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Beyond the Property Value: Real Estate Valuations & Estate Planning · Bennett Thrasher Presents: Beyond The Ledger

• 0:09
  SPEAKER_00: Welcome to Beyond the Ledger.
• 0:10
  SPEAKER_00: I'm your host, Sharaday Lakesfield.
• 0:12
  SPEAKER_00: Today we're talking about an important piece of estate planning that can quickly become complex, valuing ownership interests in real estate holding companies.
• 0:20
  SPEAKER_00: For families with significant real estate portfolios, transferring interest to the next generation isn't always accepted as determining what the property is worth.
• 0:30
  SPEAKER_00: For real estate appraisals and minority ownership interests, evaluation discounts and coordinating multiple advisors.
• 0:37
  SPEAKER_00: There are several factors that can impact the process.
• 0:40
  SPEAKER_00: And ultimately the values.
• 0:45
  SPEAKER_00: Joining me today is Sarah DeCreek, Director in Bennett Thrasher's Disputes, Valuation and Forensics Practice.
• 0:51
  SPEAKER_00: Sarah is also an accredited senior appraiser through the American Society of Appraisers, who also specializes in business valuation for estate and gift tax planning and reporting and has extensive experience helping clients navigate complex valuation matters.
• 1:07
  SPEAKER_00: So, Sarah, thank you for being back on the show.
• 1:09
  SPEAKER_00: I'm excited to dive in.
• 1:11
  SPEAKER_00: Good to be here again.
• 1:12
  SPEAKER_00: Thank you for having me.
• 1:14
  SPEAKER_00: Of course.
• 1:14
  SPEAKER_00: Are you ready to dive in?
• 1:16
  SPEAKER_01: Ready to dive in.
• 1:17
  SPEAKER_00: All right, let's go.
• 1:18
  SPEAKER_00: So let's start with the first topic of why valuation matters in estate planning.
• 1:23
  SPEAKER_00: So real estate can make estate planning a little more complicated, especially when families own properties through multiple entities.
• 1:30
  SPEAKER_00: So why is estate planning involving real estate holding entities such an important area for valuation professionals?
• 1:37
  SPEAKER_01: Yes, great question.
• 1:38
  SPEAKER_01: We've seen a lot of clients lately that are dealing with real estate holding companies.
• 1:44
  SPEAKER_01: So we work with a lot of high net worth families, ultra-high net worth families, and many of them own commercial real estate through multiple holding companies.
• 1:54
  SPEAKER_01: Often these companies are in the form of an LLC or a partnership.
• 1:58
  SPEAKER_01: So the estate planning attorneys that these clients are working with, that we're working with, they often recommend to these clients to transfer minority interests in these holding companies out of their estate.
• 2:11
  SPEAKER_01: So they're they're working with, you know, gifted estate tax strategies to minimize those taxes.
• 2:17
  SPEAKER_01: So those transfers typically require supportable valuations in the form of a qualified appraisal for gifted estate tax reporting purposes under the IRS regulation.
• 2:29
  SPEAKER_01: So a properly prepared valuation or what the IRS terms of qualified appraisal becomes really important in ensuring that that transfer can withhold IRS scrutiny down the road.
• 2:44
  SPEAKER_00: Okay.
• 2:45
  SPEAKER_00: Thank you.
• 2:46
  SPEAKER_00: So let's move into the next of understanding the structure.
• 2:49
  SPEAKER_00: For someone who hasn't been through this process before, it might help to put this in a real world context.
• 2:55
  SPEAKER_00: So, what does a typical client situation involving real estate holding entities look like?
• 3:01
  SPEAKER_01: Um, sure.
• 3:02
  SPEAKER_01: We have had many clients that have they own operating companies, they may own interests in operating companies, they may own interests in holding companies or some mix of both.
• 3:13
  SPEAKER_01: But for this podcast, you know, we're really trying to focus on ownership interests and holding companies that primarily own real estate, because in Atlanta, particularly, there's a lot of wealth in real estate.
• 3:24
  SPEAKER_01: And so this is a strategy that a lot of attorneys that we work with are using.
• 3:28
  SPEAKER_01: So for these companies, those ownership interests may be in real estate.
• 3:34
  SPEAKER_01: They may be partial ownership interests.
• 3:36
  SPEAKER_01: And when we're talking about real estate, we're really talking about real estate that is, it can be income producing, it can be producing some level of income for that holding company.
• 3:46
  SPEAKER_01: Um, but really the primary driver of value is the underlying real estate itself.
• 3:53
  SPEAKER_01: So the bottom line is these people are buying real estate and holding it because it's going to appreciate in value.
• 4:00
  SPEAKER_01: In the meantime, it's producing some level of income, but really the value is that appreciating real estate.
