In today’s blog post, I have interviewed Mr. Stephen D. Roach, MAI, SRA, AI-GRS, about the hot topic of intangible assets. Mr. Roach is co-owner of Jones, Roach, and Caringella, Inc., in the San Diego area. His accomplishments within the appraisal industry are too numerous to list but include national and international teaching, editing books that have become standard references within the appraisal community including The Appraisal of Real Estate and The Dictionary of Real Estate Appraisal, and also service on numerous boards and committees. A full bio is available here.
In the most recent issue of the Appraisal Journal, Mr. Roach brought his intellectual prowess to bear, providing an irrefutable argument that excess rents constitute intangible assets. Prior to the interview, Mr. Roach insisted that I call him ‘Steve’. Here’s what Steve had to say:
Russell: Steve, you recently published an article in the Appraisal Journal. Entitled “Is Excess Rent Intangible”. What prompted you to write the article?
Steve: Early in 2015, Jim Amorin and Leslie Sellers asked me if I was interested in joining with them to do a presentation at the 2015 AI Connect in Dallas. The title of the presentation was “Intangible Value – Unfinished Business in Need of Agreement”, and the intent was to examine several aspects the real estate / intangible asset issue. Jim Amorin discussed the issues in terms of regional malls and hotels, Leslie Sellers discussed asset allocation in real estate centric going concerns, and I looked in depth at the issue of excess rent as an intangible.
While I have always believed that excess rent is intangible, I decided to challenge my conclusion and look at the issue with fresh eyes. After I did that research and analysis, and did the presentation in Dallas, I decided that more depth was needed on the issue and that presentation of the issue to a wider audience was appropriate. That’s what prompted me to write the article. I give thanks and huge props to Jim and Leslie for asking me to join them and to look at the issue.
Russell: For those readers who don’t know, Jim Amorin and Leslie Sellers are both recent past Presidents of the Appraisal Institute, the largest and most prestigious appraisal organization in the world. I assume they’ve read and agree with the argument you presented in the article?
Steve: I would first remind you and your readers of the disclaimer contained in every issue of The Appraisal Journal that published materials represent the opinions and views of the author and are not approved or endorsed as policy by the Appraisal Institute. Having said that, both Jim and Leslie were very helpful in evolving the presentation at AI Connect. Both gentlemen read draft versions of the article and made helpful suggestions that I incorporated, and both are in agreement with the conclusions expressed.
Russell: Thanks for the reminder, Steve. With that caveat in mind, there seems to be a general consensus among those who many would consider to be intellectual heavyweights in the industry, that excess rents do indeed constitute an intangible asset. Yet the market has been slow to recognize this. Why is that?
Steve: Honestly – I don’t know. I have yet to hear a cogent argument that excess rent is anything other than an intangible asset. I suspect that there may be several things at work. First, it appears to me that several folks who were critical of my argument during and after the presentation in Dallas were actually conflating the issue of whether the contract rent in any given situation (such as a build-to-suit drug store lease) is actually market rent or includes both market and excess rent with the question of IF any part is excess rent, whether it is an intangible asset or real property.
I appreciate this opportunity to be clear – my article does not take any position on whether there is or is not excess rent for any particular property. I merely attempted to get some clarity, and some agreement, that IF there is excess rent, it is intangible. Second, as I noted in the article, there are potentially significant ramifications in the arenas of secured real estate lending, property tax valuation, purchase price allocations, allocations to support depreciation/amortization deductions, and potentially other areas. Whether folks just haven’t thought all the way through these issues, or they just don’t like the answer, I don’t know.
Russell: Steve, I appreciate the intellectual honesty of your article and the strides you’ve made in bringing transparency to the appraisal process. You’ve been gracious enough to grant me this interview and I know you’re busy. So I’ll finish with one more question. In your last answer, you mentioned several important ramifications. Two of these issues, in particular, are politically charged; lending and valuation for tax purposes. Educating lenders that intangible assets can serve as collateral might resolve one of these issues. But what about taxes?
Steve: I appreciate the thought that went into the great questions you have asked – thanks. While I understand that some of the issues presented in the article may be inconsistent with what some folks believe, or want to believe, my intent was “pure” – I just wanted to get some clarity on the excess rent issue; what appraisers and other practitioners do with the information is something that they’ll have to decide for themselves. Property tax assessment is probably the most complex issue that I discussed (and perhaps the most “political”, to use your word).
Keep in mind, however, that the issue is complicated immensely because the United States uses over 50 different sets of property tax rules and regulations. Contrast this with the Federally Regulated secured lending arena, where there are centralized sets of rules and centralized oversight. In the property tax world, the states are free to impose virtually whatever rules and valuation processes they wish, so long as they meet the constitutional requirement of equal protection.
For this reason, I think it is unsurprising that the issues of valuing the fee simple vs. the leased fee and how to treat excess rent are dealt with very differently in the various states, and it explains why the case law reaches different findings. (Shameless plug – Leslie Sellers and I will be discussing some related issues at the 2016 AI Connect in a presentation titled “Property Rights are Evolving – or Are They?”) In the article, I intentionally searched for and presented property tax case law from various jurisdictions that reached different conclusions about what to do with lease income, whether market rent or excess rent.
However, it’s my opinion that the fact that assessors and courts in different jurisdictions do things in different ways and come to different conclusions speaks not to the nature of the underlying issue, but to the differences and interpretations of the rules and regulations that are applicable in the various states. While I have no quarrel with any given state that may decide to value property as if free of any lease at all or as subject to whatever lease is in place, that decision merely defines what should be appraised, but it surely doesn’t in and of itself redefine the nature of what’s being appraised.