest and best use analysis of, 126–127
leased, 41
prime, 42
Land and Water Conservation Fund, 80
Land appraisals, 41–96
complex valuation issues in, 41–42
for contaminated property, 84–91
and eminent domain, 91–96
market influence on, 42–44
summary report example, 45–78
with wetlands, 79–84
Land residual technique, 100
Land to structure ratio, 159–160
Land values:
in increasing markets, 43–44
from industrial building appraisals, 156–158
Larger parcel requirement, 93–96
Laro, David, 262, 397, 400, 431
Las Vegas Dodge, Inc. v. U.S., 501
Last period (n), 313
Lauder II test, 430
Lawson Mardon Wheaton, Inc. v. Smith, 445, 593n.60
Lawsuits, 422
Lawyers, definitions of value from, 278–279
Leaseback contracts, 145–146
Leased land, 41
Leases:
and buildings as comparables, 139
capitalization rates for buildings from, 154
gross, 142
of industrial buildings, 139, 142–145, 153
in potential gross income, 104–105
types of, 142–145
(See also Net leases)
Legal contamination, 90
Legal description, 60–61
Legal precedents:
on marital dissolution valuations, 480–481
on shareholder and partner disputes, 454
Legally binding rules and regulations, value in, 275
Legally permissible (criteria), 10, 126
Lending, asset-based, 200, 206, 245
Levels of value, 279–281
Liabilities held, 564–565
Liability(-ies):
built-in gain tax, 564–565
for contaminated property, 84
contingent, 422
current, 543
environmental, 422
off-balance sheet, 384–385
repurchase, 498–499
in valuation of operating company with real assets, 543
Licensing (of appraiser), 78
Life:
economic, 216–217
estimated useful, 209
Light industrial use, zoning for, 168
Limited liability companies (LLCs), 589n.10
Limited life investments, 319–321
Limited partnerships, 409, 415
Limiting conditions:
hold harmless clauses in, 91
in land appraisal example, 53–59
for operating company with real assets, 569–573
USPAP requirement on, 255
Line of business, guideline company’s, 365
Liquidation premise, 8–9
adjusting balance sheet values on, 385
ANAV method on, 289
in federal tax cases, 406
marital dissolution valuations on, 461
Liquidation value, 8, 272, 282, 386
Liquidity, 412
Liquidity ratios, 546
Listing to sale adjustments, 36
Lists of exhibits, 566–567
Litman v. United States, 410–411
Living area, 26–28
LLCs (limited liability companies), 589n.10
Loading docks (loading facilities), 123, 165, 179
Loans:
commercial, 251
interest rates and, 247–248, 250–251
monthly payments on, 248–249
“upside down” in, 251
Location:
in industrial building appraisals, 167
in single-family residential appraisals, 17, 19–20
Location maps, 19–20
Longstaff, Francis, 412
Long-term debt, 543
LoopNet, 138
Lopez v. Lopez, 463–464
Losses:
vacancy, 140–141
Lot size, 22
Lucas v. Lucas, 599n.57
Mace v. Mace, 602n.81
Machinery:
accounting principles for, 196–200
valuation of, 223–245
Machinery and equipment appraisals, 195–245
and accounting principles for machinery/equipment, 196–200
asset lists for, 195–196, 201–210
cost approach for, 210–245
excerpts of, 221–245
industry overview in, 221–222
liquidation, 9
machinery and equipment valuation in, 223–245
sales comparison approach for, 221–245
Maine, 449
Maintenance:
deferred, 179
level of, 210
records of, 213–214
Maintenance expenses, 146, 153
Maler, R. Kevin, 588n.3
Management (managers), 404, 528–529
Management expenses, 110
Management structure, 529
Manufacturing assets, 146–148
Marine wetlands, 82
Marital assets:
appreciation of premarital assets as, 461–462
goodwill as, 463–466
Marital dissolution valuations, 457–487
access to records for, 483–484
adequacy of evidence for, 483
appreciation of assets in, 461–462
asset-based business valuations in, 388
buy-sell agreements in, 472–477
and covenants not to compete, 477
double-dipping in, 484–487
