Florida Bar Journal

Bricks, Mortar, and Misconceptions: The Gold Mine Hidden in Commercial Real Estate (The Many Impacts of Misunderstood Legal Standards)

This article examines critical differences between the federal and state definitions of real estate and the financial implications of the resultant valuation methodology disconnect between the two. The two legal definitions differ dramatically. Property appraisers who value commercial income-producing real estate for mortgage contracts value much more than the real estate, and business valuers, conversely, understate the contributory value of the real estate when they value a business. Defining exactly what transfers when commercial income-producing real estate sells resolves this dichotomy.

Two Disparate Legal Standards

In 49 of the 50 states (Mississippi being the outlier), intangible property is not taxable when comingled with commercial real estate. The Florida Constitution specifies:

Local taxes — Counties, school districts, and municipalities shall, and special districts may, be authorized by law to levy ad valorem taxes and may be authorized by general law to levy other taxes, for their respective purposes, except ad valorem taxes on intangible personal property and taxes prohibited by this constitution.^[1]

U.S. Treasury regulations state differently:

To the extent that an intangible asset, including an intangible asset established under generally accepted accounting principles (GAAP) as a result of an acquisition of real property or an interest in real property, derives its value from real property or an interest in real property, is inseparable from that real property or interest in real property, and does not produce or contribute to the production of income other than consideration for the use or occupancy of space, the intangible asset is real property or an interest in real property.^[2]

Understanding that these are two distinct and separate legal standards is critical to appreciating and rectifying existing disconnects in tax reporting, mortgage lending, and insuring title.

Most business valuers conduct valuation for financial reporting (VFR) or mergers and acquisitions assignments used in Securities and Exchange Commission (SEC) reports or in filings to the Internal Revenue Service (IRS). Similarly, over 90% of real property appraisers primarily perform mortgage lending assignments for federally chartered lenders. Both professions focus on federal tax law premises.

Moreover, to further complicate matters, neither profession’s academic lexicon addresses the critical differences between federal and state definitions of real property, or their implications. Yet the two distinctly different definitions outlined above require the development of two separate values when underwriting or appraising commercial real property in Florida.

Consider this paradox: Federal tax practitioners strive to minimize the intangible assets reported; state tax practitioners do the opposite. For federal tax reporting purposes, the entire contract price is treated as basis, thereby reducing the property’s federal tax exposure later when sold. However, Florida law requires reporting only the real estate portion of the going concern, as overreporting a taxable value technically constitutes tax fraud. (Intangible assets are taxed elsewhere). Appraisers performing assignments for lenders, uneducated as to the legal distinctions, typically overstate property tax liabilities in their income analyses.

Conventional property tax underwriting simply multiplies the contract price by the state ratio and then by the forecast millage (tax) rate to determine the post-sale property tax liability. This is tested by bracketing the “assessment to sale” ratios from previous transactions in the same jurisdiction. But these exercises are moot if the reported purchase price relied upon includes nontaxable (or separately taxable) items and is, therefore, overstated.

Two Professions — Two Perspectives

While cost and price are facts, value is an opinion. The real estate appraisal and business valuation professions aim to determine the value of assets accurately. However, these professions evolved independently along historical, regulatory, educational, and organizational lines. As a result, the opinions developed by otherwise competent professionals frequently differ, sometimes due to a gap (i.e., an overlooked asset), and sometimes because of an overlap (i.e., an asset valued by both appraisers).

The earliest real estate appraisal organization in the U.S. began in 1932.^[3] However, due to failures in the banking sector, Congress enacted the Federal Institution Reform, Recovery, and Enforcement Act in 1989 in order to regulate federal lending practices. Title XI addressed the need for standardized real estate appraisals, creating the Appraisal Foundation to set standards for the appraisal profession today.

Business valuation, on the other hand, is rooted in accounting and finance. The American Institute of Accountants, which later became the American Institute of Certified Public Accountants (AICPA), was founded in 1887.^[4] Certified Public Accountants (CPAs) initially focused on auditing and financial accounting. Due to the evolving demands of clients and the expanding scope of the accounting profession, business valuation later became an integral part of their services.