• 4:05
  SPEAKER_01: So, for example, think of an LLC or a partnership that may hold ownership of an apartment complex, or we see a lot of shopping centers, industrial property, ground leases.
• 4:18
  SPEAKER_01: So, like a McDonald's ground lease.
• 4:20
  SPEAKER_01: So they they own the ground lease, the actual structure could be owned by the renter or the leaser, but there's a lot of ground lease ownership.
• 4:29
  SPEAKER_01: So while the income generated through the ownership of those assets may be steady, so they might be receiving lease income or something like that, it can often be immaterial, really, as compared to the value of that underlying real estate, depending on, and it could be property worth millions or tens of millions of dollars.
• 4:50
  SPEAKER_01: So for tax purposes, for liability purposes beyond the scope of this podcast, those real estate assets are typically held in a partnership or an LLC or some type of legal entity versus held by the individual themselves.
• 5:08
  SPEAKER_01: And for that reason, when they're making these transfers out of the estate, they're actually transferring ownership in those holding companies.
• 5:17
  SPEAKER_01: It's a transfer of an interest in the partnership or the LLC versus the ownership directly of that real estate.
• 5:26
  SPEAKER_01: So the question then becomes for us, what is the fair market value of the ownership interest in that holding company rather than the value of the real estate itself?
• 5:40
  SPEAKER_00: Okay.
• 5:41
  SPEAKER_00: I'm glad you clarified that long answer.
• 5:43
  SPEAKER_00: No, but I'm glad you clarified that because a lot of people, I mean, might not know that.
• 5:48
  SPEAKER_00: And it it takes a lot of work to kind of just make sure like you're evaluating properly.
• 5:53
  SPEAKER_00: So let's go between real estate appraisal versus business valuation.
• 5:59
  SPEAKER_00: So I think it's an important distinction because people may assume that one valuation professional handles everything when real estate is involved.
• 6:06
  SPEAKER_00: So does the business valuation professional actually value the real estate, or how do those roles differ?
• 6:13
  SPEAKER_01: Yeah, I think this is a really important distinction, like you said.
• 6:17
  SPEAKER_01: So valuation or appraisal as a discipline includes several different areas.
• 6:23
  SPEAKER_01: Those areas can be business valuation, which is what I do and my team at Bennett Thrasher does.
• 6:28
  SPEAKER_01: We are focused on valuing the business.
• 6:31
  SPEAKER_01: In this case, what we're talking about in this podcast today, the holding company.
• 6:35
  SPEAKER_01: Other areas of valuation or appraisal include real estate, machinery equipment.
• 6:41
  SPEAKER_01: So there are specialized appraisers that will go in and value all types of machinery and equipment from large industrial machinery to very unique niche type machinery and equipment, um, gems and jewelry, art and estate work.
• 6:56
  SPEAKER_01: So those are different disciplines of valuation or appraisal.
• 7:00
  SPEAKER_01: Again, you had mentioned at the beginning, I'm an accredited senior appraiser through the American Society of Appraisers.
• 7:05
  SPEAKER_01: That is a designation for valuation, business valuation professionals.
• 7:10
  SPEAKER_01: A real estate appraiser, a machinery and equipment appraiser, they have different designations through different professional organizations.
• 7:17
  SPEAKER_01: So the short answer is no, we do not value as a business valuation professional.
• 7:24
  SPEAKER_01: I am not also valuing the real estate.
• 7:26
  SPEAKER_01: I'm not valuing machinery and equipment.
• 7:28
  SPEAKER_01: We rely on other appraisal professionals to go in and perform their methodologies, although there is some commonality between the methodologies in valuation in general.
• 7:38
  SPEAKER_01: So there's that commonality between how a piece of real estate is appraised and how a business is appraised.
• 7:43
  SPEAKER_01: But each has their own nuance for sure.
• 7:46
  SPEAKER_01: So again, my role and that of my team at Bennett Thrasher is really business valuation, which means I'm focused on valuing that ownership interest in the entity or the business that owns the real estate or marketable securities or an operating company.
• 8:02
  SPEAKER_00: Okay.
• 8:03
  SPEAKER_00: So let's talk about the coordination challenge.
• 8:06
  SPEAKER_00: So when you have multiple properties, entities, advisors, and appraisers involved, I imagine the process itself can become just as challenging as valuation.
• 8:16
  SPEAKER_00: So, what is one of the biggest challenges attorneys face in these engagements?
• 8:21
  SPEAKER_01: That's a great question.
• 8:23
  SPEAKER_01: And I think a reason why we can be so helpful to attorneys because we can really take that, the management of what can be a very cumbersome process dealing with many different professionals.