going-concern value in, 271
goodwill in, 462–472
investment value in, 267–268
minority and marketability discounts in, 478–479
premise of value for, 461
retrospective appraisals for, 8
rules of thumb in, 394
standard of value for, 457–461
trapped-in capital gains in, 479–482
valuation date for, 462
Market analysis:
highest and best use, 126–128
in industrial building appraisals, 126–128
Market approach to business valuation, 353–382
with alternative definitions of market value, 380
and arm’s-length negotiations, 377, 379
and buy-sell agreements, 380
capitalization procedure in, 316
comparative sales approach vs., 353–357
data sources for, 357–359
defined, 287
economic income levels in, 300–303
example of, 375–378
in federal tax cases, 406–408
guideline companies for, 364–366
in marital dissolution cases, 484
market multiples in, 359–364, 366–374
methods in, 288–289
and net cash flow, 345–346
and offers to buy, 379–380
for operating company with real assets, 550
and prior transactions, 379
procedures in, 292
relative weights for multiples in, 374
and rules of thumb, 389
and specific company risk adjustment, 332
subject companies in observed ranges in, 366–374
and weights for WACC, 344
Market data approach, 4, 6 (See also Sales comparison approach)
Market exposure, 60
Market extraction method:
for commercial appraisals, 99–100
for industrial building appraisals, 154–156
for machinery and equipment appraisals, 215, 216
Market multiples:
and capitalization rates, 369–371
for direct value of equity, 355
equity, 362–363
estimating terminal values from, 325–327
invested capital, 360–362
in market approach for business valuation, 359–364, 366–374
relative to guideline companies, 373–374
relative weights for, 374
selection of, 371–373
and time periods for financial statement data, 363–364
Market rent (economic rent), 103, 115, 154–156
Market value:
in Delaware Block Method, 441
for eminent domain takings, 92–93
and sales price, 7
of subject property, 4–5
and weighted average cost of capital, 341
(See also Fair market value)
Market value of invested capital (MVIC), 355, 360, 373–374
Marketability discounts, 355
for controlling interests, 413–414
in ESOP valuations, 496–497, 500, 505
in federal tax cases, 409–414
in marital dissolution valuations, 459–460, 478–479
with minority discounts, 412–413
in shareholder and partner dispute valuations, 444–447
Markets served, 365
Marshall & Swift Valuation Service, 131–133, 234, 244
Marvel Corporation, 366–369
Matheson, John H., 588n.3
Matthew G. Norton Co. v. Smyth, 450
Matthews, Gilbert, 448
Maximally productive (criteria), 10, 126
May v. May, 467
MBCA (see Model Business Corporation Act of 1950)
Members, in business valuation, 528
M.G. Bancorporation v. Le Beau, 452
Midyear discounting convention, 346–350
Migratory Bird Conservation Fund, 80
Minority blocks, marketability discounts for, 409–412
Minority interest discounts (minority discounts), 355
in ESOP valuations, 495–496
in federal tax cases, 412–415
in marital dissolution valuations, 478–479
marketability discounts with, 412–413
Minority interest valuations:
asset-based approach to, 383
direct valuation of equity for, 355–356
in market approach to business valuation, 354–355
premises of value for, 283
in privately held companies, 356–357
weighted average cost of capital in, 344
Minority marketable value, 281
Minority oppression suits, 380, 445–447
“Minority Oppression & The Limited Liability Company” (Moll), 588n.10
Minority shareholder oppression statutes, 437–438
Mitchell v. Mitchell, 474
Mitigation, wetlands, 82–83
Mitigation banks, 83
Model Business Corporation Act of 1950 (MBCA), 263, 439, 455, 588n.1
Model number, machinery/equipment, 208
Modified Gordon growth model, 350