Thus, the real estate appraisal and business valuation professions are subject to distinct regulatory frameworks. Nationwide, the appraisal profession is primarily regulated by the Uniform Standards of Professional Appraisal Practice (USPAP), developed, promulgated, and maintained by the Appraisal Standards Board (ASB) of the Appraisal Foundation.^[5] USPAP sets forth ethical and performance standards to which appraisers must adhere when performing appraisals for federally regulated transactions and is enforced by state licensing agencies.

The business valuation profession is regulated by a combination of state boards of accountancy and national professional organizations such as the AICPA. State boards of accountancy establish licensure, educational, examination, and experience requirements for CPAs. The AICPA provides guidelines and resources, such as the Statement on Standards for Valuation Services (SSVS),^[6] for CPAs performing business valuations.

Both professions are integral to the financial industry but evolved independently to meet the specific needs of their respective fields. Appraisers were enlisted to estimate property values primarily for lending purposes. Accountants began as monitors of financial position by organizing and to record all business activity. These fields now converge, as properties increasingly incorporate business services and as businesses often hold substantial real estate positions.

Consistent Professional Obligations

Business combinations involve complex legal, financial, and regulatory considerations and may require approval from relevant authorities and shareholders. Additionally, accounting treatment thereof and financial reporting, therefore, are subject to specific accounting standards, such as the Generally Accepted Accounting Principles (GAAP)^[7] or International Financial Reporting Standards (IFRS),^[8] depending on the jurisdiction and the nature of the combination. The Financial Accounting Standards Board (FASB) is affirmed by the SEC^[9] as a designated standard-setter for the industry.^[10]

FASB ASC 805 (known as Accounting Standards Codification Topic 805, “Business Combinations”) was completed in 2009 as part of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC).^[11] The ASC is the result of FASB’s efforts to streamline accounting standards in the U.S.

FASB ASC 805 provides guidance on how to account for business combinations under federal law, including how to recognize and measure the assets and liabilities acquired, determine the fair value of acquired assets and liabilities, and allocate the purchase price to individual assets and liabilities. It also covers the disclosure requirements related to business combinations. A CPA incorporates an asset’s use in combination with other assets and liabilities into the valuation technique used to measure the asset’s fair value.

Real estate appraisers face the same obligations as those imposed by FASB ASC 805. USPAP^[12] standard 1-4(g) requires:

When personal property, trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items.

Comment: When the scope of work includes an appraisal of personal property, trade fixtures or intangible items, competency in personal property appraisal (see STANDARD 7) or business appraisal (see STANDARD 9) is required.

Business valuers enjoy an advantage in that real and personal property are tangible (i.e., readily observable) and are typically included on a balance sheet. Real estate appraisers face a greater challenge. They are not typically provided an asset-level balance sheet, nor are they generally educated on how to incorporate that data into their valuation framework. As such, they often overlook or misidentify intangible assets.

When sale prices, or fair market values, significantly exceed replacement cost estimates, non-real property interests may exist. In such cases, a real estate appraiser should investigate further and, if discovered, collaborate with a business valuer to analyze the impact of any intangible property interests affecting values in the property at issue. This challenge has been addressed by the banking industry.

Lenders simply stopped requesting bank appraisers to develop a cost approach opinion for two reasons. First, reconciliation with the income and sales comparison approaches became more difficult as more and more business services crept into the landlord/mortgagee’s operations. Second, lenders fear violating the interagency banking guidelines,^[13] which require a separate promissory note for business assets apart from the mortgage on the real property. This approach to solving the dilemma has distorted value allocations.

Context — The Rise of Intangible Values

The existence of intangible assets has long been recognized in federal law. Prior to the promulgation of ASC 805, the IRS and U.S. Tax Courts recognized over 150 specific intangible assets. FASB later determined that, because new intangible assets are being innovated regularly, condensing them into categories would allow for their more timely and efficient recognition.

Today, most commercial real estate purchase and sale agreements refer to the ownership transfer of real, tangible, and intangible assets, some in great detail. The fact is that dirt, bricks, and sticks do not rent themselves, operate themselves, or repair themselves; those functions require people and contracts, without which the anticipated income that supports the purchase price cannot be fully realized. For example, how would an apartment complex with no tenants, no management, no internet presence, and no name recognition be valued, versus the same property at stabilized occupancy with creditworthy tenants, best-in-class management, excellent internet/social media scores, and a well-known brand name? This distinction is required by ASC 805 and is widely recognized by professionals conducting valuations for financial reporting purposes.

