1. An Appraiser’s Guide to
Purchase Price Allocation forPurchase Price Allocation for
Financial Reporting & Tax
Presenters
Justin R. Glasser, MAI
Senior Manager
Marius W. Andreasen, MAI, CFA
Senior Managing DirectorSenior Manager
Economic & Valuation Services
KPMG LLP
g g
Valuation & Advisory Group
Cushman & Wakefield
Moderator
Bill Garber
Director of Government andDirector of Government and
External Relations
Appraisal Institute

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5. Disclaimer
The views expressed in today’s webinar doThe views expressed in today s webinar do
not necessarily reflect the official position of
the Appraisal Institute.
Slide 5

6. Slide 6

7. Slide 7

8. Introduction - Presenters
Justin is currently a senior manager in the Valuation Services practice of KPMG LLP. He is
located in the firm’s San Diego office where he assists in the preparation of real property
appraisals, highest and best use studies, lease analyses, and purchase price accounting of
t ibl t l ti t i l d id ti l l t t i l di i tl ttangible assets relating to commercial and residential real estate including: gaming outlets,
hotels, destination resorts, master planned communities, manufactured home communities,
major office buildings, manufacturing and distribution facilities, retail developments, restaurants,
banks, movie theaters, and undeveloped land. He also performs transfer pricing studies relating
to qualified properties and the real property leases held between REITs and taxable REIT
subsidiaries.
Justin R. Glasser, MAI
He has performed valuations of development lands in Central America and the Caribbean,
including Belize, Haiti, Island of St. Kitts, and Island of Petite St. Vincent. Also, Justin has
provided valuation services related to lost profits associated with timeshare points and properties
located in California, Hawaii, and Mexico for purpose of litigation. Other litigation support includes
valuation services related to real property assets located throughout California.
Clients served by Justin include lending institutions, hospitality companies, insurance companies,
Senior Manager
KPMG LLP
4747 Executive Drive
Suite 600
San Diego, CA 92131
Tel 858-750-7207
Fax 858-430-9652
Cell 619-723-6110 y g , p y p , p ,
pension fund advisors, REITS, government agencies, developers, corporations, and attorneys.
Representative Clients
 Hilton Hotels Corporation
 MGM Mirage
 The Blackstone Group
 Cornerstone Real Estate Advisors
GEM R lt C it l
 Bascom
 Armada Hoffler
C it l P ti
Cell 619 723 6110
jglasser@kpmg.com
Functions and Specializations
 Real Property
 Transfer Pricing
 Litigation Support
Education, Licenses, Certifications, & Panels
 Masters of Science in Real Estate, University of San Diego
G Si Al h A d R i i t
 Dubai World
 Starwood Hotels & Resorts Worldwide
 Hyatt Corporation
 Luxury Resorts & Hotels
 Westport Capital Partners
 GEM Realty Capital
 UBS Realty Investors
 ING Investment Management
 IMH Financial Corporation
 Kiawah Development Partners
 Capital Properties
 Pillar Communities
 RedHill Realty Investors
 The Blackstone Group
 CBRE Global Investors
 Gamma Sigma Alpha Award Recipient
 B.A. in Economics, University of California at San Diego
 Member, Appraisal Institute, MAI Designation #497209
 Appraisal Institute Government Relations Committee 2013-Present
 Appraisal Institute Panel Member for IVS for Real Estate in 2013
 Appraisal Institute Panel Member for Financial Reporting in 2012
 Appraisal Institute Associate Committee Chair in 2011
 State of Arizona License # 31944
 State of California License # AG045014
 State of Colorado License #CG100042083
 State of Florida License # RZ3544
Slide 8
 Harrah’s Entertainment
 Tropicana Entertainment
 Fedinco
 Archstone
 State of Michigan License # 31944
 State of Oregon License #C001151
 State of Pennsylvania License # GA004001
 State of Texas License # 1380207
 State of Utah License # 8548636-CG00
 State of Washington License # 1102240

9. Introduction - Presenters
Mr. Andreasen is a Senior Managing Director and Americas Practice Leader of the Financial Reporting
Practice within the Valuation & Advisory (V&A) Group at Cushman & Wakefield. The Financial
Reporting Practice is a specialty within V&A focusing on corporate engagements involving real estate
related consulting services with a primary focus on valuation for financial reporting fair valuerelated consulting services, with a primary focus on valuation for financial reporting, fair value
measurement (ASC Topic 820) and purchase price allocations (ASC Topic 805), intangible real estate
assets, fractional/minority interests in real estate holding companies and partnerships, real estate-
related going concern enterprises and real estate investment trusts (REITs), and valuations of
investments across the capital stack including, equity, preferred equity, and mezzanine and senior
debt.
Mr Andreasen has worked on a national and international level with services provided from coast to
Marius W. Andreasen, MAI, CFA
Mr. Andreasen has worked on a national and international level, with services provided from coast to
coast in the United States, while also performing real estate valuations and consultations within
Mexico, Canada, India, Ireland, Aruba, and the Commonwealth of the Bahamas. These valuations and
consultations have been on a variety of assets, including office buildings, regional malls, neighborhood
and community shopping centers, hotels and destination resort properties, golf courses, convenience
stores and gas stations, apartment complexes, transportation rights-of-way, solar photovoltaic plants,
data centers, hospitals, subdivision developments, and a variety of industrial facilities including single
and multi-tenant distribution heavy manufacturing research & development facilities and cold-storage
Senior Managing Director &
Americas Practice Leader, Financial Reporting
Cushman & Wakefield of Illinois, Inc.
South Wacker Drive
Suite 2800
Chicago, Illinois 60606
Tel 312 470 1881 and multi tenant distribution, heavy manufacturing, research & development facilities, and cold storage
warehouses. These studies have been in conjunction with real estate portfolio and joint-venture
valuations, merger and acquisition due diligence support, asset impairment studies, internal planning,
highest and best use analysis, financing, litigation support, sale-leasebacks, fresh start accounting, and
estate planning.
Over the past decade Mr. Andreasen has provided valuation and consulting services on more than $60
billion in transactional value, having performed numerous studies assisting public and private REIT
Tel 312-470-1881
Mobile 847-722-8992
marius.andreasen@cushwake.com
Functions and Specializations
 Valuation
 Buy-Side Advisory
 Financial Reporting
 Litigation Support
 Fractional Interest Valuations
 Debt Valuations , g p g p p
clients in the application of FASB Statement No. 141R / ASC Topic 805 (Business Combinations),
FASB Statement No. 159 / ASC Topic 820 (Fair Value Measurements and Disclosures) and ASC Topic
852 (Reorganizations). Furthermore, Mr. Andreasen has extensive experience advising some of the
largest U.S. pension funds with regard to their real estate and infrastructure fund investments. Over
the past several years Mr. Andreasen has valued equity interests in funds which, in aggregate, total
more than $7 billion in assets under management, and span across all property types and investment
strategies, ranging from stabilized core assets to Greenfield infrastructure investments.
 Debt Valuations
Education, Licenses, Certifications
 B.S. in Finance, University of Illinois at Urbana Champaign
 Member, Appraisal Institute, MAI Designation #12432
 Chartered Financial Analyst (CFA)
 Member of the CFA Society of Chicago
 International Valuation Standards Council (IVSC)
 Cushman & Wakefield Leadership Council, Board of Advisors
 Guest lecturer, University of Illinois at Urbana-Champaign
 Appraisal Institute Government Relations Committee 2013-Present
Slide 9
g g g Appraisal Institute Government Relations Committee 2013 Present
 Certified General Real Estate Appraiser in numerous states

