Analyzing Recorded Purchase Prices

Gordon K. Vella

PRICE ≠ VALUE

Price does not equate to value!

Price and value gap is the primary reason for the credit market and investment market instability and collapse.

Price is determined by a single purchaser and/or investor while value is driven by a broader exhibition of transactions…or not?!

SUB-PRIME CRISIS

NOT ONLY the home buyers who failed to keep their end of the mortgage bargain…

NOT ONLY the physicists/mathematicians concocting inexplicable formulas on which to base credit swaps and derivatives…

NOT ONLY the CEOs and analysts who were not looking when the vague financial instruments were bought and sold…

NOT ONLY the 2000 Congress and President who legalized gambling on Wall Street…the same law that was established after the Great Depression…

Does any Single Source Bear the Blame?

ISSUES THAT IMPACT PRICE

Cash put on the table to off-set lease up cost for the sake of mitigating risk for the buyer

1031 transaction

Owner/user may have purchased property at price reflecting: “Investment Value” “Value in Use”

Commercial Transactions

ISSUES THAT IMPACT PRICE

Clear variances with market are not generally exhibited

What is value when: Broker pushes price for sake of commission Appraiser pushes value to make deal work Lender executes mortgage with borrow at 0% down

Fraudulent value…What is value?

Residential Properties

TYPES OF VALUES

ARV

Business value

Disposition value

Fair value for purchase price allocation

Going-concern value

Insurable value

Investment value

Liquidation value

Which Value is Recorded? Prospective value

Retrospective value

Transaction value

Hypothetical value

Value as is

Value in use

Market value

AGGREGATE OF RETAIL VALUES

ARV or Aggregate of Retail Values Derived within sell out analysis of a subdivision and/or

condo valuation ARV is not market value Many lenders and developers (mistakenly) consider ARV

as figure on which to base their loan or measure their profit

Present value of net income stream should be taken into account – should account for all cost including holding cost and risk

Net cash flow over the sell out period is then discounted at appropriate yield rate (including profit)

“As is Market Value” is relative to a single buyer/investor.

A Definition

GOING CONCERN VALUE

Going Concern Value Often misinterpreted as market value of the

real estate (hotels/theatres/senior living properties/golf courses)

Includes values of real estate, FF&E or M&E and business values Real estate value is often exaggerated for lack of an

appropriate allocation

A Clarification

PURCHASE PRICE ALLOCATION

Purchase Price Allocation To weight the poor performing properties in a

portfolio transaction for future collateralization

To apportion a portfolio acquisition price to individual properties based on market forces

To allocate a predetermined purchase price between the tangible and intangible assets being acquired for financial reporting purposes

Another Clarification

A CLEAR VIEW

Current economic collapse due to a price/value gap

Various values may reflect anything but market value

Recorded purchase price may not indicate market value

Understanding the various definitions of value and being in tune with the market bridges the chasm between price and value

Understanding What Is Recorded

Analyzing Recorded Purchase Prices

Gordon K. Vella