Moffitt v. Moffitt, 478
Moll, Douglas K., 589n.10
Money, cost of, 248
Montana Business Corporation Act, 447
Monthly payments, property values and, 248–249
Moore v. New Ammest, Inc., 446
Morningstar, 330–332, 336, 337, 343, 345
Morrissey v. Comm’r, 405
Mortgage equity capitalization rate, 109
Motors, machinery/equipment, 208
Multiattribute utility model (MUM), 469
MVIC (see Market value of invested capital)
n (last period), 313
National Center for Employee Ownership, 517
National sales information, 189–190, 192
National Wetlands Priority Conservation Plan, 80
Nationwide permits, wetlands development, 82
NAV (net asset value) method, 383
Negotiations, arm’s-length, 377, 379
Neighborhood description, 62
Net adjustment, 30
Net asset value (NAV) method, 383
Net cash flow:
in capitalization method, 316
in income approach for business valuation, 344–346
variables affecting, 306–307
Net cash flow to equity, 305–306, 552–555
Net cash flow to invested capital, 304–305
Net income, 188
and economic income, 303
for operating company with real assets, 553, 555
per share, 304
before taxes, 363
Net leases:
absolute, 143
double (net net), 142
single, 142
triple (net net net), 142–143, 153
Net operating income (NOI), 101, 152
Net revenues, 300
New Jersey:
marital dissolution valuations in, 471, 485–486
shareholder and partner disputes in, 444–445, 453
Niculita, Alina V., 489
NOI (net operating income), 101, 152
Noncash charges, 299
Noncompete agreements (covenants not to compete), 390, 471, 477
Nonconforming properties, residential, 34–35
Noninventory supplies, 203–204
Non-legally binding administrative rulings, 276
Nonoperating assets, 429–430, 500
Nonpermitted space, 34
Nonvoting stock, 416–417
Objectives, analysis, 522–523
Obsolescence (see specific types)
OCF (see Owner’s cash flow)
Off-balance sheet assets, 384–385
Off-balance sheet liabilities, 384–385
Offers to buy, 379–380
Officers, in business valuations, 529
Okerlund v. United States, 423
Operating company with significant real assets (business valuation), 519–574
about, 519–520
Appraisal Certification appendix, 573–574
Asset Approach to Value section, 559–565
balance sheet analysis, 542–543
Company Analysis section, 526–549
company description, 523–524
Company Source Document List, 567–568
competitors, 527–528
description of assignment, 522
Economic Outlook section, 549
financial and operating ratio analysis, 544–548
financial statement analysis, 531–541
Income Approach to Value section, 550–559
income statement analysis, 543–544
Industry Outlook section, 549
intended use and users of analysis, 523
Introduction section, 522–526
List of Exhibits, 566–567
members, management, and employees, 528–530
operations, suppliers, products, and customers, 526–527
purpose and objective of analysis, 522–523
Qualifications of Principal Appraisers appendix, 568–569
scope of work, 524–525
standards and premise of value, 523
Statement of Contingent and Limiting Conditions appendix, 569–573
strengths and opportunities, 530–531
Summary and Conclusion section, 565–566
use of specialists, 525
Valuation Methodology section, 549–550
weaknesses and risks, 531
Operating costs, excess, 214, 218–220
Operating entities, asset-based valuations of, 387–388
Operating expenses, 142–143, 544
Operating income, 301 (See also Earnings before interest and taxes (EBIT))
Operating ratio analysis, 544–548
Operating statements, expenses on, 108–110
Operations, in business valuations, 526–527
Opportunities, in business valuations, 530–531
Oppression, defining, 438
Orderly disposition, value as, 282, 385
Orderly liquidations, 8
Oregon, 446–447
Original acquisition cost, 207
Outbuildings, 29–30
Outside counsel, 529
Overall rate, direct capitalization, 151
Overborrowing, 250–251