10. DISCLAIMER
DISCLAIMER:
The processes presented in the following slides are consistent with generally
accepted accounting principles (GAAP) and guidance published by theaccepted accounting principles (GAAP) and guidance published by the
Financial Accounting Standards Board (FASB).
 “A reporting entity shall use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
l i i i th f l t b bl i t d i i i i thvalue, maximizing the use of relevant observable inputs and minimizing the
use of unobservable inputs.” (ASC 820-10-35-24A)
 “Three widely used valuation techniques are the market approach, cost
approach, and income approach….An entity shall use valuation techniques
consistent with one or more of those approaches to measure fair value.” (ASC
820-10-35-24A)
However, there is no Security and Exchange Commission (SEC) rule
mandating a specific valuation technique to comply with financial reporting in
d ith ASC 805 B i C bi tiaccordance with ASC 805, Business Combinations.
This presentation reflects years of collaboration between the valuation and
audit community, as well as the study of public comment letters sent to the
SEC and private letter rulings issued by the SEC. However, variations exist
Slide 10
p g y
across reporting entities and among service providers.

11. Overview
 Introduction to FASB
A B i f Hi t f ASC 805 A Brief History of ASC 805
 User Profile
 Standard of Value
 Market Value v. Fair Value
 Highest and Best Use (USPAP v. ASC 820)
 Value Premise (In-Use v In-Exchange) Value Premise (In-Use v. In-Exchange)
 Process (Step-by-Step) For Investment Properties
 Case Study (Office)
 Common Pitfalls and Mistakes
 IRC § 1060
 Q&A
Slide 11

12. Introduction to FASB
 Financial Accounting Standards Board (FASB)
 Independent Private Organization Created 1973
 Governs Financial Reporting (Public & Non-Public)
• Securities Exchange Commission
• American Institute of Certified Public Accountants
 Maintains Standards Maintains Standards
• FASB Accounting Standards Codification (ASC)
– e.g., ASC 805, Business Combinations
Slide 12

13. A Brief History of FASB Standards
 (1970) APB Opinion No. 16, Business Combinations
 Pooling Interests Method or Purchase Method (Cost Allocation)
• Pooling Method led to inconsistencies across financial statements
Slide 13

14. A Brief History of FASB Standards
Pooling vs. Purchase Accounting
 Prior to 2001 companies could structure acquisitions to determine thePrior to 2001, companies could structure acquisitions to determine the
choice between accounting methods: purchase accounting or pooling-
of-interests accounting
 Pooling: Combine book value of assets and liabilities of the two companies to
t th b l h t f th bi d icreate the balance sheet of the combined companies
 Example: Company A acquires Company B for $650 in stock. Equity book value
is $50. Excess purchase price attributed to increased value of PP&E (over
depreciated historical cost book value), plus value of intangibles (brand, patents,
licenses etc )licenses, etc.)
Balance Sheet, Pooling Method
Purchase A+B Purchase
Company A Company B A+B Pooling Adjustments Accounting
Current Assets 200 100 300 0 300Current Assets 200 100 300 0 300
Property, Plant & Equipment 500 50 550 100 650
Intangibles 0 0 0 500 500
Total Assets 700 150 850 600 1450
Current Liabilities 100 50 150 150
Long Term Liabilities 200 50 250 250
Slide 14
Long-Term Liabilities 200 50 250 250
Stockholder's Equity 400 50 450 600 1050
Total Liabilities & Equity 700 150 850 600 1450

15. A Brief History of FASB Standards
The Pooling Method led to inconsistencies across
fi i lfinancial statements…
Slide 15

16. A Brief History of FASB Standards
 (2001) SFAS 141, Business Combinations
 Elimination of Pooling Interests Method & Amortization of Goodwill
 Purchase Method only (Single Approach)
• Transaction Costs Included in Cost Allocation
Slide 16

17. A Brief History of FASB Standards
 (2001) SFAS 141, Business Combinations
 Elimination of Pooling Interests Method & Amortization of Goodwill
 Purchase Method only (Single Approach)
• Transaction Costs Included in Cost Allocation
(2007) SFAS 141R B i C bi ti (2007) SFAS 141R, Business Combinations
 Clarification of accounting methods
• Transaction Costs Expensed and Excluded from Allocation
Slide 17

18. A Brief History of FASB Standards
 (2001) SFAS 141, Business Combinations
 Elimination of Pooling Interests Method & Amortization of Goodwill
 Purchase Method only (Single Approach)
• Transaction Costs Included in Cost Allocation
(2007) SFAS 141R B i C bi ti (2007) SFAS 141R, Business Combinations
 Clarification of accounting methods
• Transaction Costs Expensed and Excluded from Allocation
 (2009) ASC 805, Business Combinations
 Emphasis on Fair Value
Slide 18

