Power Plant Appraisals Under Deregulation

Power Plant Appraisals Under Deregulation

Deregulation has made the electric supply industry more competitive in a number of states. While not every state is deregulated, Congress and the Federal Energy Regulatory Commission (FERC) have paved the way for a more open marketplace and an increase in competition among electricity producers.

The changes allowed each segment within the industry to be priced separately, preventing plant and transmission owners from offering preferential treatment to their own plants. This caused many public utility companies to divest their plants into separate, unregulated companies, while retaining their transmission and distribution activities. It also resulted in a greater focus on competition and income, while making it more difficult for power producing plants to generate profits. Now, power generating facilities are seeking power plant valuations to determine the fair market value of their property within a changing industry.

Several approaches are used for power plant valuations—most notably the cost approach, income approach, and the comparable sales approach—and the method best suited for a generator depends on whether their market is regulated or deregulated, although deregulation has impacted how all of these valuations are conducted.

The income approach assumes that the property is worth the value of the income stream it generates, and deregulation has shifted this technique to be based on a projection of what a facility will earn based on future market prices. The cost approach assumes that an investor will only pay what it would cost to build a substitute plant with equivalent assets, taking depreciation into consideration. In a regulated market, power plant developers are guaranteed a low-risk return that matches their cost to build. Deregulation means that returns are no longer guaranteed and bankruptcy is possible, but it also makes higher returns a possibility, thus altering the way the cost approach is handled. A comparable sales approach examines the market sales prices of comparable power generating facilities.

Deregulated markets have created active demand for power plants sold separately from transmission and distribution assets, meaning that a wealth of market data is available to accommodate sales comparisons. Deregulation and increased competition has brought about changes in all three of these methodologies, making it crucial for companies to reassess their current worth.

Whether you’re dealing with solar, wind, coal, waste to energy, or other types of power generation facilities, a valuation should include generation and transmission equipment, land, buildings, intangible assets, and any other assets tied to such operations. A more deregulated industry has made appraisals both more important to obtain, as well as more difficult to execute.

Working with an industry expert such as Appraisal Economics provides you with information that withstands the scrutiny of financial institutions, government agencies, and the courts. Whether you need to buy or sell assets, improve your accounting and property tax filings, file an insurance claim, or strengthen your strategic plan, an accurate and defensible power plant appraisal is an invaluable resource.

Common Misconceptions About Intellectual Property Law

Common Misconceptions About Intellectual Property Law

Intellectual property laws are complex, and these intricacies often lead to confusion for individuals and businesses. It behooves companies to understand intellectual property (IP) laws so they can properly protect their own IP, and understand their rights when it comes to using or referencing the IP of others.

Do not confuse copyrights and trademarks

Trademarks are used to differentiate a company’s products or services. Trademarks might protect a logo, name, phrase, design, or other branding element. A copyright is legal protection for an original work. Such an authored work may include an artistic product such as a song, a photograph, or a novel. It could also include computer software or architecture. It does not include ideas or methods of operation. Copyright holders can pursue claims at their discretion, and many owners choose not to enforce copyrights since this choice does not weaken the copyright itself (think about fan fiction or tribute bands). However, if someone else attempts to claim ownership over the copyright, it is imperative to have the copyright established so that such false claims can be corrected. Conversely, trademark owners must enforce their trademarks or risk losing them completely and diluting the value of a product or service.

Businesses do not automatically own IP

Businesses often falsely believe that they automatically own the IP created by any employee or contractor they hire. Unless a company’s contract explicitly states that it owns full rights to these developments, it may instead find that it has limited or no rights at all to such works. Corporations should undertake a thorough contract review immediately to guarantee full rights to the intellectual property it’s developing.

Protect your IP globally

Patents, which are sought to protect unique inventions, are one example of a safeguard that does not automatically equate to worldwide protection. Obtaining a patent from the US Patent Office only protects that patent within the United States. If a company is conducting business abroad, it should file for patents in each country in which it plans to operate. Additionally, laws vary around the world, so a company must comply with each individual country’s unique laws.

