1. Lurking Intangibles and Business Enterprise Value © 2015 Gaylord A. Wood, Jr.

2. Presenter: Gaylord A. Wood, Jr. Double Dukie (undergraduate and law school) Marine legal officer 53 year member, The Florida Bar Admitted to State & Federal Courts 20+ year Regular member, I.A.A.O. Ad Valorem Tax practice exclusively representing Assessors since 1968 Regular Member, Florida and Maine A.A.O. Certified Maine Assessor Designated C.I.T. (thanks to Mike Rogers) 2015 Chair, I.A.A.O. Legal Committee

3. Commercial! Greetings from IAAO President, Hon. Martin Marshall of Lenawee, Michigan Appointing committee to study the issue of intangible property in assessments IAAO Legal Seminar, Boston MA December 10-11, 2015 Your attorney will find this valuable and also get continuing education credits.

4. You could be in the other room… My views on the way many TIF districts are administered in Maine are well known A so-called “credit enhancement agreement” is nothing of the sort, it is simply a property tax exemption by another name, a good example of Down East Corporate Welfare paid for by the other taxpayers of the Town. Recipients often kick the Town in the teeth; example - Verso Paper Mill in Bucksport, “Jobs, jobs, jobs!” Google “misuse of credit enhancement agreements,” see my paper at: http://www.maineassessors.org/documents/2012/Credit. pdf

5. Verso Paper Mill (Bucksport) TIF Payment (2013): $923,575.00 Jobs lost due to mill closing, 2014: 570

6. This issue is important! Bangor Daily News, July 2, 2015: “Hollywood Casino appeals Bangor’s rejection of $36 million tax abatement.” “The owners are appealing the decision because of improper valuation techniques used in determining the valuation, such as inclusion of intangible property, most notably the gaming license,” Cashman said. Board of Assessment Review hearing, 5 PM Today!

7. ½ Mile Trotting Track Parking Garage Hotel Casino I-395 Cross Ins, Ctr.

8. The Assessor’s Best Friend For public companies, the Securities and Exchange Commission. 10-K reports tell current and prospective shareholders why they shouldn’t buy securities. 10-Ks reveal that the operator of the Hollywood Casino & Raceway is Penn National Gaming, Inc.

9. Penn National Gaming, Inc. Operates 26 facilities in 17 states Operated facilities include 31,000 gaming machines 800 table games 3000 hotel rooms 2013 spin-off of real estate to GLPI (REIT)

10. Gaming & Leisure Properties, Inc. Spin-off from Penn National Gaming 2013 Took over all real estate, but NOT gaming licenses Master lease for all properties to Penn National, 15 years

11. HC Bangor LLC Property (10-K) Subsidiary of Gaming & Leisure Properties, Inc. REIT 152 room hotel with 5,119 square feet of meeting and pre-function space, two eateries, a buffet and a snack bar, a small entertainment stage, and a four-story parking garage with 1,500 spaces. HC sub-leases from GLPI the land on which the Hollywood Casino Bangor facility is located, which consists of 6.7 acres. HC also leases 27.6 acres located at historic Bass Park, which is adjacent to the facility, which includes a one-half mile standardbred racetrack and a grandstand with over 12,000 square feet and seating for 3,500 patrons. 900 slot machines, 4 poker tables, 12 table games.

12. HC Bangor LLC (Cont’d) “GLPI has an operating lease with the City of Bangor which covers the permanent casino facility that opened on July 1, 2008. Under the lease agreement, there is a fixed rent provision, for which GLPI is responsible, which totals $100,000. The term of the lease, which commenced with the opening of the permanent facility, is for an initial term of fifteen years, with three ten-year renewal options.”

13. HC Bangor LLC Valuation GLPI acquired the Bangor Casino leased property on November 1, 2013. Per GLPI’s 10-K filed with SEC, 10/31/2014: Initial cost: Land - $12,833,000 Improvements - $84,257,000 Total: $97,140,000 2014 assessment $98,180,000 Owner requests value of $61,380,000

14. Financial Accounting Standards Board Public companies adopt FASB statements Statement #144 – “Accounting for the Impairment or Disposal of Long Lived Assets” (a) Recognizes an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) Measures an impairment loss as the difference between the carrying amount and fair value of the asset. So, has GLPI found impairment at Bangor? And has it told its stockholders that its $97M property is impaired to a value of $61M?