19. A Brief History of FASB Standard
 ASC 805, Business Combinations mandates that “an acquiring
entity shall allocate the cost of an acquired entity to the assetsentity shall allocate the cost of an acquired entity to the assets
acquired and liabilities assumed based on their estimated fair
values at date of acquisition.” Furthermore, the acquiring entity
shall “…identify all assets acquired and liabilities assumed,shall …identify all assets acquired and liabilities assumed,
including intangible assets that meet [either of] the recognition
criteria, regardless of whether they had been recorded in the
financial statements of the acquired entity.”q y
 Contractual-Legal Criterion – Asset(Liability) arises from contractual
or other legal rights (regardless of whether they can be transferred
or separated)p )
 Separability Criterion – Asset(Liability) capable of being separated
from acquired entity(property), or can be sold in combination with a
related contract, asset or liability
Slide 19
y

20. ASC 805, Business Combinations
 Definition of Business Combination
 A transaction or other event in which an Acquirer obtains
control of one or more businesses.
 A business is defined as an integrated set of activities and
assets that is capable of being conducted and managed forassets that is capable of being conducted and managed for
the purpose of providing a return.
 Initial Acquisition Accounting
 Identify Acquirer (usually evident)
 Recognition and Measurement
• Assets Acquired (e.g., building, building lease intangibles)
• Liabilities Assumed (e.g., debt)Liabilities Assumed (e.g., debt)
• Fair Value Measurement (excludes transaction costs)
 Acquirer may perform analysis “in-house”
 Acquirer has up to one year to finalize analysis
Slide 20

21. Take away…
“Why should I care about any of this?”
Slide 21

22. Take away…
Your clients careYour clients care….
Slide 22

23. Take away…
and many are already using your…and many are already using your
reports to comply with ASC 805.
(You may not even know it!)
Slide 23

24. User Profile - Overview
 Public Companies
 REITs
• Industrial
• Office
• Lodging
• Healthcare (e.g., assisted living)Office
• Retail
• Apartment
Oth ( h i d)
Healthcare (e.g., assisted living)
• Manufactured Home Communities
• Single Family REITs
 Others (when acquired)
P i t C i Private Companies
 Looking to go public
• Requires four years audited financials
Slide 24
Requires four years audited financials

25. User Profile – Walgreen Co.
 Walgreen Co., together with its subsidiaries, operates the largest
drugstore chain in the United States with net sales of $72.2 billion in
the fiscal year ended August 31, 2013. It provides customers with
convenient access to consumer goods and services pharmacy andconvenient access to consumer goods and services, pharmacy, and
health and wellness services in communities across America.
Walgreen Co. was incorporated as an Illinois corporation in 1909 as a
successor to a business founded in 1901 The Company is principallysuccessor to a business founded in 1901. The Company is principally
in the retail drugstore business and its operations are within one
reportable segment.
Slide 25

26. User Profile – Walgreen Co.
“…allocation of the
purchase price accounted
“assets…recorded at
their acquisition date
f i l ”for under the purchase
method of accounting…”
fair values…”
Slide 26
• 2010 Annual Report, Page 31, Note 4, Acquisitions….

27. User Profile - Spirit Realty Capital
 Spirit Realty Capital (Spirit) is a self-administered Real Estate
Investment Trust (REIT) company located in Scottsdale, Arizona. It
invests primarily in single tenant (generally) free standinginvests primarily in single tenant, (generally) free-standing,
commercial real estate facilities where tenants conduct retail, service,
or distribution activities.
Spirit began operations through a predecessor legal entity in 2003Spirit began operations through a predecessor legal entity in 2003.
Spirit became a public company in December 2004 and were
subsequently taken private in August 2007 by a consortium of private
investors. On September 25, 2012, Spirit completed an initial public
offering (the “IPO”) of 33.4 million shares of common stock.
As of December 31 2012, Spirit held investments throughout the
United States and its portfolio of properties was leased to
Slide 27
approximately 165 tenants.

28. User Profile - Spirit Realty Capital
 On July 17, 2013, Spirit completed the acquisition of Cole Credit
Property Trust II, Inc. ("Cole II") through a transaction in which it
merged into the Cole II legal entity and was renamed Spirit Realtymerged into the Cole II legal entity and was renamed Spirit Realty
Capital, Inc. As a result, Cole II was the "legal acquirer" in the Merger
for certain legal and regulatory matters and Spirit Realty Capital was
deemed the "accounting acquirer" in the Merger for other legal and
regulatory matters. The merger resulted in a post-closing enterprise
value of $7.4 billion.
 Exclusive of the Cole II Merger, Spirit acquired another 194 properties
for a gross investment of $408.6 million in 40 transactions during.
Slide 28

29. User Profile - Spirit Realty Capital
 Purchase Accounting and Acquisition of Real Estate
 When acquiring a property for investment purposes, we allocate the purchase price to
land building improvements and equipment based on their relative fair values Forland, building, improvements and equipment based on their relative fair values. For
properties acquired with in-place leases, we allocate the purchase price of real estate to
the tangible and intangible assets and liabilities acquired based on their estimated fair
values. In making estimates of fair values for this purpose, we use a number of sources,
including independent appraisals and information obtained about each property as a
result our pre-acquisition due diligence and its marketing and leasing activitiesresult our pre acquisition due diligence and its marketing and leasing activities.
 Lease Intangibles
 Lease intangibles represent the value of in-place leases and above- or below-market
leases. In-place lease intangibles are valued based on an estimates of costs related to
tenant acquisition and the carrying costs that would be incurred during the time it would
take to locate a tenant if the property were vacant, considering current market conditions
and costs to execute similar leases at the time of the acquisition.
• 2013 Annual Report Page 48
Slide 29
• 2013 Annual Report, Page 48