Today, IP and intangible assets comprise the lion’s share of a company’s value and promise. Therefore, it is never been more crucial to establish an intellectual property strategy, and enforce it to the fullest. In a competitive marketplace, these protections can hold a business’s future in the balance. In the US, we operate on a “first to file” system rather than a “first to invent,” meaning that protection is given to those who seek it quickly. In the current business climate, there is little room for error on this, and a smart and effective strategy should be top of mind for every business leader.

Misconceptions about IP law are everywhere and too abundant to cover comprehensively in a blog post. Engage a trusted IP consultant to help educate your business on the many intricacies of the law and dispel the myths that have crippled scores of great companies. Defending a business’s IP carves out its competitive edge, enables sustainable growth, boosts profitability, and drives higher valuations for the company. A sound strategy makes for a sound future.

Weighing the Pros and Cons of an 83(b) Election

Weighing the Pros and Cons of an 83(b) Election

Filing a 83(b) election tax form is beneficial for taxpayers that expect the value of certain stocks and securities to increase. If this step is taken and performed properly, employees and startup founders can pay taxes on the total fair market value of restricted stock at the time of granting. Electing to pay taxes when securities are granted, as opposed to when they vest, negates the need to pay taxes on “phantom income” each year. Phantom income can be triggered when the value of a company increases, not simply by exercising options or selling stock. Therefore, if, for example, you own stock in a startup that grows considerably, failing to file a 83(b) election could cost you major money. And if the securities are illiquid, you may owe taxes that are difficult to cover.  

An 83(b) ensures that when the shares are ultimately sold, more of the gain is taxed at lower rates, increasing your after-tax proceeds. Usually, in the event that the securities appreciate, an 83(b) election results in lower taxes paid out overall. But compliance with 83(b) requires taxpayers to assess the fair market value at the time of the grant. This value drives what taxes are assessed.

The best place for taxpayers to begin is to seek an appraisal of the fair market value of their common and restricted stocks, options, and other investment securities. This will determine whether or not an 83(b) election is beneficial. If it is, the appraisal can support their 83(b) filing. It is important to note that an 83(b) election must be made within 30 days of the date the securities are granted. This prevents taxpayers from waiting until the appreciation has already occurred before electing the tax benefit.

If the stock value decreases, an 83(b) election cannot be reversed. Choosing such a tax strategy when the value of a company consistently declines means that taxpayers would have overpaid in taxes by choosing to prepay on a higher equity valuation. Another scenario where an 83(b) election would be a disadvantage is if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that were never received.

In essence, the cost of failing to file a 83(b) when stocks increase in value can be devastating. Likewise, choosing to file when stock values decrease can also prove detrimental. That is why an appraisal is so important. Independent valuations help taxpayers make the best, most informed decision possible, and ensure that the IRS has the supporting evidence necessary to honor 83(b) elections when applicable. Appraisals help taxpayers weigh the risks and rewards of 83(b), eliminating faulty assumptions and blind spots from the equation.

Recognize These Three Holiday Classics? We Helped Value Them

Recognize These Three Holiday Classics? We Helped Value Them

Nothing ushers in the holiday season quite like holiday music, and it is especially exciting to hear each year’s remakes. A song like The Little Drummer Boy, for example, was originally written in 1941 by Katherine Kennicott Davis and first recorded in 1951 by the Trapp Family Singers. Since that time, there have been over 220 versions recorded in seven different languages. A handful of the artists that have recorded their own versions of the song include Johnny Cash, Joan Baez, Diana Ross, The Jackson 5, Ray Charles, and even Alicia Keys.

Think also of the other classics, like Rudolph the Red-Nosed Reindeer and Frosty the Snowman. This is precisely why copyright valuations are so important—and it was our firm that had the opportunity to value these three familiar melodies. Without a copyright valuation, the creators of these classics would have missed out on a staggering opportunity.

Copyrights protect intellectual property (IP) that might include original literary, musical, dramatic, or other artistic works. Copyright protection grants exclusive ownership rights, safeguarding the work and ensuring that if someone wants to reproduce, perform, or use a work in any form, the copyright owners are able to approve or deny such requests and, in the event that access to the work is granted, copyright owners are paid appropriately. This is known as a royalty, and whether it is in the event of a holiday song remake or a film adaptation of a novel, these can prove very lucrative for the original artist. Likewise, copyright infringement is punishable by law and therefore protects the artist against theft or unapproved uses of their work.

