Archive for category: Hot Topic

The International Society of Business Appraisers (ISBA) has recognized Shenehon Company for its excellence and adherence to professional performance standards. Shenehon was recently awarded ISBA’s Gold Seal of Trust in Business Valuation.

In presenting the award, the ISBA said, “Shenehon’s Business Valuation Unit is an outstanding example of a world-class business valuation firm.” Shenehon is the only valuation organization in Minnesota to be awarded this honor and is the only recipient in the United States that has a multi-functional practice, handling both business valuations and commercial real estate appraisals.

By: Phillip J. Butler

Shenehon Company has recently noticed a pattern where condemning authorities such as the Minnesota Department of Transportation, cities, and counties, establish temporary construction easements and want to compensate property owners in a way that is questionable and unreasonable.

Private land taken for a public project is often acquired in one of two formats: permanent or temporary. The most common temporary easement is a temporary construction easement. Since it is difficult to accurately determine construction timelines, condemning authorities place temporary easements for a longer time period than they actually need to complete construction. For example, a city might need a construction easement for nine months. Since it is difficult to accurately estimate construction timelines, the city might impose the right to use the nine months at any point within 48 months. Lately we are seeing cities like the one in our example offer to compensate property owners only for the nine months of use rather than the 48 months of right to the land. The city claims that since it will use the land for only nine months it must only compensate the property owner for that time.

Some may question this logic. One might argue that since that the city is imposing the right to use the land for 48 months it should compensate for the full 48-month period. Customary leasing practice in the marketplace is for a tenant to pay for the right to occupy a space for a period of time. If the tenant does not actually use the space during the time period stated in the lease, the tenant cannot reduce the rent payment due the landlord.

Using this customary approach to land use and leasing, we assert that it is improper for the city to impose rights for land use during a specified time period and then reduce its just compensation payments based on the fact that it did not actually use the land.

We appreciate the fact that condemning authorities want to save taxpayer dollars. But the approach we just described is a questionable method to trim costs. We maintain that just compensation is based on rights to land use and not actual use.

By: Chris Olson, MBA

Morningstar discontinued the publishing of its annual Ibbotson SBBI Valuation Yearbook at the end of 2013, so now what should valuation professionals use as a replacement?

Currently, there are two leading sources to replace the outgoing SBBI data source. The first option is the Valuation Handbook by Duff & Phelps; this is a new offering and is intended to be a comparable replacement for the Ibbotson SBBI Valuation Yearbook. The second option is the Implied Private Company Pricing Line (IPCPL) by Bob Dohmeyer, ASA; Pete Butler, CFA, ASA; and Rod Burkert, CPA/ABV, CVA.

The Valuation Handbook by Duff & Phelps offers valuation professionals source information in a similar format as the discontinued Ibbotson SBBI Valuation Yearbook, so the transition should be fairly seamless. Valuation professionals will still be able to have a break out of each risk component within the build-up method to arrive at the weighted cost of capital (WACC). However, it is still too soon to definitively comment on this source.

The other option is the Implied Private Company Pricing Line, which was discussed in the September 2013 BVR Business Valuation Update newsletter (http://bvresources.com/freedownloads/BVU_0913_PricingLine.pdf).

Using the Implied Private Company Pricing Line is an innovative way to assist valuation professionals in calculating a company’s WACC using the calculator (http://biz-app-solutions.com/IPCPL.asp), and all that is required is the company’s revenue. For example, the cost of capital for a company with $100,000 in revenue is 23.73%, while the cost of capital for a company with $100 million in revenue is 18.48%, assuming a 0% tax rate for both. The cost of capital difference between the two examples is 5.25%.

Based on what we have seen thus far, it appears that the Duff & Phelps data would be most likely used in a given valuation engagement, given that the IPCPL is only a recent development, and therefore not fully vetted.

By: Chris Stockness

In September 2013, Jones Lang LaSalle released a report on the most expensive streets for office space. Sand Hill Road, in Menlo Park, California, took top honors with an average full service rental rate of $110.76/sf. Nicollet Mall in Minneapolis, Minnesota, was 25th on the list, with an average full service rent of $36.60/sf. Of interest: Nicollet Mall moved up four spots from its 2011 ranking of 29th ($29.27/sf.). In terms of the Midwest, Minneapolis ranked 2nd to Chicago’s Wacker Drive, which was 20th on the list with an average full service rent of $36.62/sf. Detroit came in right behind Minneapolis at 26th ($30.00/sf.). Milwaukee’s Wisconsin Avenue ranked 29th ($28.90/sf.) and St. Louis’s Forsythe Boulevard at 30th ($28.06-sf.). America’s top 10 most expensive streets are all in coastal states.

Rank	Street	Market	2013 Average Full Service Rent on Street ($ PSF)
1	Sand Hill Road	Peninsula	$110.76
2	Fifth Avenue	New York	$102.02
3	University Avenue	Silicon Valley	$94.92
4	Greenwich Avenue	Fairfield County	$92.96
5	Pennsylvania Avenue	Washington, D.C.	$75.83
6	California Street	San Francisco	$62.10
7	Boylston Street	Boston	$60.20
8	Avenue of the Stars	Los Angeles	$60.12
9	Royal Palm Way	West Palm Beach	$58.52
10	Newport Center Drive	Orange County	$50.06
11	El Camino Real	San Diego	$43.32
12	Congress Avenue	Austin	$42.04
13	Arch Street	Philadelphia	$40.15
14	Brickell Avenue	Miami	$39.09
15	Union Street	Seattle	$38.92
16	Louisiana Street	Houston	$38.82
17	McKinney Avenue	Dallas	$38.55
18	NW Couch Street	Portland	$37.00
19	East Las Olas Boulevard	Fort Lauderdale	$36.84
20	Wacker Drive	Chicago	$36.62
21	Campus Drive	New Jersey	$35.65
22	Broadway	Oakland-East Bay	$33.96
23	17th Street	Denver	$32.78
24	Capital Mall	Sacramento	$32.25
25	Nicollet Mall	Minneapolis	$30.60

