Valuation Viewpoint Volume 20, Number 2 September 2015 — Summary This issue of Valuation Viewpoint covers Waterfront Residential Market, business valuation insights from Joshua Johnson, Market Trends and Indicators, trends in discounts, Market Transaction: Northland Plaza, and Market Transaction: Small Rural Radio Stations. Waterfront Residential Market marches toward full recovery by Katherine A. Ostlund. Waterfront properties in the Twin Cities market are highly sought after because of limited supply and attractive amenities. Lakefront values have appreciated steadily and are approaching pre-downturn levels. Appraisals of lakefront residential property rely on cost and sales comparison approaches, with land generally measured in price per front foot. Key waterfront appraisal factors include quantity of frontage, quality of frontage, parcel size to frontage ratio, and quality of existing improvements. Based on 2015 year-to-date NorthstarMLS data, average sale price per square foot for lakefront residential was $213.51 versus $175.87 for non-lakefront residential in the seven-county Twin Cities metro. Prime Lake Minnetonka sales set the upper bracket of market activity and indicate the lakeshore market is nearing full recovery. Shenehon’s Joshua Johnson offers business valuation insights and guidance. He emphasizes the importance of CPA-prepared financial statements or reviewed statements when buying, selling, or appraising a business, and recommends cleaning up company financial statements three to four years prior to a sale. He explains common valuation designations including ASA, CBA, CVA, CPA/ABV, and CFA, and suggests clients prioritize valuators who perform valuation work full time. Are there any prevalent trends in discounts? It depends. Joshua R. Johnson analyzes discounts for lack of control (DLOC) and lack of marketability (DLOM). For operating companies, implied DLOC is derived from control premiums in Mergerstat Review and has reverted toward historical averages since the recession. Marketability discounts for operating companies are influenced by revenue, earnings, and earnings growth using Management Planning Studies. Typical DLOM ranges vary by company size and metrics. Two items that strongly influence discounts for operating companies are the existence of shareholder/member/partner control agreements and the level of distributions to owners. Holding companies show different behavior. Closed-end fund discounts to net asset value are used as market proxies for lack of control. Those discounts ranged from 5% to 19% over recent years and have tightened to roughly 10% to 14% post-recession. Marketability discounts for holding companies depend on the extent of lack of control, quality of the underlying asset, and the terms of shareholder agreements, with typical DLOM ranging from about 10% to 25%. Market Trends and Indicators. Economic and real estate indicators include Treasury yields, bond rates, commercial mortgage ranges, institutional and non-institutional real estate returns, consumer confidence at 101.5, productivity and unemployment trends, and Midwest new housing starts. P/E ratio data now uses Pratt’s Stats. Market Transaction: Real Estate. Northland Plaza, Bloomington, MN sold August 13, 2015 for $52.5 million, $176.07 per square foot. The 15-story Class A office tower was 94.1 percent leased and had Energy Star and LEED recognition. MetLife purchased the building in 2005 for $43 million, implying modest appreciation. Market Transaction: Business. Small rural radio station sale proximate to May 2015 closed for $197,500, representing 153% of revenues and 4.2 times adjusted EBIT. The station lacked backup generator and backup broadcast capability, increasing operating risk and compressing valuation multiples relative to typical rural station benchmarks. Conclusion. Discounts for lack of control and lack of marketability vary by company type and are driven primarily by the agreements in place and the quality of underlying assets. Operating company discounts generally exceed holding company discounts, and market conditions influence, but do not solely determine, discount levels. For questions on discounts or valuation services, contact Shenehon Company at 612-333-6533. Contributors include William Herber, Cathy Hickman, Joshua Johnson, Katherine Ostlund, Robert Strachota, and Scot Torkelson. Copyright 2015 Valuation Viewpoint.
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