Copyrighting relies on an appraisal process to ensure accurate and fair copyright valuations. By taking into account historical and projected financial data, as well as market-based information on sales, licensing transactions, royalty rates, and other data for comparable copyrights and underlying assets, artists can ensure that they are paid fairly for their work. A copyright valuation uses projected cash flows and valuation models to determine the fair market value of the copyrights, ensuring that the appraisal is defensible and that copyright owners have all the necessary information on hand should the need to sue for damages arise.

Songs generate income each time they are played on the radio, streamed on a device, or used in a commercial, TV show, or movie. They also generate income every time they are covered by other artists. An iconic song can generate impressive revenue streams for decades to come, well beyond the life of the author. It pays to ensure your intellectual property is adequately protected by seeking a copyright valuation.

Don’t Fight a Property Tax Appeal Without an Equipment Appraisal

Don’t Fight a Property Tax Appeal Without an Equipment Appraisal

Property tax assessments are not written in stone. This is good news for businesses that face escalated property taxes. Business owners can and should fight unreasonable increases, but not before arming themselves with an equipment appraisal. Equipment appraisals serve as documented proof of what your equipment is actually worth, and ensure that should you appeal a property tax assessment, you have the ammunition to win.

Tax assessors are far from infallible. They are expected to value a wide range of entities, from land to vehicles, properties, tools, industrial equipment, and more. Because they are operating across such a broad range of valuations, they are especially susceptible to errors. In fact, the National Taxpayers Union estimates that between 30-60 percent of all property is over-assessed, making it paramount for you to review assessments carefully and verify supporting figures. It is also worth noting that assessors often face pressure to raise taxes, thereby increasing the availability of government funds that enable their own work. In short: viewing your property tax bill with a healthy skepticism can serve you well.

That being said, solicit input from an independent, certified equipment appraiser prior to your property tax appeal. Assessors view data compiled by outside consultants as more trustworthy than that which is provided by business management or equipment dealerships, both of which have a stake in the valuations. Third party appraisals are unbiased and defensible. Appraisers work with similar equipment on a regular basis and are trained in methodologies that hold up to scrutiny. Additionally, independent appraisers are able to take specific factors into account, such as the equipment condition, utility, remaining useful life, and can also adjust those factors by considering market conditions, economic fluctuations, and industry trends.

The valuation analysis in an equipment appraisal needs to tell a concise and compelling story. That narrative often includes what information was collected, how that process was executed, sources for market data, industry history, and industry forecasts, as well as how and why the calculations were performed. Supporting documentation can be extensive, but a trained professional will know exactly how to present the necessary information.

While many tax assessors base their calculations on estimations and opinions, the burden of proof is not on them. It is on you. And until those valuations are countered with solid documentation stating the contrary, you are stuck with the bill.

A comprehensive and well-researched equipment appraisal allows you to fight fire with facts. Appraisal reports prepared by independent, certified professionals stand up to the highest level of scrutiny and ensure that you pay only what you owe.

Avoid an IRS Audit When Gifting Family Limited Partnership Interests

Avoid an IRS Audit When Gifting Family Limited Partnership Interests

In recent years, the IRS has increased its auditing activity. This trend will persist as the government continues to target families it believes are abusing the use of discounts. One of the most beneficial ways to curb wealth transfer taxes is to establish a family limited partnership (FLP). However, structuring and managing a FLP is a complex undertaking, and individuals who wish to transfer wealth to younger family members risk making critical mistakes that could result in audits, penalties, and higher taxes. Consulting with certified appraisers prior to gifting allows you to decrease the cost of wealth transfer without inadvertently triggering red flags.

Transfer taxes can be staggering. There are estate and gift taxes, as well as a generation-skipping transfer tax imposed on gifts to grandchildren and others. A FLP is often used in concert with a comprehensive strategy for gifting non-controlling interests, to minimize these setbacks. A FLP is an estate planning strategy that allows you (as the general partner) to give your assets away to your heirs. The heirs don’t own the assets outright, making them less valuable from a tax perspective. The FLP may contain real estate, a family business, or securities. You retain a small interest as general partner, and the remainder of the assets are transferred, all at once or incrementally, as limited partnership interests to heirs.

