An interesting issue arose in a recent tax assessment case where Golf Property Analysts provided appraisal services to the owner of a multi-course golf facility.
In the appraisal of any golf facility for ad-valorem tax assessment valuation, a key element is the allocation of real and personal property. As I note in my 2016 book Golf Property Analysis and Valuation – A Modern Approach, None of the methods described in this chapter are foolproof. The appraiser faces the test of reasonableness, analyzing allocation in a convincing manner, and choosing a methodology that suits the specific situation at hand.
In the case referred to above, the question was which of the several approaches were appropriate. There are several mentioned in the book and the debate in this case came down to two methods known as the Management Fee Technique and the Excess Profits Technique.
The Excess Profits Technique is described as follows: Using the excess profits technique, a stabilized net income is calculated after removing expenses that may be unique to the owner, and
required returns are calculated for each asset with the residual being income attributed to the intangible property. The weakness of this method is that the individual asset values are typically based on cost or depreciated cost, as market value by asset is difficult to measure. It has little to do with expert management.
Proponents of the Management Fee Technique conclude that the management fee paid to the management company can be viewed as income attributable to the business, and the remaining net operating income can be attributed to the personal property (assuming that replacement reserves for personal property are properly accounted for). Utilizing this technique, any business value (intangible property) related to the operation could be accounted for by capitalizing the management fee or some portion of the management fee. Opponents of this method claim that it fails to recognize some of the other intangible property components that exist, most notably business value to the owner. This method suggests that all business value is retained by management, who usually has no investment. Thus, opponents say it fails to recognize any return on and of investment, which most would assume as necessary to any acquisition.
In the recent case referred to, the taxpayer maintained that the management fee technique was appropriate because in the jurisdiction in question, personal property (tangible) value was pre-determined by the personal property assessment, thus leaving only the business enterprise value (BEV) to be allocated. Since the case was settled immediately prior to trial, the court never had a chance to decide on this issue, but it highlights a bigger issue for allocation in tax assessment valuation.
Is there one right method? Allocation is a subjective and often imprecise process. No one method is right for all situations. In a jurisdiction where personal property (tangible) value is not predetermined, the Excess Profits or possibly some other technique may be appropriate. In any event it takes an understanding of all the relevant facts to choose the appropriate methodology in each case.