30. User Profile - Spirit Realty Capital
Spirit Realty Capital - Diversification By Tenant
Tenant
Number of
Properties
Percentage of
Total RevenueProperties Total Revenue
Shopko Stores/Pamida Operating Co.,
LLC 181 14.8%
Walgreen Company 69 4.4%
84 Properties, LLC 109 3.5%
Church's Chicken 201 2 6%Church s Chicken 201 2.6%
Academy Sports + Outdoors 9 2.3%
Circle K 83 2.2%
CVS Caremark 37 1.8%
CarMax, Inc 9 1.5%
Carmike Cinemas Inc 12 1 5%
Located in
49 states
Carmike Cinemas, Inc. 12 1.5%
Rite Aid 30 1.4%
Other 1,301 64.0%
Total 2,041 100.0%
Slide 30
• 2013 Annual Report, Page 35

31. Standard of Value
The standard of value for purchase price allocation
in accordance with ASC 805 is Fair Value (as
defined by ASC 820, Fair Value Measurements).defined by ASC 820, Fair Value Measurements).
Slide 31

32. Market Value v. Fair Value
 Market Value: 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 eachq , y
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 conditions whereby:p g y y
 Buyer and seller are typically motivated;
 Both parties are well informed or well advised and acting
in what they consider their best interests;
A bl ti i ll d f i th A reasonable time is allowed for exposure in the open
market;
 Payment is made in terms of cash in U.S. dollars or in
terms of financial arrangements comparable thereto; andg p ;
 The price represents the normal consideration for the
property sold unaffected by special or creative financing
or sales concessions granted by anyone associated with
the sale
Slide 32
the sale.
• Per Dictionary of Real Estate Appraisal (Fifth Edition)

33. Market Value v. Fair Value
 Fair Value: The price that would be received to sell an asset
or paid to transfer a liability (exit price) in an orderly
t ti b t k t ti i t t th ttransaction between market participants at the measurement
date. (ASC 820-10-35-2)
 A fair value measurement assumes that the transaction
t ll th t t f th li bilit t k l ithto sell the asset or transfer the liability takes place either
in the principal market or most advantageous market. (ASC
820-10-35-5)
 In all cases, a reporting entity shall maximize the use ofIn all cases, a reporting entity shall maximize the use of
relevant observable inputs and minimize the use of
unobservable inputs to meet the objective of a fair value
measurement. (ASC 820-10-35-16AA)
 In many cases, the transaction price (entry price) will
equal the fair value (exit price).(ASC 820-10-30-3)
Slide 33
• Per ASC 820, Fair Value Measurements

34. Market Value v. Fair Value
In other words….
Fair value, as defined by ASC 820, Fair Value
Measurements, and market value are very similar in
many respectsmany respects.
Slide 34

35. Highest and Best Use (USPAP v. ASC 820)
Under Uniform Standards of Professional Appraisal
Practice (USPAP)…( )
• When necessary for credible assignment results in
developing a market value opinion, an appraiser must
develop an opinion of the highest and best use of the realdevelop an opinion of the highest and best use of the real
estate. (Standards Rule 1-3b)
• Specifically, “an appraiser must analyze the relevant legal,
h i l d i f t ”physical, and economic factors…” (Standards Rule 1-3b)
Slide 35

36. Highest and Best Use (USPAP v. ASC 820)
According to ASC 820, Fair Value Measurements…
• A fair value measurement of a nonfinancial asset takes into• A fair value measurement of a nonfinancial asset takes into
account a market participant’s ability to generate economic
benefits by using the asset in its highest and best use or by
selling it to another market participant that would use theselling it to another market participant that would use the
asset in its highest and best use.(ASC 820-10-35-10A)
• The highest and best use of a nonfinancial asset takes into
account the use of the asset that is physically possibleaccount the use of the asset that is physically possible,
legally permissible, and financially feasible.(ASC 820-10-35-10B)
Slide 36

37. Highest and Best Use (USPAP v. ASC 820)
In other words….
Highest and Best Use, as defined by ASC 820, Fair
Value Measurements, and highest and best use as
referenced in USPAP are very similar in manyreferenced in USPAP are very similar in many
respects.
Slide 37

38. Highest and Best Use (USPAP v. ASC 820)
However, there is (at least) one significant
difference…
Slide 38

39. Highest and Best Use (USPAP v. ASC 820)
According to ASC 820, Fair Value Measurements…
• Highest and best use is determined from the perspective of• Highest and best use is determined from the perspective of
market participants, even if the reporting entity intends a
different use. However, a reporting entity’s current use of a
nonfinancial asset is presumed to be its highest and bestnonfinancial asset is presumed to be its highest and best
use unless market or other factors suggest that a different
use by market participants would maximize the value of the
asset.(ASC 820-10-35-10C)
Slide 39

40. Highest and Best Use (USPAP v. ASC 820)
In other words….
The highest and best use of an asset, as defined in
section ASC 820-10-35-10C, establishes the
valuation premise (i e in-exchange or in-use) usedvaluation premise (i.e., in-exchange or in-use) used
to measure the fair value of an asset in accordance
with ASC 805, Business Combinations.
Slide 40

41. Value Premise (of Nonfinancial Assets)
In-Use Premise
The highest and best use of a nonfinancial asset might provideThe highest and best use of a nonfinancial asset might provide
maximum value to market participants through its use in
combination with other assets as a group (as installed or
otherwise configured for use) or in combination with other
assets and liabilities (for example, a business). (ASC 820-10-35-10Ea)
In-Exchange Premise
The highest and best use of a nonfinancial asset might provide
maximum value to market participants on a standalone basis. If
the highest and best use of the asset is to use it on a
t d l b i th f i l f th t i th i th tstandalone basis, the fair value of the asset is the price that
would be received in a current transaction to sell the asset to
market participants that would use the asset on a standalone
basis). (ASC 820-10-35-10Eb)
Slide 41
) ( )

42. In-Use v. In-Exchange
Exit Market =
Buyers of the Companyy p y
In-Use Premise
Fair Value may exceed Market Value
E it M k tExit Market =
Buyers of Real Estate (Stand-Alone)
In Exchange PremiseIn-Exchange Premise
Fair Value (generally) consistent with
Market Value
Slide 42