FLPs are beneficial because creditors cannot easily penetrate the partnership to seize assets, and, from an estate tax perspective, general partners reduce the value of included assets. For people with sizeable estates, significant private business interests, or real estate that they do not plan to sell, FLPs have become a popular estate planning tactic, more so than conventional trusts, which force donors to forego ownership of their assets. But FLPs are complex and require expert assistance to avoid undo IRS scrutiny. The first, and most crucial, step is to obtain valuations of the underlying assets.

In order for assets to be appropriately discounted through the use of a FLP, their fair market value must first be determined. That’s why it is crucial to engage a valuation professional at the outset of the process. Once those numbers are established, a discount analysis is performed to assess the value of the interests being transferred. Since limited partners exercise no control over partnership assets and the marketability of the assets is limited, the value of the partnership interests is discounted for tax purposes. If, however, a valuation expert is not involved early, a FLP is more likely to be audited, at which time an expert will need to be hired anyway, and the involvement of the IRS will cause the valuation expert’s role to become much more extensive (and costly) than would have been necessary originally. Not to mention potential fines and unforeseen adjustments to your tax liability.

The complexity of managing FLPs goes beyond valuation. The partnership must also follow a number of annual record-keeping regulations, and take steps to avoid classification as an investment company, in which case appreciated assets would be subject to increased income taxes. However, most partnerships can sidestep these difficulties through thoughtful planning and consultation with knowledgeable tax and legal advisors.

FLPs can provide significant transfer tax savings, allow the donor to retain control over the assets, and also enable them to gift a greater amount of partnership interests to a younger generation. If you’re considering a FLP as part of your gifting strategy, be sure to keep the IRS at bay by properly valuing your assets. A reliable and comprehensive valuation is the cornerstone to all successful FLPs.

409A Deferred Compensation Compliance

409A Deferred Compensation Compliance

Compensation has, in many cases, moved beyond annual salaries. Most companies offer a range of deferred compensation options in addition to salary. These options might include cash bonuses, stock options, or even complex stock-based compensation awards that include a range of derivative securities. Such payment methods enable employees to negotiate more lucrative compensation packages while deferring certain taxes. However, section 409A of the tax code restricts deferred income, and companies must take appropriate steps to ensure that when granting deferred compensation, such as stock options, where awards are earned over time, they’re compliant with Section 409A of the Tax Code.

For the past decade, the IRS has leveled increased scrutiny and hefty fines at employers and employees that have failed to properly value their deferred compensation arrangements in accordance with the provisions in 409A. In order to avoid being subject to 409A, employers planning to issue incentives such as stock options and stock appreciation rights (SARs), need to demonstrate that this compensation is issued “at the money.” This means that the strike price, or the price at which employees can buy equity in the company, is equal to the fair market value of the underlying shares at the time they are granted. Incentive compensation structured this way is in compliance with 409A.

Typically, when companies fail to comply with 409A, the breach isn’t intentional. Compliance with 409A is especially tricky for privately held companies and startups that would like to offer stock options to employees. These cases require a 409A valuation. The valuation provides an appraisal of the fair market value of your company’s common stock. While it’s easy to see the daily stock price for public companies, offering private company stock necessitates an independent valuation to determine how much your company’s stock is worth. A 409A valuation determines your strike price, so that this figure is always set at or above market value, satisfying the IRS.

For private companies, a 409A valuation is required by law, and must be completed every 12 months, or possibly more frequently if you’re fundraising. While it’s possible for companies to handle the valuation internally, this is rarely the best path forward. Hiring an independent firm to complete your valuation is the best bet because it’s the only option that offers safe harbor protection. This protection ensures that the burden of proof would be on the IRS, not on you, in the event of an audit.

Non-compliance with 409A can have considerable consequences for your company and your employees. Undervaluing stock options can result in major IRS penalties, as well as lost compensation. Any option holder in violation of 409A will need to pay taxes (including interest) in addition to a 20 percent federal penalty, as well as applicable state and tax underpayment penalties. This is not a recipe for happy employees, nor is it financially viable for employers.