According to a 2019 report from Aon, a global insurance company, in 1975 intangible assets comprised only 17% of the five largest companies of the S&P 500; by 2018, intangible assets represented 84% of those same companies. Greg Case, Aon CEO, stated during the company’s 2018 third quarter earnings call (see Chart 1):^[14]

The risk industry has to keep up with a constantly evolving environment in a daily battle for relevance. As an industry, we have not kept up with a world where 75[%] of market capitalization is now driven by intangible assets.

Every company referenced in the report listed substantial real property on their balance sheets. However, as companies innovate to compete effectively, their increasing reliance on intangible assets is incontrovertible. This innovation extends to businesses operating within income-producing real property. In fact, the terms “commercial real estate” and “income-producing real estate” presuppose that a business element operates within that real estate.

Clearly, the valuation of assets and businesses is a critical component of financial decisionmaking for investors, lenders, and business owners. In the U.S., MAI-designated real property appraisers and CPA/ABV-designated business valuers are the two most prominent professionals entrusted with determining the value of the assets and liabilities involved in mergers and acquisitions and commercial real estate valuation matters. However, the methods and techniques these valuers employ, while conceptually similar, vary significantly due to the differing perspectives, metrics, and nature of the assets involved, as well as the regulatory frameworks within which the valuers operate.

Comparing Methodologies — The Devil’s in the Details

The methods employed by valuers are similar, but not the same. The market approach is one of the primary techniques employed by real estate appraisers; it involves comparing the subject property to similar properties recently sold in the same market. The approach used by business valuers is similar. CPAs assess a subject company by comparing it to similar recently sold or valued businesses in the same industry. (Business valuers also use the guidance public company method, relying on public company prices to value a privately held company.) Each of these approaches uses market data to value the property holistically, as a going concern encompassing the total assets (and liabilities) of the business. However, without the financial statements, it is impossible to determine separate values for real property, tangible personal property, and intangible property components of the going concern. This renders the sales comparison approach, as used by real property appraisers, useless if the assignment is to value only the real estate component.

Using the income approach for income-producing commercial properties, real estate appraisers estimate the property’s value based on its actual or potential income stream, considering factors such as rent, vacancy, expenses, and capitalization rates. This approach is also utilized in business valuation to estimate the present value of future cash flows generated by the subject company, taking into consideration the company’s projected earnings, appropriate discount rates, and risk factors. Once again, both professions use total income as a factor of value and estimate that value holistically. These methods typically develop opinions of the total going concern.

The cost approach, when properly developed by real estate appraisers, is the only method that intrinsically excludes intangible property. It involves calculating the cost to replace the property with a similar one at current market prices, accounting for depreciation (i.e., deterioration, inutility, externalities) and obsolescence. (Note that accountants use the term depreciation differently than real property appraisers).

CPAs may employ the asset-based approach when valuing businesses, especially when the company’s value derives primarily from its tangible assets, such as real estate, equipment, and inventory. This approach involves determining the fair market value of the company’s assets and liabilities. These tangible approaches focus on the value of the physical assets, leaving a gap between value and the sale price as a possible measure of intangible value.

Although real estate appraisers and business valuers employ distinct methods tailored to the specific characteristics of their respective professions, there are points of convergence. Both professions emphasize the importance of using relevant market data, employing appropriate valuation methods, and adhering to ethical and professional standards.

Commercial real estate appraisers primarily value real property, which may incorporate business components, whereas CPA business valuers assess the value of businesses, which may include real property. Regardless, ultimately, there is only one value for a going concern that includes both tangible and intangible components. Each profession approaches the problem from its own perspective, which then dictates the methods and techniques the valuer employs. Definitions and interests to be valued may necessitate the development of separate value indications for the same asset. Moreover, the respective value opinions rendered by each valuer should completely reconcile.

What Is Included in Value?

It’s important to understand precisely what the valuer is valuing. There are three general categories of assets (i.e., real property, tangible personal property, and intangible property); they can be described in two different ways: 1) tangible versus intangible property, or 2) real versus personal property.

Tangible properties are assets with physical substances that create value. These assets include land, site improvements, buildings, tenant improvements, furniture, and equipment.