Oversized industrial buildings, 170–171
Owner, value to, 458–459
Owner’s cash flow (OCF), 300–301, 390 (See also Discretionary earnings)
Owner’s compensation, 299
Ownership, levels of value and, 279–281
Pacific Architects and Engineers, Inc., 501–502
Palustrine wetlands, 82
Paper mills, 120
Partial acquisitions, by eminent domain, 93–96
Partner disputes (see Shareholder and partner dispute valuations)
Past transactions method, 288
Patios, 29
P/E (price-to-earnings) multiple, 370
Pension Benefit Guarantee Corporation (PBGC), 491
Permits, wetlands development, 82
Perpetual life preferred stock, 316–317
Personal goodwill (professional goodwill), 462–463, 468–469, 484
Personal property, in land appraisals, 62
Personal property values, 163–164
PGI (potential gross income), 103–105
Physical depreciation (PD):
determinations of, 213–214
and excess operating costs, 218–219
in industrial building appraisals, 128
in machinery and equipment appraisals, 213–214, 218–219, 233
Physical investigations (environmental assessments), 86–87
Physical volume, valuation rules of thumb on, 390
Physically possible (criteria), 10, 126
Pickard v. Pickard, 602n.79
Plants, excess operating costs for, 219–220
Plants, wetlands, 81
Poore v. Poore, 598n.48
Porches, 29
Potential gross income (PGI), 103–105
Powell v. Powell, 465
PP&E (property, plant and equipment), 542
Practice goodwill (enterprise goodwill), 462–463, 468–469
Preferred equities, 291–292
Preferred stock, 316–317
Pre-IPO studies, 410
Premise of value, 385–386
adjusting balance sheet values based on, 385–386
in business valuations, 385–386, 523
defined, 281–283
for marital dissolution valuations, 461
Premiums:
in ESOP valuations, 495–496
in federal tax case valuations, 417
in shareholder and partner dispute valuations, 447–450
(See also Control premiums; Risk premiums)
Price(s):
cash equivalent, 390–391
defined, 6–7
entry, 265
as equity multiple, 362
exit, 265
interest rates and, 247–248
and transaction value, 273
(See also Sale price [sales price])
Price-to-earnings (P/E) multiple, 370
Price-to-sales multiples, 373
Primary net income per share, 304
Prime land, 42
Principles of Corporate Governance (American Law Institute), 444
Prior sales, in land appraisal, 60
Prior transactions, in market approach, 379
Privately held companies:
beta for, 336
market approach to valuation of, 356–357
sales databases for, 381
sales of, 358
weighted average cost of capital for, 343
Process support equipment, 204–205
Production capability, 223
Products, in business valuation, 526–527
Professional experience, appraiser’s, 77
Professional goodwill (personal goodwill), 462–463, 468–469, 484
Profit:
contractor, 136
and sales of industrial buildings, 171–172
Profitability ratios, 545
Prohibited influences, in land appraisals, 61
Proof, burden of, 402–403
Property(-ies):
description of, 254
general- vs. special-use, 119
industrial, 84–85
nonconforming, 34–35
personal, 62
(See also Comparable properties)
Property, plant and equipment (PP&E), 542
Property held, 564
Property rights conveyed, 65, 161–162
Property tax expenses, 146
Property values, 247–251
business and personal, 163–164
government policies and, 247–251
impact of low interest rates, 249–251
and land values, 156–158
and monthly payments, 248–249
Proposed Regulation §2510.3-18(b)(2)(ii) (DOL), 578n.27
Proposed Regulation Relating to the Definition of Adequate Consideration (DOL), 491
Proprietary equipment, 208, 209
Proximity, in residential appraisals, 17, 19–20
Publicly traded companies:
as guideline companies, 358–359, 363–364
guideline method involving, 288, 415
transaction data for, 382
Publicly traded securities, 382
Published information, on industrial buildings, 138–139
Pueblo Bancorporation v. Lindoe, 445–446, 453
