Shenehon Company advised the Minnehaha Creek Watershed District

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Shenehon Company advised the Minnehaha Creek Watershed District (MCWD) in implementing its plan to purchase the former Cold Storage building site for restoration of shoreline along Minnehaha Creek. Details of the transaction are as follows:

Subject Property:
Cold Storage Facility Site – 16.9 acres
325 Blake Road
Hopkins, MN 55343

Owner:
Stewart Lawrence Group

Acquisition Price:
$14.95 Million

Immediate Goal:
Restore over 1,000 feet of shoreline on Minnehaha Creek and sell the excess land for private redevelopment

Long Term Goal:
Storm water management of the Cottageville Park neighborhood to protect and preserve Minnehaha Creek for future generations

The city of Hopkins and the MCWD previously collaborated on the Cottageville Park redevelopment project. Storm water management for that area, a cooperative effort with the Metropolitan Council, was significantly improved as a result of the acquisition.

Look for full details in the upcoming issue of Valuation Viewpoint, produced and published by Shenehon Company.

Related Articles:
Minnehaha Creek Watershed District Wants Cold Storage Site, Hopkins Patch
Watershed District to Buy Hopkins, Biz Journal
Minnehaha Creek will be getting big improvements, StarTribune

Using Demographics to Answer Valuation Questions

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Shenehon Company recently completed a study to determine whether a city’s decision to allow municipal vs private liquor affects the type of retail establishments willing to locate in a given city. In this unique analysis, the appraisal team correlated national retailer’s site location parameters with the presence/absence of municipal liquor. Shenehon Company’s analysis, lead by Scot Torkelson, CBA, presented an in-depth study of the site-location parameters used by retail giants typically found in metropolitan areas similar to Lakeville, MN.

Links to articles describing the study follow:
Pioneer Press – Lakeville study: Lose municipal liquor sales, pay more in property taxes
Thisweek Newspapers – Update: Study results suggest Lakeville keep its municipal liquor
iStockAnalyst – Lakeville study shows municipal liquor is a winner
Lazy Lighting – Lakeville Liquor Study: Close Stores, Raise Taxes

The Economy is so Bad That…

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I got a pre-declined credit card in the mail.
CEOs are now playing miniature golf.
Exxon-Mobil laid off 25 Congressmen.
I bought a toaster oven, and my free gift was a bank.
Angelina Jolie adopted a child from America.
Motel Six won’t leave the light on anymore.
A picture is now only worth 200 words.
They renamed Wall Street, “Wal-Mart Street”.
Then Bill and Hillary travel together, they now have to to share a room.

And finally,

I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds. etc…, I called the suicide hotline. I got a call center in Pakistan, and when I told them I was suicidal, they got all excited and asked if I could drive a truck.

Mergers and Acquisitions Commentary

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By: Charles Miller, CBA

The following bullet points are excerpts sourced from Strategic M&A Deals: Regions, Sectors and Structures, a May 2011 white paper prepared by Merrill Datasite and The Deal, LLC. In the publication, Merrill Datasite and The Deal surveyed 97 large-cap companies to determine their strategic acquisitions forecasts for the year ahead.