Intangible assets are non-financial assets without physical substance, which are identifiable (either being separable or arising from contractual or other legal rights). An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is not transferable or separable from the acquiree or from other rights and obligations. Unidentified or unidentifiable intangible assets are referred to as “goodwill.”

These distinctions are best presented in a chart from the Appraisal Institute’s text (see Chart 2).^[15]

Treasury regulations require that an intangible asset acquired as part of a real property transaction is treated, under federal law, as real property, unless it is a license or permit that produces income other than for the use or occupancy of space.^[16]

Furthermore, the committee report on the enactment of §197 (amortizable intangibles)^[17] of the Internal Revenue Code explained that it does not apply to any amount that is properly considered under present law in determining the cost of property that is not a §197 intangible. Thus, no portion of the cost of acquiring real property held to produce rental income (e.g., an office building, apartment building, or shopping center) is considered under the bill. Under federal law, there is no goodwill, going concern value, or any other §197 intangible in connection with the acquisition of such real property. Instead, the entire cost of acquiring the going concern is included in its basis.

Federal tax law is clear that intangible assets may be treated as real property; however, they are not taxable real property under Florida law. The importance of this difference cannot be overstated.

Typical income statement line items include the following: 1) Non-real property revenue sources; 2) contracts, including insurance, management, utilities, and all third-party service contracts; 3) technology and intellectual property; 4) professional services (e.g., accounting, legal, leasing, marketing, and payroll); 5) human capital (assembled workforce).

Understanding that commercial income-producing real estate is, in fact, a bundle of diverse assets, certain generally agreed-upon trends can be addressed. Professional valuers widely accept that a going concern will grow in perpetuity until market forces diminish or terminate viability of the business. A going concern is defined as: 1) an established and operating business having an indefinite future life and 2) an organization with an indefinite life that is sufficiently long that, over time, all currently incomplete transformations (transforming resources from one form to a different, more valuable form) will be completed.

Tangible property physically deteriorates over time due to the wear and tear that begins when a building is placed into service. Land tends to increase in value, subject to supply and demand factors, and barring negative externalities.

Business value derives from the combination of the three types of property (i.e., real, tangible personal, and intangible) and results from the four agents of production: land, labor, capital, and coordination. Generally speaking, land increases modestly in value over time, while buildings deteriorate. Even with superior maintenance, most buildings will eventually be razed. The value of the difference between the business and the real estate must be comprised of intangible assets.

When real estate appraisers value commercial income-producing properties, they typically give the income capitalization approach the greatest weight. This approach, based on the economic principle of anticipation, first determines the income-producing capacity of a property by using contract rents from existing leases, and by estimating market rent from rental activity at competing properties for any vacant space. Deductions are then made for vacancy, collection loss, and operating expenses. The resulting net operating income is divided by an overall capitalization rate to derive an opinion of value for the subject property. The capitalization rate represents the relationship between net operating income and value.

Direct capitalization treats only a single year’s income and expenses, whereas yield capitalization articulates and considers multiple years. When correctly developed, the two methods (i.e., direct and yield) effectively render the same value conclusion.

Parsing Income Method

Using an advanced form of the income approach, experienced real estate appraisers apply the parsing income method. This is consistent with the going-concern premise, which assumes the business will continue operating well into the future, if not indefinitely. Its application begins with careful analysis and allocation of income and expenses to each of the applicable asset classes.

Once the net income of each underlying asset is identified, it is capitalized into an indication of value. Values are derived by dividing each underlying asset by an appropriate capitalization rate. This method is based on the business valuation methodology called the “multiperiod excess earnings method,”^[18] originally developed by the U.S. Department of Treasury in the 1920s.

When the scope of work calls for the appraisal to include an allocation of the value opinion among the various asset classes, it may be appropriate to allocate income to each asset class with a separate capitalization rate or multiplier assigned to each income component. Allocations to every class of property should account for both a return on and a return of the investment for that asset class.

Market value of the going concern is defined as the market value of an established and operating business, including the real property, personal property, financial assets, and the intangible assets of the business. Failure to properly parse the income and expenses is a common appraisal error, which is the primary cause of misrepresented value in state tax matters.

Actual operating statements relevant to the tax year and lien date at issue for the subject property should be carefully reviewed. Typical for commercial income-producing real estate assets, the operating statements usually combine income and expense line items from both real property and business activities. Separating the two requires specialized expertise.

