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Fundamentals of Separating Real and Personal Property

Discussion in 'Commercial/Industrial Appraisals' started by Stephen J. Vertin MAI, Dec 20, 2011.

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  1. Stephen J. Vertin MAI

    Stephen J. Vertin MAI Senior Member
    Gold Supporting Member

    8
    Jan 17, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    Last week I took the new AI course Fundamentals of Separating Real and Personal Property from Intangible Business Assets. I did not put this in the educational forum section since it applies heavily to commercial work.

    I believe this is the future in AI's development into business valuation. They promise courses will follow. It makes sense since many future businesses will not have real estate and the fact of 2014 changing accounting standards. You would not believe the sentiment that the future of RE appraising is doomed because of existing and coming governmental regulations.

    The class was heavy in theory. If you are looking for a calculator class this is not it. It is great for understanding the basics and a must for appraisers doing real estate appraisals with intangible components. I applaud the effort to unite terminology covering some of the most basic issues used in most general practices. A must do in 2012 for those who have not taken it. Further it is required for SBA loans on such properties. The Chicago class last week was the second given.
     
  2. CANative

    CANative Elite Member

    268
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I need to learn more about this. I'd like to buy a copy of "A Business Enterprise Anthology" by David Lenhoff.

    It's a controversial topic.

    Right now I'm trying to grasp this concept especially how it pertains to hotels. I'm reading my notes and handouts from the HVS presentation at the AI fall conference last year.

    Reputation, workforce, contracts, copyrights, patents, trademarks, other assets, residual income, goodwill... adjusting for residual intangibles, sunk costs, Rushmore vs. BEA, :unsure:
     
  3. PL1957

    PL1957 Senior Member

    25
    Jul 19, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    What did you think of the class? The feedback that I heard was that it blew big chunks, specifically in the methodologies suggested, as well as the total lack of practical application of those methodologies. I heard hotel appraisers were most upset because it basically said the most common appraisal methodology used now (the "Rushmore method") was unacceptable.
     
  4. CANative

    CANative Elite Member

    268
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    The concept must have been coined by Einstein, who attempted to unify the general theory of relativity with electromagnetism, hoping to recover an approximation for quantum theory.
     
  5. Stephen J. Vertin MAI

    Stephen J. Vertin MAI Senior Member
    Gold Supporting Member

    8
    Jan 17, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    I enjoyed the class. But fully understand it is not for everyone. No doubt old school hotel appraisers did not like being told their method obsolescence. But I say more tools in the box. No one is going to complain to peer review groups for at least 20-years, given most text still teach Rushmore.

    It tied a lot together for me. It helped me see the need for standard terms and definitions. Further they give a lot of new definitions. I highly recommended it if you are into learning new concepts and see your future going in the intangible asset direction.

    One thing I should add, there is about 150 pages of theory that is required reading out of the book CA mentioned "A Business Enterprise Anthology" by David Lenhoff. Ideally it is to be read before the two day lecture session. Readings makes the class clearer and engaging. However, I do not think it is necessary to pass the examine. I took he day before class off and did the reading. A lot of people said they did not have time. It might have made their class experience less then optimum.
     
    Last edited: Dec 22, 2011
  6. Vernon Martin

    Vernon Martin Senior Member

    4
    Jun 8, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    Rushmore vs Lennhoff

    Could it be possible that hotel appraisers have been doing it wrong for all of these years?
    Actually, yes.

    Having spent much of my career on the lending side, I've had many opportunities to witness the change in value of a hotel once it loses its flag. The value drop is enormous, as the dropped hotel loses access to powerful reservations and frequent guest systems. The flag is usually lost because the hotel has flunked its PIP report, and is thus not in a condition to pick up another valuable franchise. The result has invariably been major loan losses after the foreclosed hotel sells for a fraction of its original appraised value.
     
  7. CANative

    CANative Elite Member

    268
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    You can't get a good flag on exterior access hotels. They're not "female friendly." They'll have to stick to doing things like making sure the landscaping is kept trimmed to "hood height." lol

    I almost flubbed one of my hotel deals by not fully realizing how much lowering the ADR to increase the occupancy affects the net income.
     
  8. Terrel L. Shields

    Terrel L. Shields Elite Member
    Gold Supporting Member

    Top Poster Of the Month

    473
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    What would be a "good flag" then? I see lots of exterior access hotels with Hampton Inn, etc.
     
  9. CBBoston

    CBBoston Member

    1
    Jan 27, 2008
    Professional Status:
    General Public
    State:
    Massachusetts
    Having taken a course or two in business valuation many years ago the basic process wasn't terribly different from RE valuation. Some of the specifics are a bit different. You better know how to analyse financial statements and how firms play games with them. If you think property owners message operating statements, they're amatures compared to even medium sized firms. There are many out there already doing business valuations and it doesnt take much to get in the field because there are little or no barriers to entry.

    Part of this BEV vs Rushmore divide has a lot to do with tax appeal work. Rushmore went out and made a name for himself and promoted his technique very effectively. Genereally the technique works in the assessors favor. Property owners have grabbed onto BEV because, at least in theory, it "truely seperates out business value and leads to lower assessed values. Since Rushmore is so embraced by tax courts its going to take some time to chage the case law. Unless you really know BEV and Rushmore backwards and forwards AND can explain it to non-finance judges and boards, you make take a beating in trying to defend BEV.
     
  10. CANative

    CANative Elite Member

    268
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Rushmore:
    Net income less:
    Management fee
    Adjust for residual intangibles

    BEA:
    Net income less:
    Management fee
    Adjust for residual intangibles
    Business start-up costs

    ------------

    Rushmore:
    Reserve for replacement
    Value of FF&E in place

    BEA:
    Reserve for replacement
    Value of FF&E in place
    Return on FF&E

    One of the interesting metrics is "Sunk Costs" (investment costs incurred before a certain activity takes place which cannot be recovered by the possible sale of the asset they produced.)

    Examples of Sunk Costs (intangible personal property) include: Pre-opening expenses, assembled and trained workforce, initial sales and marketing.
     
    Last edited: Jan 6, 2012
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