15. Valuation of Casino Hotel Read opinion of the New Jersey Tax Court relative to the Sands Hotel & Casino in Atlantic City, City of Atlantic City v. Ace Gaming, LLC, 23 NJ Tax 70 - NJ: Tax Court 2006 (“Limited Market Property”) Find out what the rent is that Gaming & Leisure Properties is being paid by Penn National and capitalize that Maine Courts love a cost approach

16. Definitions “When I use a word,” Humpty- Dumpty said, in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is, which is to be master – that’s all,” said Humpty-Dumpty.

17. What Is “Property?” A diamond ring

18. What Is “Property?” A diamond ring A pet boar hog

19. What Is “Property?” A diamond ring A pet boar hog Water rights

20. What Is “Property?” A diamond ring A pet boar hog Water rights A house and lot

21. What Is “Property?” A diamong ring? A pet boar hog? A house and lot? Water rights!

22. Real and Personal Property Real property is the “bundle of rights” constituting the rights arising out of ownership of real estate (sticks and bricks). Sometimes called “immovables.” 36 MRSA §551 uses term “real estate.” Personal property is “movables” – which under some circumstances can become part of the real estate (such as fixtures). 36 MRSA §601 defines “personal property.”

23. Tangible and Intangible Property Tangible personal property - all goods, chattels, and other articles of value capable of manual possession and whose chief value is intrinsic to the article itself. This doesn’t mean you have to be able to pick it up – an electric generating plant or a sewer system is often classified as tangible personal property.

24. Tangible Personal Property The same item can be categorized differently at different times. Example: a bathtub: In the showroom at Home Depot, inventory/stock in trade In the farmer’s pasture to water his cows, commercial personal property In the homeowner’s side yard to water the kids’ 4-H cows, household goods In place in the bathroom, fixture (real property)

25. Tangible and Intangible Property Intangible property is money, all evidences of debt, all evidences of ownership in a business organization, and all other forms of property where value is based upon that which the property represents rather than its own intrinsic value.

26. Brad Wilder, Plainfield NH

27. New Hampshire “View Tax” Remember that? 2005 “New Hampshire is different, because the state's views have become so sky-high valuable, and so fast. Statewide, one assessor said the maximum value added because of a view has jumped from a maximum of around $20,000 about 10 years ago to $200,000 or more now.”

28. Maine Constitution Section 8. Taxation. All taxes upon real and personal estate, assessed by authority of this State, shall be apportioned and assessed equally according to the just value thereof. 1. Intangible property. The Legislature shall have power to levy a tax upon intangible personal property at such rate as it deems wise and equitable without regard to the rate applied to other classes of property.

29. 36 MRSA §601 Under the previous version of the statute, many of the factors which the Assessor is permitted to consider in assessing property at its just (market) value included ‘intangibles.’

30. Can the same object be both tangible and intangible property at the same time?

31. The1933 Double Eagle Coin President Roosevelt took America off the gold standard in 1932. A handful of 1933 $20 gold pieces were struck. Most were destroyed. One found its way to the possession of King Farouk of Egypt, along with an export certificate from the U.S. Government. Seized in a Government sting, 1966 Sold at auction for $7,590,020, 2002

32. The 1933 Double Eagle coin It’s one ounce of gold, capable of manual possession (tangible), value about $1,000 It’s also legal currency, (intangible) value $20 It’s also worth $7.5M (intangible?) value Can you separate the tangible and intangible aspects of this property?