43. In-Use v. In-Exchange
Exit Market = Buyers of the Company
Scenario 1:
Company Value = $30 million
Real Estate
Market Comps = $10 million
Replacement Cost (less Physical &
Functional Obsolescence*): $15 million
*external obsolescence considered based on business enterprise
Fair Value In-Use exceeds Market Value
Slide 43

44. In-Use v. In-Exchange
Exit Market = Buyers of Real Estate
(Stand-Alone)
Scenario 2:
Company Value = $30 million
Real Estate
Market Comps = $50 million
Fair Value In-Exchange (i.e., Market Value)
exceeds Fair Value In-Use
Slide 44

45. Take Away….
 The standard of value employed under ASC 805
i f i l ( d fi d b ASC 820)is fair value (as defined by ASC 820).
 The fair value of an asset acquired as part of a
going concern is the greater of “In Use” or “Ingoing-concern is the greater of “In-Use” or “In-
Exchange” value.
 The fair value of a stand-alone asset (i e The fair value of a stand-alone asset (i.e.,
investment property) is based on an “In-
Exchange” Premise.
 Under the “In-Exchange” Premise fair value is
generally consistent with market value.
Slide 45

46. Process (Step-by-Step) – Investment Property
 Step 1: Validate Purchase Price (‘As Is’ fair value).
St 2 D t i “A If V t” f i l f t Step 2: Determine “As-If-Vacant” fair value of property.
 Step 3: Allocate the “As-If-Vacant” fair value to land, building, site improvements,
and FF&E.
 Step 4: Calculate remaining purchase price to allocate Step 4: Calculate remaining purchase price to allocate.
 Step 5: Allocate a portion of remainder (calculated in Step 4) to above- and
below- market leases (leasehold assets and liabilities).
 Step 6: Allocate a portion of remainder (calculated in Step 4) to ‘Lease-In-Place’.Step 6: Allocate a portion of remainder (calculated in Step 4) to Lease In Place .
 Step 7: Allocate a portion of remainder (calculated in Step 4) to tenant (customer)
relationships, if applicable.
 Step 8: Calculate cash equivalency of assumed debt, if applicable, and allocate ay
portion of remainder (calculated in Step 4) to debt asset/liability.
 Step 9: Reconcile fair value estimates and allocate remaining (intangible) value, if
any, to goodwill.
Slide 46

47. Process (Step 1) – Investment Property
 Step 1: Validate Purchase Price (‘As Is’)
 Standalone Transactions
• Arm’s Length
• Adequate ExposureAdequate Exposure
• All Cash (or Equivalent)
• Orderly Transaction
– Typically some sort of benchmarking is requisite
 Others (i.e., Portfolio, Off-market, Related Party)
• Income Producing Properties
– Income Approach (DCF Method)
» Estimate should be within 5% of Purchase Price» Estimate should be within 5% of Purchase Price
» Options should be considered
» Excess land valued separately (via Market Approach) and added to ‘As
Is’ value estimate
• Asset Acquisition
Market Approach
Slide 47
– Market Approach

48. Process (Step 2) – Investment Property
 Step 2: Determine “As-If-Vacant” fair value
 Income Approach
– Discounted Cash Flow Method
– Direct Capitalization w/ Lease Up Deductions
 Considerations
– Consistency with ‘As Is’ assumptions in evaluating intangible
assets
» Hold period
» TI Allowance
» Leasing Commissions
» Absorption/Downtime
– Excess land valued separately (via Market Approach)
Slide 48

49. Process (Step 3) – Investment Property
 Step 3: Allocate the “As-If-Vacant” fair value to
land building site improvements and FF&Eland, building, site improvements, and FF&E.
 Cost Approach
• Land (Market Approach)
– Can be a significant challenge, especially for large assets in dense,g g , p y g ,
urban environments.
– Goodwill residual v. Land Residual proponents
• Building & Site Improvements (RCNLD)
– Replacement Cost New Less Depreciation (RCNLD)
– Calculating the building fair value as a residual (i e As If Vacant Value less Land– Calculating the building fair value as a residual (i.e., As If Vacant Value less Land
Value) is prohibited
– The ‘As-If-Vacant’ value (from income approach) is used to benchmark the
RCNLD (rule of thumb ± X percent)
• FF&E (Market Approach or RCNLD)
– Many transactions may not include FF&E, or entity may account for it separately.y y , y y p y
 Reconciliation
• Cost Approach & Income Approach (As-If-Vacant)
– Variance ± X percent (rule of thumb)
– Results from Cost Approach utilized for allocation
Slide 49

50. Process (Step 4) – Investment Property
 Step 4: Calculate remaining purchase price to
ll tallocate.
 Subtract ‘As-if-Vacant’ fair value from purchase price
• Remainder reflects fair value of intangibles
– Above / (below) market leases
– Lease-In-Place (cost avoidance)
» Lost income during lease up
b• Rent + Reimbursements
» Tenant Improvement Allowances
» Commissions
» Legal & Marketing expense
Tenant (Customer) Relationships (if applicable)
Lease origination costs
– Tenant (Customer) Relationships (if applicable)
– Debt Asset/Liability (if applicable)
– Goodwill (if applicable)
» Goodwill v. Land Residual debate
Slide 50

51. Process (Step 5) – Investment Property
 Step 5: Allocate a portion of remainder (calculated in
Step 4) to above- and below- market leases.
 Income Approach $7 00
$7.25
$7.50
$7.75
• Estimate market rent
• Forecast contract rent
• Forecast market rent $5 25
$5.50
$5.75
$6.00
$6.25
$6.50
$6.75
$7.00
Rent($/SF)
Contract Rent
Market Rent
• Subtract forecast market rent
from contract rent
• Present value cash flow variance Period 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Contract Rent 5.00 5.00 5.50 5.50 5.50 5.50 5.50 6.00 6.00 6.00 6.00 6.00
M k t R t 5 75 5 89 6 04 6 19 6 35 6 51 6 67 6 83 7 01 7 18 7 36 7 54
$4.50
$4.75
$5.00
$5.25
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Year
• Considerations
– Options (assume exercised if below market)
» “significant economic compulsion” = 10%?, 5%?, ???
» Case Study: Cedar Realty Trust
Market Rent 5.75 5.89 6.04 6.19 6.35 6.51 6.67 6.83 7.01 7.18 7.36 7.54
Difference -0.75 -0.89 -0.54 -0.69 -0.85 -1.01 -1.17 -0.83 -1.01 -1.18 -1.36 -1.54
Slide 51
y y
– Expense reimbursements
– Materiality Thresholds (start/end dates, percent variance)