  • With the stock market roaring back, companies flush with cash and credit flowing freely, global M&A totaled $608 billion in the first quarter of 2011-a 32.7% jump over the same period last year, according to Dealogic. What’s especially interesting is that most of the deals fueling this increase have been strategic acquisitions by corporates, amounting to more than 90% of transaction revenue.
  • While M&A activity has showed renewed signs of life, so far, much of that activity has been concentrated among bigger deals and a handful of dealmakers. Of those who participated in the survey, just 41% say they engaged in an M&A transaction in the first four months of the year. Bankers say they see more dealmakers warming to transactions in the months ahead.
  • Information from The Deal Pipeline reflects this move toward bigger deals. According to the data, there were 437 deals in the first quarter, compared with 405 in 2010, with a dramatic rise in large deals: 78 transactions were valued at $1 billion or above in the first quarter, a rise of 23% over 2010. On the other hand, the number of smaller deals has declined so far this year, from 137 deals under $50 million in the first quarter to just 97 this year.
  • Costs are a big factor. Nearly half of the respondents say that the price of the target company is the biggest challenge they face in making a strategic acquisition. A further 29% say economic uncertainty is the big challenge, 11% cite availability of financing options, and 4% point to global instability.
  • “I think we are getting back to more normalized multiples for acquisitions,” says Andrew Ballheimer, co-head of the global corporate practice at London law firm Allen & Overy LLP. “In the boom market of 2007 and 2008, the multiples were very, very high, and then they dropped to a very low level. Now they are getting back to more normal levels.” Raymond James’ Lane says values have ratcheted down about 25% from their 2007 highs.
  • For those who prefer debt, financing is now relatively easy to obtain, compared with the tight money situation following the mortgage crisis two years ago. According to the survey, 68% of executives feel lending opportunities have opened up, while only 32% say that lending conditions remain tight.
  • “There’s a more competitive environment now for strategic acquirers than there was in the past,” Curragh says. “While the economy is improving, organic growth is not substantial enough for a number of corporates, which are seeing attractive opportunities for M&A.”
  • Technology is the most sought-after sector, with 33% of dealmakers saying they believe the sector is likely to have the largest number of acquisitions in 2011. This was followed by financial services at 16% of respondents, healthcare with 11% and energy at 10%.
  • If the executives’ predictions prove accurate, 2011 is slated to be an outstanding year for strategic M&A. While the economic recovery has been lacklustre so far, that has helped keep valuations reasonable and presented attractive buying opportunities to many firms.

In sharp contrast, small businesses (under $5 million in revenue and less than $1,000,000 in loans), seem to be playing in a different ballpark. Big banks’ outstanding loans to small businesses dropped 14% between March 2011 and March 2010 according to an analysis by the Kansas City Federal Reserve Wall Street Journal, Smaller Businesses Seeking Loans Still Come Up Empty.

Only 17% of loan-seeking small businesses landed bank financing over the past six months, as noted in the article. As seen in the excerpts from the Strategic M&A Deals article above, the situation is quite different for larger companies. About 37% of respondents from privately held companies with revenue greater than $25 million have successfully secured bank loans in the last six months.

The Strategic M&A Deals report may exhibit some optimism (possibly over optimistic) in that more deals are getting done and financing is available for the larger deals. Nonetheless, the small businesses seem not to be participating in any improvement in the capital markets as lenders may perceive the small business too risky for investment.

Off-Site Parking & The Tax Court

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In urban areas, office buildings, apartments, retail, and other such uses often lack sufficient on-site parking. In many situations, owners are permitted to fulfill their parking requirements with a nearby parking solution. The off-site parking lot and the subject property may have the same ownership, or the subject property may be permitted to use an off-site parking option through a lease, easement, reciprocal easement agreement, or other right of use. When parking for the subject property is provided by another property, the tax court has been clear that an appraiser should not discount the subject property for lack of parking. However, the Tax Court is not always clear as to how the parking should be valued or how any income resulting from the parking should be treated.

Recently, the Tax Court provided some guidance in 444 Lafayette, LLC and Meritex Enterprises, Inc., v. County of Ramsey, (April 7, 2011). In this case, although there are no parking spaces on the subject property, the subject property is benefitted by a reciprocal easement agreement that was entered into in August of 2004. This reciprocal easement agreement provides 966 employee parking spaces and 13 visitor/delivery parking spaces. In addressing how to handle these parking spaces the Court said, “it is appropriate to include parking income from adjacent parcels since there is an easement which benefits the Subject Property with not only the parking, but also the income from that parking.” This ruling certainly does not address how to value all parking arrangements. However, in situations where there is an easement, the Tax Court makes it clear that the easement adds value to the subject property; it not only satisfies the parking requirements, it also generates income, to which the property owner is entitled. These benefits are transferred to the subject property and the value of the benefits must be taken into account. In a tax appeal, the issue of how to handle parking arrangements not directly tied to the subject property is very complex. In such cases, the fee simple valuation of the subject property must include the consideration of easement and leasehold rights, as well as the larger parcel, and how it should be handled.