33. Internal Revenue Code §197 Enacted in 1993, a compromise convention intended to allow purchasers of property to write off their purchase price over time. Many items in that section are not even property: Vendors’ agreements, assembled work force, trained staff, competitive advantage, customer relations, customer base, recruitment…

34. History of the Concept Prior to 2001, very little direction to appraisers. Debate at the 1999 Appraisal Institute meeting in Orlando David Lennhoff developed Appraisal Institute Course 800, “removal of intangible assets” which premiered at Washington, DC in 2001. Course withdrawn by the Institute

35. Appraisal of Real Estate Can a publication that has multiple editions be considered “authoritative?” Lennhoff: “Methodologies associated with the separation of business value from total property value have been evolving over time, and many theories exist. For further information about the separation of business value, the reader is directed to recent Appraisal Institute publications.” (SC&H Group 2014) Course 833? (2011)

36. Business Enterprise Value (BEV) 11 th. Edition of The Appraisal of Real Estate: “A value enhancement that results from items of intangible personal property such as marketing and management skill, an assembled work force, working capital, trade unions, franchises, patents, trademarks, non-realty related contracts/leases, and some operating agreements.” (1996 edition, page 578) I see Dave Lennhoff’s evil hand here…

37. In the AORE 13 th. Edition… Business value. A going concern is an established and operating business with an indefinite future life. For certain types of properties (e.g. hotels and motels, restaurants, bowling alleys, manufacturing enterprises… landfills), the physical real estate assets are integral parts of an ongoing business. The market value of such a property (including all the tangible and intangible assets of the going concern, as if sold in aggregate) is commonly referred to by laymen as business value or BEV, but in reality it is market value of the going concern including real property, personal property, and the intangible assets of the business. (See figure 2.1.)

38. Appraisal of Real Estate (From Appraisal of Real Estate, 13 th. Edition, page 30 figure 2.1) “Intangible Property” is: Reputation, Work Force, Residual Income, Goodwill, “Other Assets” Contracts, Copyrights, Patents, Trademarks

39. A Business Value Anthology Published by The Appraisal Institute in 2001 Contained 10 articles on the concept of ‘business value’ primarily by MAI’s. A second edition included 9 more articles on the concept

40. Jeffrey Fisher / William Kinnard Dr. Fisher’s memorandum dated September 20, 1988 to “Shopping Center Assessment Network (SCAN)” “Dr. William Kinnard also attended the seminar, and Bill and I discussed the business value question further after the seminar. Bill also believes that there is a business value associated with a shopping center. In fact, during his "Keynote Address" at the official opening of the conference two days after the seminar, Bill commented in his speach [sic] that "Income/investment property also includes business elements". He also commented that to the extent that these business elements are being taxed along with the real estate, there may be "double taxation“ because the business income is taxed at the federal level. Bill and I discussed this further over breakfast the next day, and he is interested in working with me on developing this concept further and producing a paper on the topic. We will be working together to try to develop ways of separating the business value and real estate components.”

41. Hotels and Motels Steve Rushmore, MAI, is the father of the intangible/business value in hotels concept. According to Rushmore, a hotel involves real estate, tangible personal property, and intangible property such as working capital, assembled work force, the “flag” (franchise) value, etc.

42. The Rushmore Approach Rushmore advocates the Management Fee Method; deduction of a management fee in an owner-managed hotel completely removes the ‘business value’ from the hotel. Lennhoff says this doesn’t really remove business value but assists the owners in obtaining large loans.

43. Chesapeake Hotel v. Saddlebrook Township (NJ Tax 2005) Lennhoff’s value adjusted out: “(a) personal property; (b) the hotel franchise or "flag" (in this case the Marriott affiliation); (c) various residual intangibles, including goodwill and business and credit relationships; and (d) developmental and start-up outlays associated with the initiation of the hotel business.”

44. Chesapeake Hotel v. Saddlebrook Township (NJ Tax 2005) Court affirmed the assessment Court noted, “It bears emphasis that this decision is based upon the consideration of the reasoning and supporting data addressed in the record of this case for the particular adjustments proposed. It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records.”