52. Process (Step 5) – Investment Property
 Step 5: Allocate a portion of remainder (calculated in
Step 4) to above- and below- market leases.
 Point of Debate
• Contract Escalations vs. Market Inflation
• Example:
– Grocery anchor signed today for 20 year term, $10/SF with no escalations
– Market standard is that similar leases would be signed without any escalations
– Assume annual market inflation is 3% per year (over the long-run projection)
– Is the flat lease a favorable lease to the tenant?
– Is the flat lease representative of market terms?
Slide 52

53. Process (Step 6) – Investment Property
 Step 6: Allocate a portion of remainder (calculated
in Step 4) to ‘Lease-In-Place’.
 Think of it as “cost avoidance”
L I Pl i l d (f l ) Lease-In-Place includes (for example)
• Leasing Commissions
• Legal & Marketing Costs
• Downtime
• Rent Abatements
• Expense Reimbursement
• Lost Rent
• Tenant Improvement Allowancee a p o e e o a ce
 Pro Rata Remaining Lease Term
Slide 53

54. Process (Step 6) – Investment Property
 Step 6: Allocate a portion of remainder (calculated
in Step 4) to ‘Lease-In-Place’.
 Point of Debate
Sale Leaseback Transaction• Sale-Leaseback Transaction
• For a sale-leaseback, is there a LIP intangible?
• Technically, the lease is signed after the asset is purchased (not “in-place” at
the time of purchase)
The economics of the transaction are impacted b the leaseback agreement• The economics of the transaction are impacted by the leaseback agreement
(most likely the purchase does not occur without the leaseback
arrangement)
• Does this meet one of the two intangible asset requirements?
Contractual-Legal Criterion Asset(Liability) arises from contractual or– Contractual-Legal Criterion – Asset(Liability) arises from contractual or
other legal rights (regardless of whether they can be transferred or
separated)
– Separability Criterion – Asset(Liability) capable of being separated
from acquired entity(property), or can be sold in combination with a
Slide 54
q y(p p y)
related contract, asset or liability

55. Process (Step 7) – Investment Property
 Step 7: Allocate a portion of remainder (calculated
in Step 4) to tenant (customer) relationships, if
applicable.
 An existing relationship with a customer/tenant may giveAn existing relationship with a customer/tenant may give
rise to intangible value to the acquirer in that there may be
cost savings associated with the relationship (e.g., the
potential reduced expenditure arising from the renewal of
an in-place tenant).
• Probability-weighted present value of future expected cost savings
driven by the relationship (avoided downtime between leases, avoided
TI allowance, etc.))
 In practice, we do not typically see a value assigned to
tenant relationships. This is an advanced concept which
falls outside the scope of our discussion today.
Slide 55

56. Process (Step 8) – Investment Property
 Step 8: Calculate cash equivalency ofy
assumed debt, if applicable.
 Accounts and notes payable, long-term debt, and other
claims payable must be assigned amounts “at presentclaims payable must be assigned amounts at present
values of amounts to be paid determined at appropriate
current interest rates.”
 If a mortgage is assumed in the acquisition of a property,g g q p p y
there may be an intangible asset to the extent that the
assumed mortgage features a below market coupon.
 Likewise, assumed mortgages which feature above market
coupons represent an assumed liability to the buyer.
 This is an advanced concept which falls outside the scope
of our discussion today.
Slide 56

57. Process (Step 9) – Investment Property
 Step 9: Reconcile fair value estimates and
allocate remaining (intangible) value, if any, to
goodwill.
 Variance Greater Than 5 percent? (Or should it be 3 percent?) Variance Greater Than 5 percent? (Or should it be 3 percent?)
• In the event the sum of the allocated fair value estimates for land, building
& site improvements, and intangibles exceeds or falls short of the
purchase price by more than 5 percent, this may be indication of goodwill
b i h h h ld i it ti b for a bargain purchase; however, one should revisit assumptions before
making this conclusion.
 Variance Less Than or Equal to 5 (or 3?) percent?
• In the event the sum of the allocated fair value estimates for land, building, g
& site improvements, and intangibles or falls at or within 5 percent of the
purchase price, a pro rata adjustment (push factor) is made to the fair
value estimates (with the exception of debt/financial instruments) to
reconcile to the purchase price.
Slide 57

58. Case Study (Office)
Transaction Overview
Sale Price $36,150,000
Sale Date 8/7/2013
Property Characteristics
Type Office
Class C
Year Built 1997
Gross Building Area (SF) 215,688
Parking Structure (SF) 297,000
Site Area 62,006
Rentable Area (SF) 147,447
Construction Type Concrete/Steel Frame
Number of Stories 9
S ( ) 3 11Land Size (Acres) 3.11
Land Size (SF) 135,472
Slide 58

59. Case Study (Office)
Fair
Value
 Step 1: Validate Purchase Price (‘As Is’).
 Standalone Transaction
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
• Arm’s Length
• Adequate Exposure
• All Cash (or Equivalent)
As-Vacant -
Land -
Building Improvements -
Site Improvements -
Total Tangible Assets -
• Orderly Transaction
– No. Typically some sort of
benchmarking is requisite
Intangible Assets
Leasehold (Building)
Total Advantage -
Total Disadvantage -
Total -
In Place Lease -
Total Intangible Assets -
Total Assets Allocated $ -
Slide 59

60. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36 150 000Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
A V t 30 890 000
 Step 2: Determine “As-If-Vacant” fair value.
As-Vacant 30,890,000
Land -
Building Improvements -
Site Improvements -
Total Tangible Assets -
Intangible Assets
Leasehold (Building)
Total Advantage -
Total Disadvantage -
Total -
In Place Lease -
Total Intangible Assets -
Total Assets Allocated $ -
Slide 60

61. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30 890 000
 Step 3: Allocate the “As-If-Vacant” fair
value to land…
As Vacant 30,890,000
Land 2,992,263
Building Improvements -
Site Improvements -
Total Tangible Assets -
Intangible AssetsIntangible Assets
Leasehold (Building)
Total Advantage -
Total Disadvantage -
Total -
In Place Lease -
Total Intangible Assets -
Total Assets Allocated $ -
Slide 61

62. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30 890 000
 Step 3: …and to building and site
improvements.
As Vacant 30,890,000
Land 2,992,263
Building Improvements 26,418,467
Site Improvements 227,668
Total Tangible Assets 29,638,398
Intangible AssetsIntangible Assets
Leasehold (Building)
Total Advantage -
Total Disadvantage -
Total -
In Place Lease -
Total Intangible Assets -
Total Assets Allocated $ -
Slide 62

63. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000As Is 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30,890,000
Land 2 992 263Land 2,992,263
Building Improvements 26,418,467
Site Improvements 227,668
Total Tangible Assets 29,638,398
Intangible Assets
 Step 4: Calculate remaining purchase
price to allocate.
Leasehold (Building)
Total Advantage -
Total Disadvantage -
Total -
In Place Lease -
$36,150,000 -$29,638,398 = $6,511,602
Total Intangible Assets -
Total Assets Allocated $ -
Slide 63

64. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30 890 000As Vacant 30,890,000
Land 2,992,263
Building Improvements 26,418,467
Site Improvements 227,668
Total Tangible Assets 29,638,398
Intangible Assets
 Step 5: Allocate a portion of remainder
( l l t d i St 4) t b d
Intangible Assets
Leasehold (Building)
Total Advantage 810,354
Total Disadvantage (248,265)
Total 562,089
(calculated in Step 4) to above- and
below- market leases.
In Place Lease -
Total Intangible Assets 562,089
Total Assets Allocated $ -
Slide 64

65. Case Study (Office)
Step 5 – Detailed Look
Tenant Name: Appraisal Institute
Square Feet 4,547Square Feet 4,547
End Date 4/18
Remaining Months 57 Partial Year
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Contract Base Rent ($/SF) 20.91 21.33 21.76 22.19 16.89 - - - - -
Contract Reimbursement ($/SF) 8.45 8.57 8.88 9.15 6.91
29.36 29.90 30.64 31.34 23.80 - - - - -
Market Rent 22.50 23.18 24.33 25.55 19.74 - - - - -
Market Reimbursement ($/SF) 8.57 8.69 8.94 9.22 6.97
31.07 31.87 33.27 34.77 26.71 - - - - -
Variance ($/SF) (1.71) (1.97) (2.63) (3.43) (2.91) - - - - -
% -5.50% -6.18% -7.91% -9.86% -10.89% - - - - -
Refined Variance ($) -7,775 -8,958 -11,959 -15,596 -13,232 - - - - -
Discount rate 8.25%
PV Variance ($44,515)
PV Contract Rent $525,765
% Contract Rent -8%
Don’t forget generally accepted materiality thresholds….
• Exclude leases with start/end dates within (x) months of Acquisition Date
• Exclude leases with variance within (x) percent of (contract or market) rent
Slide 65

66. Case Study (Office)
Fair
Value
Net Purchase Consideration to be Allocated: $ 36,150,000
As-Is 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30,890,000, ,
Land 2,992,263
Building Improvements 26,418,467
Site Improvements 227,668
Total Tangible Assets 29,638,398
Intangible Assets
 Step 6: Allocate a portion of remainder
Intangible Assets
Leasehold (Building)
Total Advantage 810,354
Total Disadvantage (248,265)
Total 562,089
I Pl L 5 549 514  Step 6: Allocate a portion of remainder
(calculated in Step 4) to ‘Lease-In-
Place’.
In Place Lease 5,549,514
Total Intangible Assets 6,111,603
Total Assets Allocated $ 35,750,001
Slide 66

67. Case Study (Office)
Step 6 – Detailed Look
 Lease-In-Place includes (for example)
 Leasing Commissions
 Legal & Marketing CostsLegal & Marketing Costs
 Downtime
 Rent Abatements
 Expense ReimbursementExpense Reimbursement
 Lost Rent
 Tenant Improvement Allowance
Slide 67

68. Case Study (Office)
Step 6 – Detailed Look
 Leasing Commissions
 Legal & Marketing Costs
(i)
SF
Leasing
Commission
Legal &
Marketing
RUL
(Months)
Market Terms
(Months)
Remaining %
Market Term
Total Leasing Cost
( ) (b) ( ) (d) ( ) (f) (d) / ( )
(g) =
(a) (b) (c) (d) (e) (f) = (d) / (e)
(g)
(c) * (f) * Rent + (a) * (b) * (f)
4,547 $5.00 3.0% 57 60 95.0% $ 36,583
Slide 68

69. Case Study (Office)
Step 6 – Detailed Look
 Downtime
 Rent AbatementsRent Abatements
 Expense Reimbursement
(ii)
SF
Downtime
(Months)
Rent
Abatement
(Months)
Downtime +
Abatement
RUL
(Months)
Monthly
Expenses
Total
Reimbursement
Revenue
(a) (b) (c) (d) = (b) + (c) (e) (f) (g) = (d) * (f)(a) (b) (c) (d) (b) (c) (e) (f) (g) (d) (f)
4,547 6.0 4.0 10.0 57 $ 8.45 $ 84.50
Slide 69

