IPT Property Tax Symposium

1. Analyzing Recorded
Purchase Prices
Gordon K. Vella

2. PRICE ≠ VALUE
 Price does not equate to value!
 Price and value gap is the primary reason for the
credit market and investment market instability and
collapse.
 Price is determined by a single purchaser and/or
investor while value is driven by a broader exhibition
of transactions…or not?!

3. SUB-PRIME CRISIS
Does any Single Source Bear the Blame?
 NOT ONLY the home buyers who failed to keep their end
of the mortgage bargain…
 NOT ONLY the physicists/mathematicians concocting
inexplicable formulas on which to base credit swaps and
derivatives…
 NOT ONLY the CEOs and analysts who were not looking
when the vague financial instruments were bought and
sold…
 NOT ONLY the 2000 Congress and President who
legalized gambling on Wall Street…the same law that was
established after the Great Depression…

4. ISSUES THAT IMPACT PRICE
Commercial Transactions
 Cash put on the table to off-set lease up cost for the
sake of mitigating risk for the buyer
 1031 transaction
 Owner/user may have purchased property at price
reflecting:
 “Investment Value”
 “Value in Use”

5. ISSUES THAT IMPACT PRICE
Residential Properties
 Clear variances with market are not generally exhibited
 What is value when:
 Broker pushes price for sake of commission
 Appraiser pushes value to make deal work
 Lender executes mortgage with borrow at 0% down
 Fraudulent value…What is value?

6. TYPES OF VALUES
 ARV Which Value is Recorded?
 Business value  Prospective value
 Disposition value  Retrospective value
 Fair value for purchase  Transaction value
price allocation
 Hypothetical value
 Going-concern value
 Value as is
 Insurable value
 Value in use
 Investment value
 Market value
 Liquidation value

7. AGGREGATE OF RETAIL VALUES
A Definition
 ARV or Aggregate of Retail Values
 Derived within sell out analysis of a subdivision and/or
condo valuation
 ARV is not market value
 Many lenders and developers (mistakenly) consider ARV
as figure on which to base their loan or measure their
profit
 Present value of net income stream should be taken into
account – should account for all cost including holding
cost and risk
 Net cash flow over the sell out period is then discounted
at appropriate yield rate (including profit)
 “As is Market Value” is relative to a single buyer/investor.

8. GOING CONCERN VALUE
A Clarification
 Going Concern Value
 Often misinterpreted as market value of the
real estate (hotels/theatres/senior living
properties/golf courses)
 Includesvalues of real estate, FF&E or M&E
and business values
 Real estate value is often exaggerated for lack of an
appropriate allocation

9. PURCHASE PRICE ALLOCATION
Another Clarification
 Purchase Price Allocation
 Toweight the poor performing properties in a
portfolio transaction for future collateralization
 To apportion a portfolio acquisition price to
individual properties based on market forces
 To allocate a predetermined purchase price
between the tangible and intangible assets
being acquired for financial reporting purposes

10. A CLEAR VIEW
Understanding What Is Recorded
 Current economic collapse due to a
price/value gap
 Various values may reflect anything but
market value
 Recorded purchase price may not indicate
market value
 Understanding the various definitions of value
and being in tune with the market bridges the
chasm between price and value

11. Analyzing Recorded Purchase
Prices
Gordon K. Vella