45. Cable Television Cable TV operators typically determine the physical replacement cost of the system. Step 2 – determine a rate of return appropriate for the system, say 10%, multiply the RCN of the system by.10 = income required to support the system. All income over that amount is income to “intangibles” Summation, not unit appraisal Market Approach: Homes Passed times sale price of similar system per home passed

46. Cable Television “Intangibles” Technology related (e.g., engineering drawings) Customer oriented (e.g., customer lists) Contract related (e.g., favorable supplier contracts) Data processing oriented (e.g., computer software) Human capital related (e.g., a trained and assembled work force) Marketing related (e.g., trademarks and trade names) Location related (e.g., leasehold interests) Goodwill related (e.g., going-concern value)1 –1. See, e.g., Rabe, James G. & Reilly, Robert F., Valuing Intangible Assets as Part of a Unitary Assessment, J.Prop.Tax Mgt., Winter 1994, p.12; Smith, Gordon V., Intangibles, What are they, Where are they? Proceedings, IAAO 59th. Conference on Assessment Administration, Washington, DC 1993.

47. Sounds like Section 197 property: Goodwill Going Concern Value Workforce in place including its composition and terms and conditions (contractual and otherwise) of its employment Business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers), Any patent, copyrights, formula, process, design, pattern, knowhow, format, or other similar item, Any customer based intangible Any supplier based intangible, and Any other similar item, Any license, permit, or other right granted by a government unit or an agency or instrumentality thereof, Any covenant not to compete, Any franchise, trademark, or trade name

48. Mount Bachelor Ski Resort Mt. Bachelor, Inc. v. Department of Revenue, 539 P.2d 653 (Oregon 1975) Real estate assessment calculated by capitalizing net income: Lift ticket price x # of tickets sold + other income – expenses. Can you sell the ski resort business on a particular property and keep the property? Case really not about “business value.”

49. Waste Management Landfill Waste Management of Wisconsin, Inc. v. Kenosha County Board of Review, 516 NW2d 695 (Wisconsin 1994) Landfill valued by the income approach: Tipping fees minus operating expenses = NOI capitalized into opinion of value. Objection made that this included the business enterprise value and permit.

50. Waste Management Landfill “A landfill license is specific to the site, and the operator of a licensed landfill may neither carry the license with it nor transfer the license to a successor owner upon a sale of the landfill property. …Although the license itself may not be transferred with the land, certainly this inherent value passes to a new owner.”

51. Waste Management Landfill “Dr. Karvel concluded that the Assessor's calculations excluded management services and a profit for such services. Foreman's testimony before the board of review identified the nontransferable business value as the difference between owner-operator income ($18 million according to Foreman) and one reached by using rental income (according to Foreman, $6 million in this case). Thus according to Foreman, $12 million was business value.... The board of review could reasonably have concluded that the Assessor's calculations adequately accounted for any business value unrelated to the real estate.”

52. The Shopping Center Cases Dr. Jeffrey Fisher and Dr. William Kinnard invented the idea that there was a non- taxable “business value” lurking within shopping centers. First case was from Wisconsin, State ex.rel. N/S Associates v. Village of Greendale Board of Review, 473 N.W.2d 554 (Wisconsin Court of Appeal 1991)

53. Southridge Mall, Greendale WI Ohio was a “contract rent,” not a “market rent” state; recent sale sets the assessment. Mall sold for $114,737,091 Agreed that a “spanking new” mall could be built for $62,000,000 with a RCNLD of $50,000,000. Taxpayer argued the difference was “intangible value” and not taxable.

54. Southridge Mall, Greendale WI “The key of the analysis is whether the value is appended to the property, and is thus transferrable with the property, or whether it is, in effect, independent of the property so that the value either stays with the seller or dissipates upon sale. See Oshkosh Country Club,172 Wis.at 84, 178 N.W. at 252 (A non- transferable use may not be considered as an element of value.).”Oshkosh Country Club,172 Wis.at 84, 178 N.W. at 252

55. Southridge Mall, Greendale WI “Southridge mall's raison d'etre—namely, the leasing of space to tenants and related activities such as trash disposal, baby stroller rentals, etc.—is a transferrable value that is inextricably intertwined with the land and "all buildings and improvements thereon, and all fixtures and rights and privileges appertaining thereto," … just as the transferrable value of a farm—the growing of crops—is inextricably intertwined with the property from which the farm operates.”

