Numbers Out of Your/Your Accountant’s Hat are not the Best Evidence of Personal Property Value (in a Real Estate Transaction).

Many commercial real estate deals include the sale of personal property at the realty, such as supplies, inventory, furniture, fixtures and equipment (“personalty”). Typically, in these deals, an allocation between the real estate and the personalty will be made. The incentive to allocate is to reduce the amount subject to transfer tax at sale (which is based solely on real estate value), and to reduce the amount of real estate taxes after the sale.

The “devil is in the details” of determining the value of the personalty. Most often, the value is either guesstimated by the owner (i.e., pulled out of the proverbial hat) or valued by the buyer’s or seller’s accountant (i.e., pulled out of the accountant’s hat). While there are many good accountants, with good financial skills/tools, the Ohio Supreme Court recently held (in the case of Hilliard City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 2011-Ohio-2258, 2010-0389 (OHSC)) that appraisal evidence is the best evidence of personalty value (intertwined in a real estate sale).

The Court in “Hilliard” first reaffirmed the long-standing Ohio rule in valuation: that the sale price in a recent arm’s length sale between a willing seller and buyer is the true value for taxation purposes. When the sale, however, includes personalty and realty, and the owner seeks an allocation of the price in order to reduce the value of the personalty from the overall sales price, the Court explained that the owner has the burden to prove the value of the personalty.

The owner in Hilliard shared its financial statements, which statements showed a value of $800,000, out of a 3.6 million dollar hotel deal. The Board of Revision and the Board of Tax Appeals basically agreed with the value of $800,000, based upon the accountant’s estimate that the personalty, per room was $10,000/room and the hotel had eighty (80) rooms. The School Board appealed, claiming that an owner or accountant’s guestimate is not sufficient evidence of value of personalty. The Supreme Court of Ohio agreed, and stated that an appraisal from a licensed appraiser would be the best evidence of the personalty’s value. Unfortunately for the owner, the lender’s appraisal had been introduced into evidence, and that appraisal valued the personalty at $3,500/room, for a total of $280,000 (more than $500,000 less than the accountant’s guestimate).

The moral of this story? If you have a mixed real estate and personalty deal, get a licensed appraiser, and allocate based on “the appraiser’s hat vs. the accountant’s”.