• 8:37
  SPEAKER_01: I think we can really take that burden from the attorneys and handle it more efficiently for them and for their clients.
• 8:45
  SPEAKER_01: So it's often not the valuation methodology that can be the challenge.
• 8:49
  SPEAKER_01: It's really managing that process.
• 8:52
  SPEAKER_01: When you have, for example, when an attorney has a client that owns, let's say five holding companies, the engagement then may require multiple real estate appraisals.
• 9:02
  SPEAKER_01: So let's say each of those five holding companies has one or two pieces of real estate.
• 9:06
  SPEAKER_01: So you go anywhere from five to ten real estate appraisals that need to be coordinated.
• 9:11
  SPEAKER_01: That those companies may own marketable securities.
• 9:14
  SPEAKER_01: So you're you're having to collect statements on what types of marketable securities they own, any type of assets or investments that they have.
• 9:22
  SPEAKER_01: So there's a lot of coordination in valuing a holding company to get the right set of appraisers aligned to produce that value that they need for their uh state tax.
• 9:34
  SPEAKER_01: So all of those require communicating with each professional, coordinating information.
• 9:40
  SPEAKER_01: So if the attorney has to be the quarterback for that process, they're having to deal with many of those separate advisors and making sure each one is getting the correct information.
• 9:50
  SPEAKER_01: Am I getting the information I need for the business evaluation?
• 9:53
  SPEAKER_01: Is the real estate appraiser getting the information they need from the client to move forward with their piece?
• 9:58
  SPEAKER_01: And then we all need to typically coordinate that information.
• 10:02
  SPEAKER_01: So there's a timing piece of it as well.
• 10:05
  SPEAKER_01: So it can really become a headache for the attorney to source all of the appraisers, coordinate all of the information, make sure they have the appropriate client contact, make sure all of the timing is aligned and that it is moving forward to meet their client's goals, and then make sure that you know the appropriate person is communicating with the client, communicating the status of all of those moving pieces to the attorney.
• 10:30
  SPEAKER_01: So they are make sure they're meeting their clients' needs.
• 10:33
  SPEAKER_01: So that's often sometimes something that can become a real headache for the attorney.
• 10:39
  SPEAKER_01: They don't want to do it necessarily.
• 10:41
  SPEAKER_01: It's a very big time suck for them.
• 10:43
  SPEAKER_01: So um, if they've got to be acting as that project manager, that's something that we can do and we can take that burden from them.
• 10:51
  SPEAKER_01: And I think it's much more efficient because that's pretty much the world that we live in.
• 10:56
  SPEAKER_00: Yeah.
• 10:56
  SPEAKER_00: Yeah.
• 10:56
  SPEAKER_01: And for them, it's not necessarily they're there to make sure that the strategy is that they're coming up with the strategy correctly and that they're executing that strategy for their clients.
• 11:06
  SPEAKER_01: And and this is just one piece of it.
• 11:08
  SPEAKER_01: So they don't want that whole process to make this.
• 11:12
  SPEAKER_00: Especially they're like, I'm not really here for that, but they're like, I don't want to make it a whole lot easier.
• 11:19
  SPEAKER_01: Making sure the timing is, you know, correct.
• 11:22
  SPEAKER_01: And I think a lot of times you you can lose sight of, oh, they re they needed that one piece of information, and now that's holding up so many other things.
• 11:31
  SPEAKER_01: So yeah, so that's something that I think that we can effectively do that can be really helpful to attorneys.
• 11:38
  SPEAKER_00: Right.
• 11:39
  SPEAKER_00: Huge asset.
• 11:40
  SPEAKER_00: Okay, so let's go into managing the process efficiently.
• 11:43
  SPEAKER_00: You already kind of touched on it a bit.
• 11:45
  SPEAKER_00: And with that many moving pieces, good coordination can probably make a major difference in keeping the engagement on track, which you just explained very, very thoroughly.
• 11:55
  SPEAKER_00: So, how can the valuation process be managed more efficiently for the client and their advisors?
• 12:02
  SPEAKER_01: You know, it's not untypical for or unusual for us to work with clients that don't necessarily know what they have.
• 12:10
  SPEAKER_01: Okay.
• 12:10
  SPEAKER_01: Um, we've had a lot of clients, multi-generational families, that maybe the parents, they were the one that curated the assets.
• 12:18
  SPEAKER_01: They formed the company, and it was over years and years.
• 12:22
  SPEAKER_01: And so all of a sudden there's this collection of companies and assets that hopefully not, but sometimes the bulk of the information is held by those individuals, um, not necessarily so they know all in their mind.
• 12:37
  SPEAKER_01: They know, like, okay, I know that we've got this piece of real estate, we've got this and that.