Purpose, of analysis, 51–52, 254, 522–523
Put-call collars, 411
Q1-Q6 quality of construction ratings, 15
Qualified appraisers, of charitable contributions, 420–421
Qualified appreciated stock, 421–422
Qualitative analysis, for multiple selection, 371, 373
Quality of construction, 15, 23–24
Quantitative analysis, for multiple selection, 371
Quantity survey method, 134
Rapid-American Corp. v. Harris, 447
Real estate appraisals, 267, 354, 355 (See also Commercial appraisals; Single-family residential appraisals)
Real estate loans, 247–249, 251
Real property:
description of, 63, 175–176, 254
in industrial building appraisals, 175–187
value not attributable to, 65
Real rate of return, 327–328
Reasonable expectations test, 438
Recapture, 100
Recirculation, ESOP share, 498
Recognized appraisal procedures, use of, 62
Reconciliation:
of asset lists, 200
in commercial appraisals, 118
in land appraisals, 69
for operating company with real assets, 550
Records, access to, 404, 483–484
Redemption, ESOP share, 498
Regional sales information, 191–194
Regression analysis, 412
Reich v. Valley National Bank of Arizona, 502–504
Related parties, 379
Relevering betas, 344
Remediation, contaminated property, 87, 88
Rent(s):
actual, 115
in commercial appraisals, 114–116
contract, 102
economic/market, 103, 115, 154–156
in income approach, 148–150, 153
for industrial buildings, 144–145
in leaseback contracts, 145–146
Rent surveys, 104
Rental homes, 39
Rentals, free, 106
Replacement allowance, 110–111
Replacement cost new, 385
Replacement costs:
in direct dollar method, 217–218
in industrial building appraisals, 130–131
in machinery and equipment appraisals, 212–215
reproduction vs., 137, 212–213
used-, 385
Reproduction costs, 137, 212–215
Repurchase liability, 498–499
Repurchase obligations, ESOP, 496
Resales, 162–163
Reserves, for replacements, 110–111, 146
Residential appraisals (see Single-family residential appraisals)
Residential property, contamination of, 85
Residual values (see Terminal values)
Restaurants, 393
Restricted stock, 280, 281, 410–411
Retail spaces, collection losses in, 106
Retrospective appraisals, 8
Return of investment, 100
Return on capital, 220
Return on invested capital, 373–374
Return on investment, 100
Return on sales, 373
Revaluation, 383–384
Revenue(s):
in business valuations, 389, 543
in land appraisals, 60
net, 300
in rules of thumb, 389
Revenue Ruling 59-60 (IRS):
fair market value in, 523
on guideline company selection, 364–365
on holding company valuations, 408
market approach to business valuation in, 311, 406
on weighting of valuation method results, 431, 432
Revenue Ruling 77-287 (IRS), 410
Revenue Ruling 81-253 (IRS), 276
Revenue Ruling 93-12 (IRS), 276
Revised Model Business Corporation Act (RMBCA):
definition of fair value in, 263–264, 439–440
minority and marketability discounts in, 443
minority oppression statutes and, 437
valuation date in, 274
Ridge height, 122
Risk(s):
in business valuation example, 531
company size-related adjustment to, 558
company-specific adjustment to, 331–332, 337, 558
defined, 328
horizon/interest rate, 330
industry-specific adjustment to, 557
interest rate, 330
and market multiples, 370–371
premium for, 328
systematic, 334
unsystematic, 334
Risk Premium Report (Standard & Poor’s Corporate Value Consulting), 331
Risk premiums:
and cost of equity, 557–558
industry, 332
Riverine wetlands, 82
Robertson v. United States, 414
Rogers v. Rogers, 474
R.S. Means Company, 131
Rules of thumb for business valuation, 389–396
and cash equivalent prices, 390–391
checking, against transactions, 391–394
court opinions on, 394–395
in market approach, 289
nature of, 389–390
procedures with, 292
sources of, 391
Running time, machinery/equipment, 209–210