Valuations protect your company and your staff from undo financial consequences. Obtaining regular, defensible valuations is a necessary step for all private companies that wish to incentivize employees through deferred compensation packages.

Navigating Section 409A can prove perilous to companies that overlook this requirement. Thankfully, independent valuation experts that are skilled at these types of appraisals remove those risks, enabling employers to offer robust incentives to their most valued employees with confidence.

Going Green: The Impact of Energy-Efficiency on Commercial Property Valuations

Going Green: The Impact of Energy-Efficiency on Commercial Property Valuations

In 2013, the global green market was worth $260 billion and encompassed a full 20 percent of all new commercial real estate construction in the United States; experts project that by 2022, the market will have burgeoned to a worth of over $364 billion and that green buildings will become more of a norm than a novelty.

These statistics may be somewhat startling, given the predominant misconception that sustainable construction is expensive and often not worth the front-end investment it requires. In truth, energy efficiency’s value cannot be summed up in the simple math of building construction costs versus utility expenses saved; sustainability is a hallmark of top-tier corporate offices—and today, every influential player wants in.

Green construction has enjoyed widespread adoption from some of the most notable forces in business today. All Apple facilities, for example, run on 100% renewable energy, while Cisco Systems approaches sustainability with the same attention to asset design and cost-effectiveness it would give to any of its products. Modern businesses are not only looking to lessen their emissions outputs and cut down on their utility expenses, but also make a powerful statement about their environmentally-friendly culture and priorities. This widespread interest in sustainability boosts market demand for green buildings and thus provides value to those that are outfitted to be energy-efficient.

Potential tenants have good reason to seek out sustainable buildings. Energy-efficient constructions are well-known for their energy savings; according to one study from the Institute for Market Transformation, if a project decreases energy usage by 10 percent across a space that encompasses 100,000 square feet and pays $2.50 for each, the property’s net operating income can increase to over $25,000.

However, potential gains are not limited to energy savings alone. One well-respected research venture published by Greg Kats in 2003 found that companies could save as much as $55 per square foot in “hidden” costs due to improvements in ventilation, lighting, and environment. Sustainable companies often pay less in unemployment insurance and medical costs because employees are happier and take less sick days when working in healthier environments.

That said, demand and productivity gains are not the only factors at work. Certified green buildings are well-known to outperform their conventional peers; one 2012 McGraw Hill Construction study found that sustainable renovations increased building value by 10.9 percent for new construction and 6.8 percent for existing projects. Accredited sustainable structures have also been found to enjoy more instances of lease renewal, decreased rates of tenant rent concessions, significantly higher levels of tenant satisfaction, and even increased occupancy. This means that sustainable properties often fare better during real estate valuations and offer more potential for profit to their owners than conventional constructions tend to; some studies have indicated that an owner’s return on investment can leap as much as 19 percent on existing projects and by nearly 10 percent for new constructions.

This potential for improved value comes with a caveat: buildings with a few sustainable features do not have the market value that certified green properties do. If investors intend to accrue the most benefit from incorporating greater sustainability into their buildings, they must formally submit their properties for third-party consideration and receive a sustainability rating from an accredited organization. Achieving a rank is an often-daunting process that poses an additional financial cost on top of existing construction expenses.

For some property owners, the time and financial investment might not be worth the potential gain. Certified or not, having green features allows investors to appeal to common demand, boost their property above competitors’ listings, and raise rents to reflect the space’s increased value. However, so-called “brown” buildings with a few “green” characteristics do not have the market value that certified buildings hold; formally-accredited properties have been found to have 4 to 5 percent higher lease rates than their informally-sustainable competitors.

Regardless of whether a building is certified or not, however, there can be no doubt that incorporating energy-efficient systems and structures will improve the value of a property, especially given the pro-sustainability preferences in the commercial market. As such, even small renovations are well-worth a property developer’s consideration when it comes to boosting asset value.

The Value of Women Leaders in Big Business

The Value of Women Leaders in Big Business

The research is clear. Gender diverse corporations are more profitable than companies comprised predominantly of men. The percentage of women in corporate leadership positions can directly impact a business’ bottom line, making it more valuable to the market. Equality is not just about fairness anymore, it is about yielding better business results.