• 12:41
  SPEAKER_01: And yes, there's tax returns and things to support it, but there's oftentimes cases where it's not laid out nicely on a spreadsheet where everything is identified.
• 12:49
  SPEAKER_01: So you've got that second generation coming in and saying, what are we even looking at?
• 12:54
  SPEAKER_01: I'm not quite sure.
• 12:55
  SPEAKER_01: Like, I know we have all these assets, but I'm I'm not quite sure how they all fit together.
• 12:58
  SPEAKER_01: I don't know the different entities.
• 13:00
  SPEAKER_01: So I think that that is a big area where we can help.
• 13:05
  SPEAKER_01: We can start with usually working with their CPA to help identify what are the different companies that need to be valued, who owns what interests in each company and what assets are included in each of those.
• 13:19
  SPEAKER_01: And then you go a little bit further, working with those accountants and saying, okay, here are the different assets we've identified which need to be valued.
• 13:27
  SPEAKER_01: Um, in terms of maybe we need to pull in a real estate appraiser or a machinery and equipment appraiser to value some of these assets.
• 13:33
  SPEAKER_01: So we can work with them to do that and help identify those.
• 13:37
  SPEAKER_01: Then we work with several different real estate appraisal companies.
• 13:41
  SPEAKER_01: So we can work with um clients that have very broad, diverse real estate portfolios, or they might have just a handful of five to ten commercial properties.
• 13:52
  SPEAKER_01: Um we can work to source competitive fee quotes from different real estate appraisal companies.
• 13:59
  SPEAKER_01: The attorneys don't have to do that.
• 14:01
  SPEAKER_01: We can then present it to the attorney, to the client, they can make a decision.
• 14:04
  SPEAKER_01: And again, it's us quarterbacking that whole process, making sure that their timing, the real estate appraiser's timing, is going to be my timing because I need their input to get what I need to the attorney.
• 14:16
  SPEAKER_01: So then we can coordinate that so that all of those pieces fit together simultaneously and we're meeting the timing needs of the attorney and they can meet their clients' needs.
• 14:28
  SPEAKER_00: So let's go into why minority interests may not equal prorata value.
• 14:34
  SPEAKER_00: So let's get into an area that can be surprising for clients.
• 14:37
  SPEAKER_00: The value of a minority ownership interest isn't always as simple as doing the math.
• 14:42
  SPEAKER_00: So why might a 30% or 49% ownership interest be worth less than that same percentage of the underlying real estate value?
• 14:51
  SPEAKER_00: And this is very interesting.
• 14:52
  SPEAKER_00: So I will definitely want to hear what you've got to say.
• 14:54
  SPEAKER_01: Yes, Sharday, this really gets to the heart of the evaluation work that we do at Bennett Thrasher, which is for the purpose of preparing qualified appraisals, again, that meet that IRS standard.
• 15:06
  SPEAKER_01: That's so key.
• 15:07
  SPEAKER_01: And again, that's kind of talking about what a qualified appraisal meeting that IRS standard is a little bit, it's beyond the scope of this podcast and also very boring.
• 15:17
  SPEAKER_01: But it is very, very important.
• 15:20
  SPEAKER_01: Very important.
• 15:21
  SPEAKER_01: So oftentimes, you know, we are tasked to value an interest in a company, in this case, a holding company, a real estate holding company that is less than 100%.
• 15:31
  SPEAKER_01: So, particularly if it is getting transferred to a trust, that transfer is oftentimes going to be less than even if that person owns 100% of this company, the transfer is going to be less than 100%.
• 15:45
  SPEAKER_01: Um, and that's for tax strategy purposes.
• 15:48
  SPEAKER_01: So we're typically valuing something that is less than 100% or even less than controlling.
• 15:54
  SPEAKER_01: So we would just for simplification purposes, let's call controlling 51%.
• 15:59
  SPEAKER_00: Got it.
• 16:00
  SPEAKER_01: Um, so 50% or less can be considered typically a non-controlling interest.
• 16:06
  SPEAKER_01: So in that case, the application of discounts to that pro-rata value are warranted under the fair market value standard.
• 16:14
  SPEAKER_01: This is the world that I live in.
• 16:16
  SPEAKER_01: Fair market value to support these tax strategies for gift and estate tax purposes.
• 16:20
  SPEAKER_01: So, for example, let's say that we're we're valuing a holding company, and this holding company primarily owns real estate assets, and let's say those are worth 10 million.
• 16:31
  SPEAKER_01: Then they own a little cash of a million.
• 16:34
  SPEAKER_01: They own some maybe$4 million of marketable security.
• 16:37
  SPEAKER_01: So just for simplification purposes, we'll say that their total assets are worth$15 million.
• 16:43
  SPEAKER_01: We've been tasked by the attorney to value a 33.3% interest.