Fair Market Value versus Distressed Value

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By Clay Shultz, ASA Senior Valuation Analyst

Are you looking for a real life example of the difference between fair market value and distressed value? Look no further than the History Channel’s Pawn Stars. If you’ve never seen an episode, here’s a brief description: The setting is a Las Vegas pawn shop, which specializes in antiques, memorabilia, and other historical collectibles. Episodes feature everyday people trying to sell (or pawn) their interesting items – ranging from old currency to antique firearms – to the shop’s proprietors. Generally, the shop’s staff members know a little about the items in question. But, more often than not, they rely on an expert to offer an opinion as to what the item is worth. Once the expert has given an estimate of value, negotiations begin. A typical scenario goes like this:

  • The expert estimates that the item could sell for $4,000 to $5,000 at auction.
  • The seller hears $5,000 and makes that the asking price.
  • The pawn shop employee counters with a very low number, citing that the shop can only hope to resell the item for the estimated value of $4,000 to $5,000 given by the expert. Meanwhile, the store has overhead costs in addition to the carrying cost of its inventory.
  • After some back-and-forth, the seller realizes that in order to achieve the auction value of $4,000 to $5,000, he or she will likely incur an auction fee, which could substantially lower the proceeds from sale.
  • Finally, the seller comprehends that the offer from the shop is for cash in hand today, as compared to having to wait for the opportunity to sell the item at auction. In the final analysis, the seller usually sells the item to the shop for a price substantially lower than anticipated.

So what’s going on here? Regardless of the particular fair market value definition used, it is generally understood that the buyer and the seller are free from any compulsion to act and the asset is offered in the open market for a reasonable period of time. On Pawn Stars, it is true that neither party is compelled to act. Nonetheless, the seller goes to the shop with the intention of receiving cash today, which makes it a compulsive sale. Additionally, we have only one buyer and one seller and no market exposure. Likewise, it is important to keep in mind that fair market value describes the price at which property would change hands, not the net proceeds to the seller. In real world situations, like Pawn Stars, sellers frequently appear much more concerned with getting cash in hand than maximizing their net proceeds. As a result, the item is generally sold well below the expert’s estimated fair market value.

CapX2020 and ‘Buy the Farm’

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By: John T. Schmick

Over the past ten years Minnesota statutes pertaining to the use of eminent domain powers have changed. Once biased towards the condemning authority, eminent domain laws are now more balanced and the rights of both property owners & government are considered. The most recent trend is to develop one set of rules for all condemning authorities. Thus, Minnesota’s eminent domain procedures now emphasize Public Service Corporations (PSCs). While there remains room for improvement, the eminent domain process, as it relates to utility company takings, is vastly improved.

Statutes pertaining to pipeline and power line takings are located in MN Statutes Chapter 216: Utilities; not in the more well-known MN Statutes Chapter 117: Eminent Domain. Often referred to as the ‘Buy the Farm’ statute, PCS guidelines are found in MN Statute 216E.12 subd. 4. Chapter 216E describes Electric Power Facility Permits; section 12 references Eminent Domain Powers: Power of Condemnation; and subdivision 4 focuses specifically on Contiguous Land. This obscure statute regulates the process whereby real property is acquired to accommodate a high-voltage transmission line with a capacity of 200 KV or greater. If a PSC uses its eminent domain powers to take part of a property, the owner has the option to also require the utility company to acquire, in fee interest, any amount of contiguous land to which the owner has an interest. Simply stated, when a property is condemned for a high-voltage power line, the owner has the right to insist the utility company (PSC) buy all or any part of the adjacent land. The property owner is also entitled to relocation as an alternative to living next to a power line.

The 345 KV CapX2020 power line (currently under construction in various parts of Minnesota), falls within the scope of MN 216E.12 subd. 4. Thus, any property owner affected by this project must make a decision: negotiate for damages based on a traditional before and after taking valuation analysis, or require the utility to buy the entire property. Some consider the statute burdensome for utility companies, but that’s not necessarily true. Even if the PSC is forced to purchase the entire property at the front end, the ultimate cost to the utility company should be marginal. Once the power line has been constructed and the easement recorded, the utility company is free to sell the property. The difference between the cost to purchase the land from the original property owner and the price for which the PSC sells the land is the true reflection of the damages caused by a new power line to the property. If the real estate market is in a growth mode when the PSC sells, the utility company may realize a profit and project costs will be minimal. If the market is in decline, final project costs may be higher. In either case, the utility company takes the same market risk as every other property owner. Thus, the true cost of the project is borne by the utility company, not the property owner, which is appropriate given that the purpose of eminent domain laws is to protect the property owner while allowing government entities and PSCs the power to acquire land for public use.