56. USPAP Rule 1-2(3) Pro business value advocates cite this rule to justify the perceived need to deduct a business value from the overall value conclusion. I am the original conspiracy theorist; I note that Dr. Fisher was a founding trustee of The Appraisal Foundation, although I disclaim knowledge of his input into that Rule.

57. Southdale Mall - Minnesota “In reaching our final conclusion, we reject Petitioner's argument that a portion of Southdale's value is attributable to some intangible personal property which may be a business value. Mr. Leirness concluded that approximately one-third of the total asset value is a non-real property component. He describes this intangible value as the unique drawing power of Dayton's, the radius restrictions negotiated between Petitioner and both Dayton's and J.C. Penney, and the aggregate customer base drawing power of the three anchors.

58. Southdale Mall - Minnesota “In support of the presence of this intangible value, Dr. William N. Kinnard, MAI, SREA, testified and presented the results of a study he conducted in order to determine the relationship between anchor mix and value to a shopping center. He undertook the research to develop a methodology for appraisers to value the business enterprise. The appraisal industry has accepted standards for valuation of real and tangible property but the valuation of intangibles remains less accepted. Dr. Kinnard based his research on a comparison of super-regional and community shopping centers. He concluded that there is an increment to shopping center sales attributable to anchors that attract greater than normal numbers of shoppers. The presence of such above normal anchors results in the center owners receiving higher rents which ultimately result in a higher value for the center.

59. Equitable v Hennepin, 1995 WL 702527 (Minn. Tax 1995) “Dr. Kinnard was not asked to quantify the increment of value at Southdale which would result because of the presence of Dayton's-- an above average anchor. He was asked only to report on the methodology which he is developing. Dr. Kinnard was reluctant to describe this increment of value as business enterprise value or to give it any name. He is sure it exists and he is confident that it can be measured. We are not so sure.”

60. UAH Hydro Plant / Winslow Hydroelectric plant. Owner entered into a power purchase agreement (PPA). Dam cost $45,000,000 to construct. The price Central Maine Power paid for electricity became lower than the price under the PPA. CMP bought out 10 of them, UAH did not sell. State Tax Board found the contract was “inextricably intertwined” with real estate.

61. UAH Hydro Plant / Winslow “We have previously recognized that intangible property that is inextricably intertwined with a tangible asset may be considered in determining the just value of the tangible property. In Glenridge Development Co. v. City of Augusta, 662 A.2d 928, 931 (Me. 1995), we determined that a HUD mortgage subsidy to a low- income housing project is a "value-influencing factor" that was properly considered when determining the just value of the real estate. Applying this principle here, treating UAH's facility's status as a qualifying facility with a PPA in place as inextricably intertwined with the plant's highest and best use is justified because, as determined by the Board, that status defines the current use of the facility and it has a substantial influence on its value.”Glenridge Development Co. v. City of Augusta, 662 A.2d 928, 931 (Me. 1995),

62. Dr. James Ifflander, PhD, CFA (1) The claimed intangible asset must be legally definable, (2) the claimed intangible asset must be capable of private ownership, (3) the claimed intangible asset must be separate and divisible from the tangible asset and marketable by itself, and (4) the claimed intangible asset must have value. In the Matter Of Colorado Interstate Gas Co., 79 P3d 770 (Kansas Supreme Court 2003)

63. “Legally Definable” Goodwill? Management skills? (“You get what you pay for!”) Assembled Work Force? Customer Relationships?

64. “Capable of Ownership” Is an “assembled work force” capable of ownership after the 14 th. Amendment? The last thing the hotel operator does at midnight of sale day is to fire everybody. The value of a particular employee to the employer is the contract – the discounted difference between the contract salary and market salary.

65. Example: David Ortiz “Big Papi” 2015 salary: $16,000,000 2016: $10,000,000 Contract expires in 2018 Question: What could he earn if he were not under contract to the Red Sox?

66. “Separate and Divisible” Fast food franchise – BK, McDonald’s Hotel “flag” Bethel Inn Resort Sebasco Harbor Resort Seaside Inn – Kennebunkport (1667) Westin Portland Harborview (Eastland Park Hotel)

67. Questions?