• 16:48
  SPEAKER_01: Just for so for simplified math, the pro rata value of a 33 and a third interest, the pro rata value of 15 million is 5 million.
• 16:58
  SPEAKER_01: So, however, under that fair market value standard, the value of that 33.3% interest could be less than that$5 million or that pro rata value.
• 17:10
  SPEAKER_01: So we would consider some of the additional questions that we would ask related to the ownership of that interest, in particular as it relates to that value.
• 17:21
  SPEAKER_01: Because it's a private company owner, it's not as simple as just selling that interest on a public stock exchange or going on your computer and you know, type in a few keys and then all of a sudden you've liquidated that interest.
• 17:36
  SPEAKER_01: Um, so a few of the questions that would relate to discount and calculating that value on a discounted basis would be can the owner of that interest force the sale of the real estate?
• 17:48
  SPEAKER_01: So, how are they going to realize that value?
• 17:50
  SPEAKER_01: How are they, if I own 33.3% and that's in this big shopping center, how do I actually get them the money for that?
• 17:59
  SPEAKER_01: Can I force the sale of that piece of real estate?
• 18:02
  SPEAKER_01: Most likely not.
• 18:04
  SPEAKER_01: Um, can I force the sale of those marketable securities?
• 18:06
  SPEAKER_01: No, I don't have the control to do that.
• 18:08
  SPEAKER_01: And then I force and say, okay, well, we have$1 million of cash sitting on the balance sheet.
• 18:13
  SPEAKER_01: I want some of that cash.
• 18:15
  SPEAKER_01: If I'm 33.3, I typically cannot access that value of that.
• 18:20
  SPEAKER_01: I can't determine who's the management.
• 18:22
  SPEAKER_01: I can't determine how capital is being deployed and spent in the company.
• 18:27
  SPEAKER_01: So it makes it very challenging for that 33.3% owner to actually access that value, that prorata value of 5 million.
• 18:40
  SPEAKER_01: But why it's discounted is because it really suffers from these different features, rights and restrictions, is what how we would look at them.
• 18:48
  SPEAKER_00: Okay.
• 18:49
  SPEAKER_00: So let's talk about discount for lack of control.
• 18:52
  SPEAKER_00: You already kind of went in a bit.
• 18:54
  SPEAKER_00: So one factor that can affect that value is how much control the owner actually has over the entity and its decisions.
• 19:01
  SPEAKER_00: What is a discount for lack of control and why does it matter when valuating a minority interest?
• 19:08
  SPEAKER_01: So a lot of the things that I just mentioned, the ability to make distributions, the ability to sell real estate, all of those are things that require control.
• 19:18
  SPEAKER_01: And then to access the value of that cash is uh what we would consider what is the marketability of that interest in that company.
• 19:26
  SPEAKER_01: So a minority owner in a company.
• 19:29
  SPEAKER_01: So in our example, our 33.3% interest order, they generally cannot control operations, as we said.
• 19:36
  SPEAKER_01: They can't select management, they can't get rid of a manager that they don't like.
• 19:41
  SPEAKER_01: They can't force those distributions of cash, they can't force liquidation of assets to realize value.
• 19:48
  SPEAKER_01: Um, so they can't control a lot of the major decisions that would enable them to access that value.
• 19:55
  SPEAKER_01: So those control provisions are considerations under the fair market value standard.
• 20:00
  SPEAKER_01: So because the owner lacks those authorities, because the fair market value of that interest then that we're looking at is not 5 million.
• 20:10
  SPEAKER_01: It is oftentimes discounted from that proportional share of asset value.
• 20:16
  SPEAKER_01: This is referred to, in this example, a discount for lack of control, or sometimes it's referred to as a minority interest discount.
• 20:24
  SPEAKER_00: Okay.
• 20:25
  SPEAKER_01: So this is one of the two major discounts that we look at when we're preparing a valuation under the fair market value standard.
• 20:33
  SPEAKER_00: Okay.
• 20:35
  SPEAKER_00: So let's talk about discount for lack of marketability.
• 20:38
  SPEAKER_00: I know you brought that word that term up.
• 20:40
  SPEAKER_00: So control isn't the only consideration.
• 20:43
  SPEAKER_00: There's also the question of how easily someone can actually sell that ownership interest.
• 20:48
  SPEAKER_00: So, what is a discount for lack of marketability and how can that affect the value of an interest in a private real estate holding company?
• 20:56
  SPEAKER_01: So, bottom line, buyers are generally going to pay less for an asset that is difficult to convert to cash.
• 21:03
  SPEAKER_01: So, if you're thinking, we're again, we're valuing a 33.3% interest in a private company.