A recent global study conducted by the Peterson Institute for International Economics, which surveyed 21,980 global, publicly traded firms from 91 different countries, found that if women were to participate more fully in corporate leadership, the economic impact could be profound. Having at least 30 percent of women comprising the C-suite (CEOs, board members, and other C-level executives) adds 6 percent to net profit margins. Marcus Noland, director of studies at Peterson says, “The evidence of women in the C-suite is robust: no matter how we torture the data we get the same result: women in the C-suite are associated with higher profitability.”

And that is only one of the recent studies completed on the topic. Catalyst research shows that companies with a higher percentage of women in executive roles have a 34 percent higher total return to shareholders than those that do not. Another Catalyst study found that companies with the most females outperform those with the least on return on invested capital by 26 percent. MSCI Inc. found that US companies with at least three women on the board had median gains in return on equity 11 percent higher, and earnings per share 45 percent higher, than companies with no women directors. Credit Suisse Research came to a similar conclusion about women board members. There have also been recent studies by McKinsey and Gallup that show startling links between gender diversity in leadership and higher returns on equity, operating profits, revenues, net profits, and stock prices. Several other studies link gender diversity to higher productivity, employee commitment and retention, greater innovation and creativity, and more effective talent recruitment.

And yet, progress on this remains unhurried. In 2017, on average, women accounted for just 17 percent of corporate board members and 12 percent of executive committee members in the top 50 listed G-20 companies.

Intangible assets, including employees and their accompanying talent, now drive the bulk of a company’s valuation. Given the consistency of these results across such a wide swath of current research, gender parity should be top of mind for firms looking to both optimize current performance and position themselves for higher corporate valuations in the future.

Striving for meaningful gender diversity within your company and ensuring that women are represented equally on senior management teams and in the boardroom is no longer simply the “right” thing to do—it is also the smart thing. The presence of women contributes to functional and skill diversity and establishes a non-discriminatory culture where all hard-working employees can thrive. And that is precisely the kind of culture that best attracts, retains, and makes good use of exceptional talent that drives lasting results.

Patents Pay: Fortune 500 Companies Profit from Intangible Assets

Patents Pay: Fortune 500 Companies Profit from Intangible Assets

Established companies do not thrive on tangible assets alone. To say that intangible assets play a large role in determining the overall value of a company is a gross understatement. In fact, patents, copyrights, and other intangible assets can have substantial impact on the value of a business. In today’s marketplace, it is not uncommon for real estate holdings and equipment to account for a very small piece of the overall pie.

This is a byproduct of our knowledge-based economy. To thrive in today’s post-manufacturing world, where industries have been transformed and balance sheets turned upside down, smart businesses are routinely evaluating the assets listed on their balance sheet, and unlocking the true value of their businesses by assessing intangibles. Even smarter businesses are taking that concept one step farther and ensuring that they have systems in place to continually uncover hidden innovation and intellectual property as they move forward.

Unfortunately, intangible asset valuation is a tricky area that is difficult to handle in-house. Accounting systems are not designed to provide feedback on intangibles, and given that these valuations involve greater subjectivity, a professional with a consistent and respected methodology is usually necessary. However, an understanding of your company’s intangible assets—whether they be trademarks, employees, brand loyalty, proprietary technology, copyrights, customer relationships, contracts, R&D, corporate culture, trade secrets, or something else—drives your business valuation.

That number is something that all companies should know, whether they are raising money, selling the business, attracting financing, protecting intellectual property from competitors, or simply trying to grow faster. After all, how can a company become the next industry leader without an intimate knowledge of its assets? Google doesn’t have an $800 billion market capitalization because it owns a lot of servers and furniture. Google is a powerhouse because it understands how to leverage intangible assets.

Intangible assets are what gives a company its edge and boosts its earnings. Taking steps early on to capture and increase the value of patents and intangible assets allows business owners to grow their company ahead of an exit or another corporate milestone. Profitability now hinges on a company’s ability to create, transfer, assemble, integrate, protect, and exploit knowledge assets.

Your company likely has numerous entities that contribute to your success. They may be a streamlined business process, a talented senior management team, or a stellar customer retention program. Make sure you understand where your company’s value truly lies.