Ryan v. Tad’s Enterprises, 451–452
Sale(s):
below-market, 171–172
distressed, 7
and economic income, 300
of entire companies, 356–357
in equity multiples, 362–363
fee simple, 161–162
forced liquidation, 8
in invested capital multiples, 361
national information on, 189–190, 192
outlier, 160–161
price-to-sales multiples, 373
prior, 60
of private companies, 358
of public companies, 356–358, 382
regional information on, 191–194
resales, 162–163
return on, 373
subsequent, 424–428
and use of buildings as comparables, 139
whole plant, 231
Sale price (sales price):
and sales concessions, 21
variation in, 171–174
Sales comparison approach (in general):
defined, 229
uses of, 5
value formula for, 4
Sales comparison approach to commercial appraisals, 108
Sales comparison approach to economic obsolescence, 219–220
Sales comparison approach to industrial building appraisals, 160–174
adjustments in, 163–171
elements of comparison in, 161–163
with general-use buildings, 121
and variation in sale prices, 171–174
Sales comparison approach to land appraisals (see Land appraisals)
Sales comparison approach to machinery and equipment appraisals, 221–245
Sales comparison approach to single-family residential appraisals, 13–39
about, 13–14
adjustments in, 31–32
assessment information for, 33–34
with dissimilar comparable sales, 33
examples of, 35–39
Fannie Mae Form 1004 items in, 13–31
for nonconforming properties, 34–35
Sales comparison approach to wetlands valuation, 83–84
Sales concessions, 21
Saltzman v. Comm’r, 426
Sampson v. Sampson, 486
Sander v. Sander, 487
Savings, interest rates and, 249–250
SBBI Valuation Edition 2002 Yearbook (Morningstar), 332
Scharfman v. Scharfman, 595n.21
Schroeder, Steven, 459
Scope, of appraisals, 50–53, 255, 524–525
SEC (see Securities and Exchange Commission)
Secondhand (term), 104
Section 404(k) deductions, 495
Section 415 limitations, 495
Section 1042 rollovers, 495
Section 6660 undervaluation penalties, 401
Securities analysis, 268–269
Securities and Exchange Commission (SEC), 279, 281, 357–359, 382
Segregated cost method, 134
Sellers, consideration for, 400–401
Seller’s discretionary cash flow (SDCF), 300–301, 390 (See also Discretionary earnings)
Semiconductor manufacturing, 205
Sensitivity analysis, 325
Serial numbers, machinery/equipment, 208
Settlement, tax dispute, 433
Severance damage, 94
SFAS (Statement of Financial Accounting Standards), 265–267
Shareholder and partner dispute valuations, 437–455
about, 437–439
Delaware Block Method, 440–443
and “entire fairness,” 450–453
and fair value, 439–440, 453–454
fair value in marital dissolution vs., 458
influence of states’ precedents on, 454
premiums in, 447–450
timeliness of, 455
Shopf v. Marina Del Ray Partnership, 592n.40
“A Simple Statutory Solution to Minority Oppression in the Closely Held Business” (Matheson & Maler), 588n.3
Single net leases (net leases), 142, 143
Single-family residential appraisals, 13–39
adjustments in, 31–32
assessment information for, 33–34
avoiding bias in, 1–2
with dissimilar comparable sales, 33
examples of, 35–39
Fannie Mae Form 1004 items in, 13–31
income approach for, 39
for nonconforming properties, 34–35
sales comparison approach for, 13–39
Size:
of industrial buildings, 169–171
of residential lots, 22
risk adjustment for company, 558
Size Premium in Excess of CAPM (Morningstar), 337
Soft costs (indirect costs), 134–135, 232–233
Solar industry, 250–251
Sommers v. Sommers, 461
S&P 500 (Standard & Poor’s 500 stock composite average), 334
Special tax assessments, 146
Specialists, in business valuation, 525
Special-use buildings, 120–122, 130
Special-use properties, 119
Specific company risk adjustment, 331–332, 337, 558
Specific industry risk adjustment, 557