Traditionally, the term “going-concern value” is used to describe the market value of a proven property operation, although a more accurate term is “market value of the going concern.” The concept of the value of the going concern can also be applied to a proposed business operation. The current definition of going concern highlights the assumption that the business enterprise is expected to continue operating well into the future (usually indefinitely). The market value of a going concern includes the incremental value associated with the business concern distinct from the value of the tangible real property and personal property. The assemblage of the land, buildings, labor, equipment, financial assets, and the marketing operation creates an economically viable business that is expected to continue.

It may be difficult to separate the market value of the tangible assets (i.e., the land and the building) from the total market value of the business, but such a division of realty and non-realty assets may be required by the intended use of the appraisal. Application of the cost approach can be useful in separating the value of the tangible assets because the cost approach specifically excludes personal property and intangibles. An appraiser must always state when intangible assets are included in the property appraised, even when unable to separate the market value of the real property from that of the going concern.

Only qualified practitioners should undertake assignments such as these, which must be performed in compliance with the appropriate professional standards. A real estate appraiser may need to collaborate with a personal property or a business appraiser, or both, on such an assignment.

Importantly, the parsing income method assures that assets are not inadvertently taxed twice. When assets are properly identified and valued on a property-level balance sheet, proper reporting for both federal and state tax matters is clarified and better supported.

Value Determinants

In exploring what creates value, classical economists identified the four agents of production: land, labor, capital, and coordination. Together, in response to desire, scarcity, utility, and effective purchasing power, these four agents create value. Each of these renders a contributory value that can be valued as part of a business.

Land

In classical economics, land refers to all natural resources and the physical space upon which production takes place. This includes not only agricultural land but also minerals, water bodies, forests, air rights, and other natural elements. Land is essential for all forms of production. It provides the raw materials necessary for manufacturing, the space for building factories and infrastructure, and the basis for agricultural production. Land is considered fixed in supply in the short run, which means its quantity cannot be easily increased. Real estate appraisers value land.

Labor

Labor encompasses the physical and mental efforts exerted by individuals in the production process, including both skilled and unskilled work, as well as intellectual labor. Because it transforms raw materials into finished goods and services, labor is a crucial element of production. The quantity and quality of labor input significantly impact production output. Business appraisers value human capital and the assembled workforce.

Capital

Capital refers to the tools, machinery, equipment, and infrastructure used in production. It encompasses both physical capital (such as factories and machines) and financial capital (money invested in production). Capital is essential for increasing the productivity of labor and the efficiency of production. It allows for the development of processes, which leads to higher output and economic growth. Real estate appraisers and personal property specialist appraisers value tangible capital while business valuers focus on financial capital.

Coordination

Coordination or entrepreneurship refers to the role of people who take risks, innovate, organize resources, and make decisions in the production process. Entrepreneurs identify opportunities, combine factors of production, and undertake business ventures. They play a critical role in coordinating the other elements of production. They decide what, how, and for whom to produce, and they bear the risks and uncertainties associated with economic activity.

Determining the contributory value of entrepreneurship or coordination in economic production is a complex and multifaceted task. Unlike the other factors, which can have more straightforward and quantifiable measures, entrepreneurship involves a range of qualitative and subjective elements. Nevertheless, analysts have developed various theories and approaches to assess the contributory value of entrepreneurship and coordination in economic activities.

One way to measure its value is to examine the profitability of entrepreneurial activities. The financial success of a venture can indicate the entrepreneur’s ability to identify opportunities, allocate resources efficiently, and create value. Returns on investment and other financial metrics are used to assess the performance of entrepreneurial endeavors.

Entrepreneurship drives economic growth by fostering competition, increasing productivity, and expanding markets. Entrepreneurs often introduce innovations, new products, or improved processes to the market. The value of these innovations can be assessed through intellectual property registrations, the adoption rate of new technologies and processes, or the impact of innovations on productivity and economic growth. Innovations that lead to positive externalities or spillover effects can have substantial contributory value.

Obviously, entrepreneurs play a significant role in job creation. The number and quality of jobs created by entrepreneurial activities can be quantified and used as an indicator of their economic contribution.