• 21:10
  SPEAKER_01: Private company, by its nature, it's not publicly traded.
• 21:13
  SPEAKER_01: There's no exchange that I can simply list my interest on, and there's a market out there of buyers for it.
• 21:20
  SPEAKER_01: Um, so it it cannot be sold quickly, typically.
• 21:23
  SPEAKER_01: It takes time for that price.
• 21:25
  SPEAKER_01: There's only so many people that may be interested in buying it.
• 21:28
  SPEAKER_01: There may not be a sufficient pool of buyers because when I look at the agreement, whether that's the shareholder agreement, partnership agreement, that interest may be subject to owner's transfer restrictions.
• 21:41
  SPEAKER_01: If you think about a family entity, the idea of that family entity is typically let's keep this in the family.
• 21:48
  SPEAKER_01: So oftentimes there are restrictions that say this is the small pool of people that you may be able to transfer this interest to, and under these certain conditions.
• 21:58
  SPEAKER_01: So that all relates to the Marketability of this interest is just simply not as attractive as buying an interest in a publicly traded company that can be liquidated and turned into cash very quickly.
• 22:11
  SPEAKER_00: Okay.
• 22:12
  SPEAKER_00: So let's go into common valuation mistakes.
• 22:16
  SPEAKER_00: So we've talked about what a strong valuation process looks like, but there are also mistakes that can make a valuation much harder to defend later.
• 22:24
  SPEAKER_00: So what are some of the common mistakes you see in these engagements?
• 22:29
  SPEAKER_01: So again, what my team at Bennett Thrasher and I do is to prepare valuations that meet that qualified appraisal standard as defined by the IRS.
• 22:40
  SPEAKER_01: So going into those regulations again in depth, not part of this scope of this podcast, but they are very robust requirements to meet that qualified appraisal standard.
• 22:52
  SPEAKER_01: And many attorneys want that because it deals with the statute of limitations.
• 22:57
  SPEAKER_01: It only gives the IRS so much time to go back and review that gift that was made.
• 23:02
  SPEAKER_01: So that's a really important reason why you should have an appraisal that meets that qualified appraisal standard.
• 23:10
  SPEAKER_01: And so there's a qualified appraisal standard and a qualified appraiser.
• 23:14
  SPEAKER_01: So kind of two different components.
• 23:16
  SPEAKER_01: So I would say that's number one key.
• 23:19
  SPEAKER_01: You should really have an analysis or an estimate of value that meets that standard.
• 23:24
  SPEAKER_01: Other mistakes or areas of caution that I would include would be reliance on an old, if you're looking at a real estate holding company primarily, reliance on an old or an outdated real estate appraisal.
• 23:37
  SPEAKER_01: There's a cost component to a real estate appraisal.
• 23:40
  SPEAKER_01: If you have multiple holding companies that hold multiple real estate parcels, you've got to pay for multiple real estate appraisals.
• 23:48
  SPEAKER_01: That is worth the money.
• 23:50
  SPEAKER_01: I would say the same thing for a business valuation.
• 23:52
  SPEAKER_01: It is worth the money to get those done appropriately and buy those qualified appraisers in the long run because you're going to, you know, potentially suffer review consequences down the road if you don't.
• 24:06
  SPEAKER_01: So relying on an outdated or an old real estate appraisal.
• 24:11
  SPEAKER_00: Got it.
• 24:12
  SPEAKER_01: Particularly in a market that's changing.
• 24:14
  SPEAKER_01: So let's say Atlanta, like the Atlanta real estate market, commercial real estate market, we've seen so many fluctuations through COVID and through various other ups and downs in the economy that impact the value of real estate.
• 24:28
  SPEAKER_01: So relying on an old appraisal is really questionable.
• 24:32
  SPEAKER_01: Probably not a good source of information for that valuation.
• 24:37
  SPEAKER_01: I would say ignoring or not appropriately considering the rights and restrictions in an operating agreement.
• 24:44
  SPEAKER_01: We review a lot of operating agreements, shareholder agreements.
• 24:48
  SPEAKER_01: Again, those are the sources of the rights and restrictions that we are using to support those discounts for lack of control, discounts for lack of marketability.
• 24:58
  SPEAKER_01: So important to review those agreements and be documenting why there is support for those, that appropriate level of discounts.
• 25:07
  SPEAKER_01: Don't assume that discounts are automatic.
• 25:09
  SPEAKER_01: I think that just putting in a standard, oh, I'm gonna, you know, I think that the discounts are typically in this range.
• 25:15
  SPEAKER_01: So I'm just gonna slap this discount on and not put in a lot of support for it.
• 25:20
  SPEAKER_01: That's a very bad idea.
• 25:22
  SPEAKER_01: And the IRS is looking at that.
