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Case 6 – The Case of the Missing Values


Situation:

A national lumber and building supply company and client, acquired a chain of 10 centers from a regional competitor. The properties were located in one Midwestern state. Real estate taxes for the 10 centers were approx. $170,000 annually.

Problem:
The tangible assets were acquired via an asset purchase agreement. Individual sale prices were not negotiated and appraisals' were not prepared. When booking the assets the buyer utilized the considered opinion of its in-house professionals to allocate the purchase price to the acquired assets ( real property, business personal property, inventory and rolling stock). This allocation was then booked as the cost basis of the assets and recorded with the various counties. The allocated value of the real estate was 40% of the total purchase price. While the total taxable value of the centers was just over 80% of the total purchase price. The buyer and assessor's opinions of value obviously did not agree.

Solution:
On behalf of the buyer, appeals were filed on eight of the ten properties, where the assessor's opinion of value significantly exceeded the allocated purchase price. While an allocated purchase price is not necessarily good evidence of value, after explaining the circumstances of the transaction and the procedure followed to allocate the purchase price five of the tax assessors supported reductions to their County Boards of Review. Two of the three remaining appeals were contested to the Board of Review. These were favorably settled.

The last appeal proceeded to circuit court where the taxing authority vehemently objected to using the allocated purchase. It's objection was exclusively based on the relatively recent, 4 year prior, construction cost of the center. The cost of the land and construction of improvements was over two times higher than the allocated purchase price. In court, local council was able to prevail and convince the court that the recorded sale price was the best indication of value.

Results:
Based on E&A's efforts eight of the ten assessments were reduced to or within 5% of the allocated purchase price. A process that was completed within two years of the closing. The annual real estate tax liability for the 10 properties was reduced by $67,000, from $170,000 to $103,000. A 40% reduction. The individual reductions ranged from a low of 20% to a high of 61%.

There are a lot of ways to make an acquisition work.


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