The contributory value of entrepreneurship and coordination can vary significantly across different industries. It can be challenging to precisely measure this value due to the intangible and dynamic nature of entrepreneurial activities. Therefore, a combination of quantitative and qualitative methods is often necessary to gain a comprehensive understanding of their contributory value in a going concern.

Measuring Contribution

Clearly, the efficient allocation and combination of these four production agents are essential to maximize economic output and growth. Consistent with this, owners and operators of commercial real estate assets compete for creditworthy tenants through adaptation to changing customer preferences, as well as innovations in services and pricing. Still, measuring the contributory value of each agent can be challenging.

Overlooked Discrepancies

The vast majority of CPAs focus on federal matters. It is a “one-size-fits-all” world and geography is irrelevant. In contrast, SALT (i.e., state and local tax) practitioners typically exercise their expertise in particular states. While IRS audit fears drive the expenditure of enormous resources on federal compliance matters, state-level compliance matters can be just as impactful, and just as costly, to a firm’s core mission. This is especially true when the property’s largest operating expense (i.e., property tax) is a SALT matter.

The “great American experiment” complicates matters. Each state enjoys its own unique legal framework and interpretation of the rights and responsibilities enumerated in, or explicitly excluded from, the U.S. Constitution. This fosters economic and social competitiveness among the states, allowing the various legislatures to experiment in how they each address challenges and opportunities.

The Answer Depends, Who Needs to Know?

Is the question answering a matter under federal law or state law? The Internal Revenue Code permits the federal government to tax personal and business income. Generally speaking, nine states do not tax income. Not surprisingly, state laws vary regarding the taxability of asset classes and the incomes they may generate. Every state taxes real property. Twelve states do not tax tangible personal property. Intangible property, when part of a real estate transaction, is only taxable in Mississippi. Because taxation is subject to legislative change, practitioners (and authors) must remain abreast of frequently shifting jurisdictional nuances.

Regardless of the textbook definitions, taxable real estate ultimately depends on that jurisdiction’s legal definition of what exactly constitutes real estate and the explicit ownership interest to be valued. For federal purposes, an intangible asset acquired as part of a real property transaction is treated as real property, unless it is a license or permit that produces income other than for the use or occupancy of space. Thus, taxpayers may regard the entire purchase price as real estate for federal tax reporting purposes. The benefit from doing so can be a deferred or minimized federal tax obligation. Real Estate Investment Trusts (REITs)^[19] and 1031 Like-Kind Exchange^[20] properties get favorable federal tax treatment as a matter of policy to incentivize investment in commercial income-producing real estate as an economic stimulus in return for deferred federal tax revenues. These incentives actually benefit federal tax coffers.

Conversely, the definitions of real estate, as set forth in state laws, are generally consistent, although there is some variation in the interest valued. Most state legislatures intend to tax the unencumbered fee simple interest under the “value in exchange” premise. The benefits of this approach include ensuring that owners who outperform the market are not punished for their innovations, successful competitiveness, and superior management. The concept stems from the equal protection clause of the U.S. Constitution. In fact, every state offers some promise of equal treatment tied to the U.S. Constitution in its legal framework.

For tax purposes, Florida law defines real property as “land, buildings, fixtures, and all other improvements to land.”^[21] This does not include personal property, which is defined as including “household goods,” “intangible personal property,” “inventory,” and “tangible personal property.”^[22] Real property and tangible personal property^[23] are taxed by the counties, which are forbidden from taxing intangibles,^[24] as part of yearly ad valorem taxation. While Florida does have a nonrecurring intangible tax, this is limited to obligations secured by real property (i.e., mortgages or liens).^[25] Furthermore, personal property associated with the sale of commercial real estate is generally exempt from sales tax as an infrequent bulk sale.^[26]

In Perspective

Is everything you know about real property valuation enough? The short answer is: it depends. Per USPAP and SSVS, professionals (including attorneys) must first identify the appraisal problem. Who is the client? What is the intended use of the appraisal (e.g., transaction or litigation-related)? Who else might be its intended users? What type of value(s) (i.e., the interest(s) at issue) and what legal definition of value is sought or required? What property or properties are to be valued? Is more than one type of appraiser required? Should they issue a collaboratively developed single report or independent reports? What are the risks of that decision? What is/are the effective date(s) of the opinion(s)? Are there any hypothetical or extraordinary conditions to be considered?