• 25:24
  SPEAKER_01: They want to know that you've actually looked, you've looked at those rates and restrictions of that interest in particular.
• 25:30
  SPEAKER_01: You're using the studies that are out there to quantify the discounts to come up with a discount that is well supported.
• 25:36
  SPEAKER_01: So I think that is very important.
• 25:38
  SPEAKER_01: You know, for the attorneys, I think making sure that those governing documents are up to date.
• 25:44
  SPEAKER_01: Um, oftentimes they are not.
• 25:47
  SPEAKER_01: Attorneys that we're working with, they weren't the original preparers of those documents.
• 25:50
  SPEAKER_01: So I think that those are some of the areas of caution.
• 25:54
  SPEAKER_00: Okay.
• 25:54
  SPEAKER_00: Thank you.
• 25:55
  SPEAKER_00: Those are some great tips for a lot of people.
• 25:58
  SPEAKER_00: Like, okay, let me, I might have done that.
• 26:00
  SPEAKER_00: Let me let's let's go back and like revise or review everything.
• 26:05
  SPEAKER_00: Okay, so what attorneys and advisors should have ready?
• 26:08
  SPEAKER_00: So let's dive into that a little bit.
• 26:09
  SPEAKER_00: A lot of those issues seem like they could be avoided or at least minimized with the right information available from the beginning.
• 26:17
  SPEAKER_00: So, what should attorneys, advisors, and their clients have ready to help the valuation engagement more efficiently?
• 26:23
  SPEAKER_01: Our valuation engagement letters go out with a list of requested information.
• 26:28
  SPEAKER_00: Okay.
• 26:28
  SPEAKER_00: Okay.
• 26:28
  SPEAKER_01: Best case scenario, our clients have all of this information.
• 26:32
  SPEAKER_01: They are accountants by nature.
• 26:34
  SPEAKER_01: So they are very much like, I need this information.
• 26:37
  SPEAKER_01: I wish I could say that that was what happened all the time.
• 26:40
  SPEAKER_01: I know the attorneys wish they could say that that's how it always was.
• 26:44
  SPEAKER_01: Unfortunately, it's not, but a lot of the information that we would need obviously includes good, clean financial statements or good, clean tax returns, tax returns that are up to date.
• 26:56
  SPEAKER_01: Who knew you could go two years and not file your tax returns, but you can leave statements that have done that.
• 27:02
  SPEAKER_01: So tax returns, financial statements, operating agreements, shareholder agreements, partnership agreements, whichever of those apply for the type of organization that you are in.
• 27:13
  SPEAKER_01: And this would be if I could speak directly to the business owners, to these private company owners, make sure you're reviewing your operating agreement, shareholder agreement, buy sell agreement if you have one, partnership agreement.
• 27:27
  SPEAKER_01: Make sure those documents, they're not just to be put together when the organization is formed.
• 27:34
  SPEAKER_01: Those are living documents that should be updated as your company changes.
• 27:40
  SPEAKER_01: So I would say operating agreements, org charts, lists of your property, who owns what interests in each of the properties.
• 27:49
  SPEAKER_01: If there are any prior appraisals, if you have done any type of prior appraisal, whether that's of for machinery and equipment, maybe you had to get an appraisal to support insurance that you acquired.
• 28:00
  SPEAKER_01: Any type of appraisal is good to keep that on hand because that's always good information to give to us that we would request.
• 28:08
  SPEAKER_00: Okay.
• 28:09
  SPEAKER_00: So let's go into basis and broader planning considerations.
• 28:13
  SPEAKER_00: So valuation is obviously one piece of a much broader estate planning strategy.
• 28:18
  SPEAKER_00: And transferring every real estate interest may not always be the right answer.
• 28:23
  SPEAKER_00: So should all real estate interests be transferred out of the state, or are there other tax and basis considerations the advisory team should evaluate?
• 28:33
  SPEAKER_01: I think absolutely.
• 28:35
  SPEAKER_01: This is um, again, I'm the valuation professional, so but this is a conversation that is somewhat part of the valuation discussion, particularly when we have these large estates that have numerous real estate holding companies.
• 28:51
  SPEAKER_01: There's, you know, quite often there is a balance looking at what makes sense to transfer, what makes sense to hold, and get that step up in basis.
• 29:01
  SPEAKER_01: So that's, I would say, primarily a discussion between the client and their tax advisor.
• 29:08
  SPEAKER_01: Again, I'm the valuation professional, but they are typically working with a tax advisor, they are working with their estate planning attorney, and they are having those discussions.
• 29:16
  SPEAKER_01: But it's absolutely an area where we're seeing more discussion because of that fluctuation in real estate value.
• 29:25
  SPEAKER_01: Um, and again, because the exemptions have changed.