70. Case Study (Office)
Step 6 – Detailed Look
 Lost Rent
(iii)(iii)
SF
Downtime
(Months)
Rent
Abatement
(Months)
Downtime +
Abatement
RUL
(Months)
Market Base
Rent Per SF
(Monthly)
Total Rent
(Monthly)
Lost
Rent
(a) (b) (c) (d) = (b) + (c) (e) (f) (g) = (a) * (f) (h) = (d) * (g)
4 547 6 0 4 0 10 0 57 $ 1 88 $ 8 526 $ 85 2564,547 6.0 4.0 10.0 57 $ 1.88 $ 8,526 $ 85,256
Point of Debate- Present Value Factor of Lost Rent?
Slide 70

71. Case Study (Office)
Step 6 – Detailed Look
 Tenant Improvement Allowance
(iv)(iv)
SF
TI Allowance
(PSF)
RUL
(Months)
Market Terms
(Months)
Remaining %
Market Term
Total TI's
(a) (b) (c) (d) (e) = (c) / (d) (f) = (a) * (b) * (e)
4 547 $ 2 00 57 60 95 0% $ 8 6394,547 $ 2.00 57 60 95.0% $ 8,639
Slide 71

72. Case Study (Office)
Step 6 – Detailed Look
 Lease-In-Place Value (Total)
(i) (ii) (iii) (iv)(i) (ii) (iii) (iv)
Total
Leasing Cost
Total Reimbursement
Revenue
Lost
Rent
Total TI's
LIP
Value
(a) (b) (c) (d) (e) = (a) + (b) + (c) + (D)
$ 36 583 $ 84 50 $ 85 256 $ 8 639 $ 130 563$ 36,583 $ 84.50 $ 85,256 $ 8,639 $ 130,563
Slide 72

73. Case Study (Office)
 Step 9: Reconcile fair value estimates and allocate
remaining (intangible) value, if any, to goodwill.
Fair Adjustment Fair Value
Value Factor Allocated
Net Purchase Consideration to be Allocated: $ 36,150,000 $ 36,150,000
As-Is 36,150,000 36,150,000
Variance 0.00%
Tangible Assets
As-Vacant 30,890,000 1.0112 31,240,000
Land 2,992,263 1.0112 3,030,000Land 2,992,263 1.0112 3,030,000
Building Improvements 26,418,467 1.0112 26,710,000
Site Improvements 227,668 1.0112 230,000
Total Tangible Assets 29,638,398 29,970,000
Intangible Assets
Leasehold (Building)Leasehold (Building)
Total Advantage 810,354 1.0112 820,000
Total Disadvantage (248,265) 1.0112 (250,000)
Total 562,089 570,000
In Place Lease 5,549,514 1.0112 5,610,000
Slide 73
Total Intangible Assets 6,111,603 6,180,000
Total Assets Allocated $ 35,750,001 $ 36,150,000

74. Common Pitfalls and Mistakes
 Portfolio Transactions
 Occasionally appraisers will utilize the allocated purchase
prices provided by the client for a portfolio and neglect to show
support for the allocated purchase price.support for the allocated purchase price.
Why does it matter you ask?
 If the client doesn’t use an appropriate methodology to allocate
the purchase price, then the stated purchase price may be
incorrect and the allocation may not reconcile.
 A (real life) example of using the wrong methodology is utilizing
the direct capitalization approach based on in-place net
operating income for an unstabilized property to derive
allocated purchase price
Slide 74
allocated purchase price.

75. Common Pitfalls and Mistakes
 As Is and As-If-Vacant Calculations
 Keep market leasing assumptions consistent with those utilized
in the As Is calculation under Step 1.p
 Do not assume demand based on existing demand; the
scenario assumes the tenants are displaced so overall demandscenario assumes the tenants are displaced so overall demand
would increase by the amount of space currently occupied.
Slide 75

76. Common Pitfalls and Mistakes
 Replacement Cost New Less Depreciation (RCNLD)
 Utilize the cost approach (RCNLD) to support the allocated
building value; do not base allocation on a building residual.
 Include (don’t exclude) soft costs (those excluded from MVS base
costs) and developers profit in the RCNLD calculation. But how
much?
 Do not reconcile RCNLD (inclusive of land) to purchase price.
 Include support for effective age and depreciation; older age may
reflect deferred maintenance and younger age reflects renovations
and capital improvements.
Slide 76

77. IRC § 1060
 Under Internal Revenue Code (IRC) § 1060, an applicable asset
i iti i t f h th di t i di t facquisition is any transfer, whether direct or indirect, of a group
of assets if the assets transferred constitute a trade or business
in the hands of either the seller or the purchaser and the
purchaser’s basis in the transferred assets is determined whollypurchaser s basis in the transferred assets is determined wholly
by reference to the purchaser’s consideration.
 For purposes of determining the seller’s amount realized for
each of the assets sold in an applicable asset acquisition theeach of the assets sold in an applicable asset acquisition, the
seller allocates consideration to all the assets sold by using the
residual method under §§ 1.338–6 and 1.338–7.
 Under the residual method the market value is allocated to land Under the residual method the market value is allocated to land
and building (i.e., Class V assets) and the intangible value
attributed to the in-place-leases is allocated to building
improvements
Slide 77
improvements.

78. Take away…
 When performing a purchase price allocation for tax reporting
th i t ibl l i ll t d t b ildipurposes, the intangible value is allocated to building.
 Using the same as example as before, the allocation for tax
reporting purpose would be as follows:
Purchase Price Allocation
ASC 805 IRC § 1060
Purchase Price $ 36,150,000 $ 36,150,000
Land 3,030,000 Land 3,030,000
Building & Site Improvements 26,940,000 Building & Site Improvements 33,120,000
Building
Advantage/Disadvantage 570,000
In Place Lease 5,610,000
Slide 78

79. Q&A
Use the Questions box to submit a question.
Submit yourSubmit your
question
Slide 79

80. Webinar Handouts
Webinar handouts can be downloaded from
the resource page which is included in your
connection e-mail.
Slide 80

81. Upcoming Events
Upcoming Webinarp g
 May 7 – Golf Course Valuation
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Trial Components
Slide 81

82. Upcoming Events, cont.
Slide 82

83. Upcoming Events, cont.
Slide 83

84. Evaluation
Please complete the brief survey that willPlease complete the brief survey that will
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Slide 84

85. Thank you for joining us.
Slide 85