While other markets have seen a range of highs and lows over the years, office rents in the Twin Cities Market and the Minneapolis Central Business District (CBD) have not appreciated significantly in the past thirty-five years. This is due mainly to the availability of development opportunities in nearby first ring suburbs. Because of easy access to major roadways, such as the Interstate 494/694 loop and Interstate 35, supply keeps up with and often outpaces demand. The Minneapolis CBD has experienced major development cycles every 10 to 15 years with the last cycle occurring around the year 2000 and the previous cycle taking place in the late 1980s. During these cycles rental rates waxed, then waned, as more space was placed on the market. As a result, rents have not changed much overall. In contrast, most of the markets at the top of the list are on the east or west coast: locations in areas that are more densely developed, with limited options for new development. Characteristics of the10 most expensive U.S. streets for office space include the following:

1. Sand Hill Road, Menlo Park, California: $111.00/sf. (-2.5%)
   Historically the most expensive area in Silicon Valley, Sand Hill Road has deep roots with the venture capital community and houses the top VC firms in the greater Bay Area.
2. Fifth Avenue, Midtown Manhattan, NYC: $102.00/sf. (+5.0)
   Consistently ranked among the most expensive shopping streets in the world, Fifth Avenue is also home to numerous hedge funds looking for top-quality space in Midtown and willing to pay more for those coveted office locations with their unparalleled amenities.
3. University Avenue, Silicon Valley, Calif.: $95.00/sf. (+14.1%)
   Located in Downtown Palo Alto, University Avenue is known for its vibrant startup community, as its proximity to Stanford University makes it an ideal location for recruiting top young talent.
4. Greenwich Avenue, Greenwich, Conn.: $93.00/sf. (+3.4%)
   Greenwich Avenue competes with the best commercial real estate, leveraging its rich history preserved through older buildings. Top-shelf retail establishments dot the historically-rich corridor, from the top of the avenue down to the transit center. Hedge fund and financial services firms occupy the majority of office space, with many top executives only steps from their homes. Premier office buildings offer close proximity to train, and command rents as high as $100/sf.
5. Pennsylvania Avenue, Washington, DC: $76.00/sf. (-5.5%) 
   Despite slower overall market conditions in recent quarters, Pennsylvania Avenue has continued to experience rent premiums. Known as “America’s Main Street,” Pennsylvania Avenue is home to many firms desiring close proximity to Washington’s two main points of power, the White House to the west and the Capitol to the east. Some of the increased growth in tenant demand in recent years has stemmed from the government affairs sector of corporate America.
6. California Street, San Francisco: $62.10/sf. (+43.9%)
   The main street of the city’s North Financial District, California Street, is known for its historic cable car routes. It is a wide street with high-priced real estate. Growth in technology and associated industries, along with limited new supply, has pushed rents up by almost half over the past two years.
7. Boylston Street, Boston: $60.20/sf. (+14.3%)
   Boylston Street runs through two of Boston’s most prestigious areas, Back Bay and the Financial District. It is home to numerous landmarks, trophy office buildings, and high-end retail, as well as some of the city’s most distinctive skyscrapers.
8. Avenue of the Stars, Los Angeles: $60.12/sf. (+1.9%)
   The main thoroughfare in highly-desirable Century City market, Avenue of the Stars is home to many prominent legal and financial service firms and talent firms, as well as the largest cluster of Class A Trophy assets on the Westside.
9. Royal Palm Way, West Palm Beach: $58.52/sf. (+0.9%)
   Royal Palm Way is dubbed “Banker’s Row” due to the concentration of wealth management and financial services firms, catering to wealthy residents on Palm Beach Island.
10. Newport Center Drive, Orange County: $50.06 p.sf. (+4.3%)
    Sitting on a bluff overlooking the Pacific Ocean, Newport Center Drive is a 1.3-mile ring that encompasses the Fashion Island retail center. World-class dining and retail amenities along with ocean view suites and access to posh residential neighborhoods make Newport Center Drive one of the most premiere places to rent office space in Southern California.

The Personal Income and Outlays report for April 2013 was recently published by the Bureau of Economic Analysis. According to the data, the year-over-year inflation rate fell to an all-time low of 1.05% based on the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices due to their volatile nature. This is the lowest annual core PCE increase ever reported; the previous low of 1.06% was reported more than fifty years ago in March 1963. Including food and energy, inflation was even lower at 0.74%.

Inflation is defined as the rate at which the general level of prices paid for goods and services rises over a period of time. Rising inflation means the cost of goods and services has increased, which leaves the consumer with less purchasing power because every dollar spent will purchase a smaller percentage of a good or service. If low inflation means smaller price increases and greater purchasing power per dollar, wouldn’t such an environment be one we should strive to maintain? Why does the Federal Reserve choose to target inflation at 2.0 percent?

While low inflation allows consumers to purchase more goods with their dollars, its effects extend far beyond the consumer’s wallet and some Federal Reserve officials are worried these conditions could spell trouble for our economy going forward.

Look for a more in-depth analysis in the Summer Issue of Valuation Viewpoint, available August, 2013.