• 29:28
  SPEAKER_01: We have uh higher exemption amounts now in terms of estate tax exemption.
• 29:34
  SPEAKER_01: And so some assets were transferred into trusts when those exemptions were lower.
• 29:40
  SPEAKER_01: That may not make the most sense now.
• 29:41
  SPEAKER_01: And again, I know the attorneys are talking with their clients, the tax advisors are talking with their clients about these issues.
• 29:47
  SPEAKER_01: Those are those types of planning discussions that the attorneys and the tax advisors are so that's what makes them so incremental and important in this process is to be having these discussions.
• 29:59
  SPEAKER_01: So regardless of the strategy that they're using, whether that would be to hold the real estate to achieve the step up in basis or transfer it out, you need to understand what the value is first to be able to make those decisions.
• 30:15
  SPEAKER_01: And so we would be part of that discussion and way, helping the tax advisor, helping the attorney understand what the value is so they can make those very important recommendations.
• 30:25
  SPEAKER_00: Okay.
• 30:26
  SPEAKER_00: All right.
• 30:26
  SPEAKER_00: So let's close this thing out and round out this conversation.
• 30:30
  SPEAKER_00: So we've covered a lot from appraisals and ownerships, interest to discount, documentation and coordination.
• 30:37
  SPEAKER_00: So if attorneys and advisors remember just one thing when approaching real estate planning involving real estate holding entities, what should it be?
• 30:46
  SPEAKER_01: I think it's probably more than one thing.
• 30:48
  SPEAKER_01: Okay.
• 30:49
  SPEAKER_01: I would say, I would say, and I'm saying I'm preaching to the choir, I'm sure the attorneys are saying the same thing as are the tax advisors.
• 30:57
  SPEAKER_01: Start early, start discussion early.
• 31:01
  SPEAKER_01: We all encourage our clients to start the process early to be thinking about it.
• 31:06
  SPEAKER_01: In the best world, they do three to five years ahead of their planning and they're helping us put together the plan so we can give them the best outcome.
• 31:16
  SPEAKER_01: In real life, a lot of it is happening because of an event.
• 31:21
  SPEAKER_01: So it's not always possible to plan and execute that strategy the way that it would be the best outcome, but we're doing the best with you know what they're able to provide.
• 31:31
  SPEAKER_01: So if there is an event, making sure that they are obtaining those real estate appraisals is particularly for, you know, that we're talking about a lot of real estate holding companies.
• 31:42
  SPEAKER_01: Real estate is an asset that has gone up and down.
• 31:45
  SPEAKER_01: It's very sensitive to market fluctuations.
• 31:48
  SPEAKER_01: So getting a current real estate appraisal to support whatever that transfer date is is very important.
• 31:54
  SPEAKER_01: It is worth the expense.
• 31:56
  SPEAKER_01: Up-to-date governing docs, you know, making sure that we understand them, that they're up to date and current with the current needs of the structure of your business, not how when it was structured 20 years ago.
• 32:07
  SPEAKER_01: And then really making sure that we're focusing on a process evaluation process with all of the different professionals that is really going to provide that supportable conclusion of value.
• 32:20
  SPEAKER_00: Thank you, Sarah, for being back on.
• 32:22
  SPEAKER_00: Thank you for providing such detailed, essential information insights on this topic.
• 32:28
  SPEAKER_00: And hopefully people hear this and like, uh, maybe we need to grab somebody really quickly because we might we might need a little bit more guidance than we've had in the past.
• 32:38
  SPEAKER_00: So thank you for being on.
• 32:40
  SPEAKER_00: I hope to see you again.
• 32:41
  SPEAKER_00: And I'm sure our audience would just can't wait to hear this conversation.
• 32:45
  SPEAKER_01: I hope so.
• 32:46
  SPEAKER_01: Thank you, Sharday.
• 32:47
  SPEAKER_01: I appreciate the opportunity, of course.
• 32:51
  SPEAKER_00: If there's one takeaway from today's conversation, it's that successful estate planning involving real estate holding companies requires more than simply knowing what the property is worth.
• 33:02
  SPEAKER_00: Accurate appraisals, a clear understanding of the ownership interests being transferred, strong documentation, and coordination across the advisory team can all help create a valuation that is efficient, supportive, and flexible.
• 33:16
  SPEAKER_00: Thanks for tuning in to Beyond the Ledger.
• 33:18
  SPEAKER_00: For more insights and expert perspectives, visit bccpa.net and explore latest resources.
• 33:24
  SPEAKER_00: And don't forget to like, follow, share, and subscribe.
• 33:27
  SPEAKER_00: Until next time, I'm Sharday Lake Fields, and we'll see you for the next conversation.