Central Corridor Issues

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By:  John T. Schmick

Development of Light Rail Transportation (LRT) along University Avenue in St. Paul has been front page news as pre-construction activity for the project, such as moving utility lines, begins. A recent article in the Highland Villager (Getting out while they can, Feb. 23-Mar. 8, 2011) highlights some of the problems created by the project including the most common complaint: loss of on-street parking that is forcing businesses to relocate or close. Often overlooked in news articles of this nature are the many zoning changes that also impact corridor properties.

In an upcoming article (Spring Issue 2011) of the Shenehon Newsletter, author John Schmick discusses problems created for property owners by zoning changes made prior to eminent domain takings for the Central Corridor LRT project. The Central Corridor Overlay District, enacted in 2008 and due to expire in June 2011, put in place new zoning performance standards for corridor properties. When the overlay district expires, it will be replaced by permanent zoning changes that include many of those same (or similar) performance standards. New requirements for building setbacks, development density, and on-site parking will have a dramatic impact on properties in the Central Corridor area. These changes created a tremendous shift in non-conformity for many properties which must be addressed in the eminent domain cases that are now in the pre-taking negotiating stage. Understanding how these changes affect current and future property owners and businesses along the corridor is essential to the successful resolution of condemnation litigation.

Recent Decline in Transaction Multiples

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By Charles A. Miller, CBA

Sales price valuation multiples for small- to middle-market privately held companies have historically been fairly steady over time in many industries. However, the public capital markets experienced significant declines in 2008 and 2009 at the forefront of the recent recession; and the recession negatively impacted sales price multiples for privately held companies as well. The decline is illustrated in the following graphs reproduced from “Historic Trends in Private Company Multiples” (BVR, Business Valuation Resources, LLC, May 2010). These charts illustrate that sales price multiples declined roughly 20% or more by 2009 from the central tendencies shown 2001 to 2007.

The first chart was created using data from Pratt’s Stats® and the second was created using data from BIZCOMPS®. Both databases (available at BVMarketData.com) contain details of sold private businesses, including selling price, industry, financial information, valuation multiples and more. The Pratt’s Stats® database has financial details available for more than 16,470 private companies including both larger M&A transactions and main street businesses while the BIZCOMPS® database typically contains transactional information on smaller “Main Street” businesses (service station, restaurant, convenience store, print shop, travel agent, florist, coin laundry, beauty salon, auto repair shop, video rental, day care center, etc.).

Note: in the above chart, MVIC is an abbreviation for Market Value of Invested Capital. MVIC includes both the market value of equity and the interest bearing debt.

Note: in the above chart, SDE is an abbreviation for Seller’s Discretionary Earnings. Seller’s discretionary earnings is defined as the company’s net profit before taxes and any compensation to the owner (normally one working owner) plus amortization, depreciation, interest, other non-cash expense and non-business related expenses.

Recently, there have been positive signs that the mergers and acquisition market is improving, which may eventually translate into improved multiples. According to a recent article in the StarTribune (Neal St. Anthony et al, “Flurry of Deals Signals Recovery.” StarTribune, January 31, 2011), Minnesota investment firms closed 298 mergers and acquisitions in 2010 compared to 152 the previous year. Much of the improvement was attributed to an increase in activity in December 2010. Nationally, there were 9,833 deals in 2010 compared to 7,350 in 2009, and 8,734 in 2008.

It remains to be seen if, or how much, transaction multiples will improve in 2011 with the recent stabilization of the economy. However, business valuations performed with effective dates in late 2008 to 2010 should address the existing recessionary economic environment, especially when transactions from previous years are used for comparison purposes.

Federal Rules of Evidence Change

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Expert Witness Discovery Rules Changed on December 1, 2010

Forensic accountants and valuation experts will now enjoy greater work-product protections as a result of key changes in the Federal Rules of Civil Procedure. Draft reports and most communications between an expert and the retaining attorney are considered privileged. Over the years, opposing sides employed a variety of time-consuming, expensive strategies in the attempt to maintain confidentiality. Draft reports and attorney-expert interactions are crucial elements in developing defensible opinions of value that are consistent with case law and comprehensible to the average person. These revisions, effective December 1, 2010, do not change the responsibility of the court under Daubert. Although attorney-expert communications are no longer automatically discoverable, the court still determines what evidence will be admitted in any given case.

We recommend that appraisers retain all source documents in the job file to verify facts and data used to prepare the report; limit the number of drafts shared with the retaining attorney; and not rely on assumptions provided by the attorney unless those assumptions are disclosed in the report.

Click here for more information on these changes.