Sprinklers, fire prevention, 125
Square foot value, 26–28
Standard & Poor’s 500 stock composite average (S&P 500), 334
Standard & Poor’s Corporate Value Consulting, 331
Standardized text, 11
State government, eminent domain rules of, 92–93
State statutes:
definitions of value in, 274–275
dissenting stockholder, 437
fair value under, 262–264
minority shareholder oppression, 437–438
on stockholder appraisal rights, 439–440
Statement of contingent and limiting conditions, 569–573
Statement of Financial Accounting Standards (SFAS), 265–267
Statutory law, on value, 274–275
Steneken v. Steneken, 485–486
Stern v. Stern, 474
Stewart v. Stewart, 467–468
Stigma of contaminated property, 89–90
Stockholder appraisal rights, 439–440
Straight-line depreciation, 197, 198
Strategic acquisition value, 279, 280
Strategic buyer value, 442–443
Strategic (synergistic) value, 270, 272
Strengths, in business valuation, 530–531
Stribling v. Stribling, 602n.82
Style, residence, 23
Subject companies:
in observed ranges, 366–374
for valuation of operating company, 540–541
Subject property:
description of, 62–63
market value of, 4–5
prior sales of, 60
Subsequent events and information, 423–428, 501
Subsequent sales, 424–428
Substantive fairness (fair price), 450, 451
Substitution principle:
in appraisal theory, 1–2
in sales comparison approach, 4
Summary Appraisal Report (for land), 45–78
appraiser’s qualifications, 77–78
area analysis, 63–64
assessment review, 64–65
assumptions and limiting conditions, 53–59
certification, 75–77
compliance and disclosures, 59–62
discussion and conclusions of value, 68–69
executive summary, 48
maps of subject property, 49–50
photographs of subject property, 70–75
purpose, function, and scope of appraisal, 50–53
real property value conclusion, 70
subject description, 62–63
summary of analysis and valuation, 65–68
Summation method, 233
Superadequacies, 32, 147–148, 166, 171
Super-flat floors, 123
Suppliers, in business valuation, 526–527
Supplies, noninventory, 203–204
Surcharges, 153
Surplus land, 158–160
Sweere v. Gilbert-Sweere, 597n.45, 599n.58
Swimming pools, 31–32
Systematic risk, 334
t (tax rate), 313
Takings clause, 92
Tangible assets, 383–384
Tangible book value, 298
Tax purposes, valuations for (see Federal tax case valuations)
Tax rate (t), 313
Tax Reduction Act of 1984, 513
Tax Reform Act of 1986, 418, 491
Tax Relief Act of 1997, 490
Tax shelters, 481–482
Taxes:
built-in gain tax liability, 564–565
and ESOP contributions, 498
estate, 398
income, 109–110
in marital dissolution valuations, 480–482
property, 146
special tax assessments, 146
Taylor v. Taylor, 465–466
TCE (tricholoroethylene), 84–85, 88
Technological obsolescence, 129, 215, 233
Technology, remediation, 87
Temple v. United States, 415
Terminal values:
defined, 322
discounted cash flow models with, 321–325
estimating, 325–327
and forecast periods, 324–325
for operating company with real assets, 558–559
Third-party information, on industrial buildings, 138–139
Thomson PPC, 381
Time:
running, 209–210
Time adjustments, 162–163
Time periods, for financial statement data, 363–364
Timeliness, of shareholder/partner dispute valuations, 455
Todd v. Comm’r, 421–422
Total book value, 298
Total cost of goods sold (COGS), 543–544
Total invested capital, 355–356
Total rate of return, 327–328
Total return, 345
Transaction method, 354–355
Transaction value, 272–273
Transactions, arm’s-length, 7, 404–405
Transportation services, 124, 169
Trapped-in capital gains, 418–420, 450, 479–482
Treasury bonds, 329
Treasury securities, 330
Trending:
asset list classifications and, 201
basis for, 231
and depreciation, 213
in machinery and equipment appraisals, 231, 234, 244–245
types of, 244–245
Tricholoroethylene (TCE), 84–85, 88
