Like many of us, I am following the New York Attorney General’s (NYAG) civil fraud lawsuit against Donald Trump. However, my main interest is not the politics of the matter but rather the issues relating to appraisals of golf course properties. Upon reading the complaint, I realized there are likely differences between valuations of assets and entities that could be misunderstood, and that the term “value” can mean different things in different context.
The complaint filed by NYAG alleges that property valuations, including the Trump golf property portfolio were manipulated to enhance the perception of Trump’s wealth to banking officials, voters and others. In many cases, the generally accepted accounting principle (GAAP) of “fixed asset value” (FAV) was alleged to have been used to report the “market value” of properties on financial statements. FAV is an accounting term that is used to establish a basis for depreciation based on the cost of the property. FAV can be described as its original cost, minus accumulated depreciation, minus any impairment charges. Thus, as improvements are made to a property, its (income) tax basis may change based on the cost of those improvements. The question of whether the improvements contribute a like amount to the market value is raised.
Appraisals we’ve done for lenders or for use by clients on financial statements typically are done for the purpose of estimating “market value” which is a very different concept. The (abridged) definition of market value is: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under (certain) conditions.
Most critically, the concept of market value presumes a sale, whereas FAV does not. Thus, a significant question in the Trump case relative to the appraisals is what were the appraisers asked to value. While there are certainly instances of appraisers acquiescing to their client’s wishes and artificially inflating appraisals, I’m not making that judgement here. For most bank-related appraisal assignments, we are clearly asked to estimate market value. Even then, it’s sometimes unclear as to whether the client seeks the value of the going-concern (all the tangible assets of the business) or just the value of the real estate (land and improvements). With golf property appraisals, in most cases we are asked to value the going concern, because that’s how they’re bought and sold.
Among the issues in the Trump case is the difference in value estimates in appraisals done for banking and financial statements and those done for real estate tax assessment appeals. Unlike most other golf property appraisals, those done for ad-valorem real estate tax assessment appeals are focused on estimating the market value of the assessed real estate. Thus, it is generally accepted that a valuation objectively and accurately done for a real estate tax assessment appeal would result in a lower value (assuming continued present use as highest and best use) than the value of the going concern. It should be noted that methodology for allocating real and personal property from the going concern value varies from state to state and can often yield inconsistent results.
Also raised in the complaint are whether branding has an impact on the value of a golf property and the element of membership refund liability. The branding question is relatively simple. If it perceived that the brand has value, and that brand is transferrable to a potential purchaser, then it is possible that it contributes to the market value of the property. Branding can also diminish the market value as well if negative perceptions exist.
The impact on value from a membership refund liability can be significant, and is challenging to estimate. Many clubs were established with membership programs which promised that entrance fees would be refunded either after a period of 30 years (often with continued membership rights) or if a member resigned on a “4 in, 1 out” basis. This meant that not only did the member get his entrance fee back at some point, but also the club developer/owner avoided income taxes on the sale of these memberships because there’s a liability on the balance sheet. It all works great until membership sales decline and pricing drops. There are many clubs with substantial refund liabilities that in some cases make the club unmarketable to some buyers who simply won’t assume the liability. The most widespread method of valuing this liability is a net present value calculation based on the due dates and amounts of the refunds. This liability is most certainly a negative factor impacting the value of a club.
It is not uncommon for golf properties to have a highest and best use that is alternative to golf. In many cases, golf courses are sought for residential development. When valuing these properties for such development, it’s incumbent upon the appraiser to consider not only the zoning, which may or may not allow the development, but the time required and costs incurred to achieve approval, permitting and the sales absorption of the resulting lots. Thus, if the value of the land is greater than that of the club, its present value is likely considerably less than if lots were available to deliver and build on as of the valuation date.
While no opinion is offered herein on the merits of this case, it brings to light in the general population, issues relating to golf property appraisals that may not be clearly comprehended and are now part of the broader national conversation.