These questions require careful consideration of the relevant legal framework and problem at issue. If an answer is sought for state law purposes, the relevant framework varies. Given that most real estate appraisers regularly perform assignments for federally chartered lenders, many overlook the nuance, and, therefore, the significant implications when value opinions are sought for a different purpose. This is similar to knowing on which side of the road to drive in a foreign country.

Traditionally trained and/or federally focused real estate appraisers typically overlook elements in both revenue and operating expenses that are viewed and regarded differently by business valuers. Can both be right? Intangible assets such as financial instruments, contracts, human capital, technology, and intellectual property are necessary to operate the business conducted in and on the real estate, but they are not real estate (except per the Internal Revenue Code). Moreover, these intangible assets are often taxed elsewhere.

Consequences

The implications are significant and commonly result in the inadvertent misreporting of asset values for state tax purposes. On average, in a healthy market, 30% of commercial real estate sale prices across the U.S. are attributable to intangible asset values under state laws. Failure to recognize the contributory value and separately taxable nature of these assets deters transaction activity. The policy implications should be carefully considered because real estate transaction volume is a significant economic driver in Florida. One of the most problematic underwriting issues in commercial real estate is how to forecast post-sale property tax liabilities. This issue undermines more pending transactions than any other single factor.

Benefits

The proper reporting of taxable values eliminates underwriting uncertainty and reduces bid/ask spreads when commercial real estate is for sale. Moreover, the societal benefits of minimizing a commercial property owner’s largest operating expense (property tax) are multifold: 1) More transactions at lower sale costs generate more revenue for state and local governments than fewer transactions at higher prices, especially in states with statutory assessment caps like Florida. (The real estate, rental, and leasing industry contributed the most to Florida’s GDP in 2024, generating a value of $265.5 billion.);^[27] 2) Employment rates stay high; 60 job functions are required to effectuate a single transaction; 3) Lenders’ debt service coverage ratios improve, reducing their risk of defaults; 4) Buyers are not forced to raise rents and retenant commercial properties; 5) When housing remains affordable, residents are not forced to move further away from employment centers. That, in turn, reduces commute times, traffic congestion, and strains on roadway infrastructure.

In sum, higher economic efficiencies increase transaction frequency, which increases tax revenues and supports more high-paying jobs in a continuous cycle.

When accepting an assignment, some appraisers fail to consider, “Does my client really know what they are asking for? Is that what they really need?” As a result, many appraisers answer the wrong question. You can’t get the value right if you get the law wrong. These misunderstandings have substantially contributed to the now historic acrimony among many assessors and taxpaying property owners, which, in turn, impacts the entire taxation process. Much of this avoidable disagreement stems from a fundamental misunderstanding of differences in the relevant legal standards and their respective, and differing, definitions of real estate.

Real estate appraisers frequently render different value conclusions for a subject property in a single report. Depending upon the assignment, an appraiser may render both fee simple and leased fee value conclusions in one report. Predevelopment assignments typically require the appraiser to render an “as is” opinion of the land value, an “upon completion” of the intended improvements value opinion, and an “upon stabilization” value conclusion of the going concern. Eminent domain appraisers provide “before and after” opinions.

Given the landscape described herein, an appraiser who works for a federally chartered lender can legally regard the totality of the going concern as real property and render an accurate and defensible opinion for mortgage loan purposes. Simultaneously, the same appraiser, if properly qualified, can also render a separate opinion of value under Florida’s legal standard, articulating an equally defensible opinion. Put another way, one game is “tag” and the other is “tackle.” Knowing which rules apply is key to avoiding injury.

Lost in Translation

In today’s world of multi-disciplinary assignments, understanding (and embracing), the intersection of two disparate disciplines can be perplexing. It is challenging for several reasons, not least of which is that the two professions (i.e., real estate appraisal and business valuation) adopt jargon that use the same words, but with different meanings. Regardless of whether the lead professional is the real estate, tangible personal property, or business appraiser, that individual must now consider collaborating and learning to communicate with a qualified specialist counterpart. Certainly, all professionals involved in the world of commercial real estate transactions should be aware that one expert, working alone, may not be able to render the opinion of value that their client needs. Of course, serious vetting of the selected expert is critical to a defensible outcome.

This column is submitted on behalf of the Business Law Section, Stephanie Lieb, chair, and Kathleen DiSanto, editor.