Tri-Continental Corp. v. Battye, 440
Triple net leases (net net net leases), 142–143, 153
Undervaluation penalties, 401
Uniform Appraisal Data Specification, 14
Uniform Appraisal Standards for Federal Land Acquisitions, 92, 96
Uniform Mortgage Data Program, 13
Uniform Standards of Professional Appraisal Practice (USPAP), 253–255
compliance with, 254–255
definition of market value, 261
on hypothetical appraisals, 8
on marketing time, 10
requirements for narrative appraisals, 11
on retention of source documents, 206
standards, 253–254
The Union Illinois 1995 Investment Limited Partnership v. Union Financial Group, Ltd., 590n.20
Unlevering betas, 344
Unsystematic risk, 334
Upside down (in loans), 251
U.S. Bankruptcy Code, 274
U.S. Court of Appeals, 278
U.S. Department of Agriculture (USDA), 20, 251
U.S. Treasury Department, 260–261, 490, 491
Usage hearings, 42
Use, value in, 9
Use restrictions, 168
Used-equipment approach, 219, 244–245
Used-replacement cost, 385
Useful life, estimated, 209
USPAP (see Uniform Standards of Professional Appraisal Practice)
Utah, 454
Utility services, 124–125, 142, 166
VA (Veterans Administration), 20, 251
Vacancy, in land appraisals, 60
Vacancy losses, 140–141
Vacancy rate, 105–106
Vacation homes, 39
Valuation approaches, 6, 308–309
in appraisal theory, 3–6
in federal tax case valuations, 405–409
formulas for, 4–5
in machinery and equipment appraisals, 228–244
and methods, 285–287
for operating company with real assets, 549–550
and procedures, 286–287
relationships between, 5–6
USPAP on exclusion of, 255
Value(s), 259–283
acquisition, 270
appraisal, 7–10
authorities on, 273–279
book (see Book value)
breakup, 387
commercial, 167–168
definitions of, 260–270
disagreements over, 259–260
in discounted cash flow method, 311
enterprise, 271–272
fair (see Fair value)
fair cash, 592n.41
fair market (see Fair market value)
fundamental, 268–270
going-concern, 271, 282, 470, 523
intrinsic, 268–270
investment (see Investment value)
levels of, 279–281
market (see Market value)
minority marketable, 279–281
premises of, 281–283, 385–386, 461, 523
property (see Property values)
sources of authority on, 273–279
square foot, 26–28
strategic/synergistic, 270, 272
terminal (see Terminal value)
transaction, 272–273
Value in exchange, 9
Value in use, 9
Value not attributable to real property, 65
Value of invested capital, 355
Value to owner, 458–459
Valuemetrics, Inc., 510–511
Vegetation, hydrophytic, 81
Very high frequency omnidirectional range (VOR) facilities, 36
Veterans Administration (VA), 20, 251
View, 23
Volume, rules of thumb on, 390
VOR (very high frequency omnidirectional range) facilities, 36
Voting stock, 416–417
W (weight), in income approach, 313
WACC (weighted average cost of capital), 313, 341–344
Wall height, 178
Washington State, 450, 473–475, 480
Washington v. Washington, 596n.22
Water supply, 124
Weaknesses, in business valuation, 531
Weber Industries, Inc., 448
Weight (W), in income approach, 313
Weighted average cost of capital (WACC), 313, 341–344
Weighting:
of approaches to value, 5
of market multiples, 374
of rental data, 150
of valuation results in tax cases, 431–433
for weighted average cost of capital, 342–344
Weinstein v. Weinstein, 602n.82
West, Tom, 391–393
Wet fire prevention sprinklers, 125
Wetlands, 79–84
defined, 79–81
mitigation of, 82–83
permits for development on, 82
types of, 82
valuation of, 83–84
Whole plant sales, 231
Wisconsin, 460–461
Withdrawals, 363
Wood, David, 469
Woodstoves, 29
Workforce availability, 167
Working capital, 298, 307, 543, 555
Written appraisal forms, 60
Year acquired, 207
Year manufactured, 207
Yield capitalization method, 100, 287
Yield to maturity, 329
Yoon v. Yoon, 468
Zerbe v. Zerbe, 601–602n.79
Zipp, Alan, 459