COMMERCIAL REAL ESTATE DEVELOPMENT COMPANY

Appraisal Economics has completed the valuation of a New Jersey-based commercial real estate development company engaged in construction management and the development of properties for light industrial use, including warehouses, distribution centers, and light manufacturing. The company also provides property management services. We valued the Company using the discounted cash flow method of the income approach and the guideline transaction method of the market approach. A key issue was the determination of a market-based level of owners’ compensation, as the majority owner was significantly under-compensated for the value of his services rendered to the business.

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PROFITS INTEREST IN MAJOR REAL ESTATE DEVELOPMENT

Appraisal Economics Inc. has determined the fair value of a profits interest in the real estate development of one of the tallest buildings in Manhattan. When completed, the building is projected to be one of the most expensive office towers in the world. Our engagement consisted of analyzing the projected economics of the project, including construction costs, joint venture terms, rental rates and vacancies, future capitalization rates, and myriad other complexities associated with a project of such magnitude. The valuation of this complex security included traditional discounted cash flow analysis and option pricing analysis, based on the terms of the profits interest. We valued the put rights, call rights, and redemption rights inherent in the profits interest. Also included in our analysis was valuation of promote interests embedded in the development project.

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CONSTRUCTION CONGLOMERATE

Appraisal Economics has determined the fair market value of minority, non-controlling interests in various companies under common ownership engaged in construction management, construction material manufacture, and construction equipment rental in the Mid-Atlantic region. We determined the business enterprise value and the corresponding equity value of each company using the capitalization of earnings method of the income approach and the guideline transaction method of the market approach. Key issues included normalized levels of contract revenue, given the wide year-to-year fluctuations, as well as appropriate owners’ compensation for each entity, given that each of the owners rendered services in a variety of capacities to all of the companies. As part of our analysis, we made adjustments to the pro rata values of the subject interests to account for their lack of control and lack of marketability.

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FIRST AID SUPPLIES MANUFACTURER

Appraisal Economics Inc. has valued the intangible assets of a first aid supplies manufacturer that designs, produces, and distributes burn dressings and other wound care products to first responders, militaries, and providers of industrial and consumer first aid kids around the world. The company was acquired by a private equity firm. Products include burn gels, burn dressings, fire blankets, burn care blankets, antiseptic and antibacterial sprays, creams, and ointments, hydrocortisone-based anti-itch products and other related products. Appraisal Economics valued the trademarks, trade names, patents, and unpatented proprietary technology and manufacturing processes. Typically, customer-related assets are recognized and valued separate from goodwill; however, the company has elected the private company alternative under Accounting Standards Update No. 2014–18.

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GOODWILL IMPAIRMENT OF A PUBLIC COMPANY

Appraisal Economics Inc. has tested for, and determined the amount of, goodwill impairment for each reporting unit of a publicly traded company for ASC 350. We considered the market capitalization of the common equity. We also valued the preferred equity held by a private equity fund, which included a liquidation preference and a conversion feature. We performed a discounted cash flow analysis for each reporting unit and the publicly traded parent company. Once we concluded the fair value of each reporting unit, we compared each reporting unit’s fair value to its book value. For the reporting unit that we determined was impaired, we appraised and subtracted the fair value of these assets from its enterprise value. The difference is the fair value of goodwill, and the amount by which the goodwill’s fair value was less than its carrying value was the amount of goodwill impairment.

With the issuance of Accounting Standards Update 2017–04 in January 2017, as early as January 2017 and no later than 2020, “Step 2” has been eliminated and goodwill impairment will be calculated as the excess of the reporting unit’s carrying value over the reporting unit’s fair value. This eliminates the need to value all of the company’s assets as though there were a business combination on the testing date, reducing the complexity and compliance costs associated with ASC 350.

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PREMIUM PAPER COMPANY

Appraisal Economics Inc. has valued a globally recognized premium paper manufacturer. The company produces and distributes coated and uncoated paper products that are used for stationary, photo books, and high-end brochures and catalogues. The company has produced the official stationary used by several U.S. Presidents, the White House, and the Department of Defense, which awards paper certificates in conjunction with military honors including the Congressional Medal of Honor. We determined the business enterprise value of the company using the discounted cash flow method of the income approach and the guideline transaction and guideline company methods of the market approach. Then, using various quantitative methods, we determined appropriate discounts for lack of control and lack of marketability and applied these discounts to the company’s per share value. The results of our analysis were used for estate planning purposes.

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MAJOR LEAGUE SPORTS TEAM

Appraisal Economics Inc. has performed a valuation analysis of a U.S. major league sports team and its related regional sports network. As part of our analysis, we also determined the value of derivative interests in various entities that own the team and network. Our valuation included the discounted cash flow method of the income approach and elements of the market approach, including the application of market multiples. We also determined the value of preferred securities associated with the aforementioned entities, based on a full credit analysis and examination of prevailing market interest rates for similar securities. Finally, we determined appropriate minority discounts and discounts for lack of marketability.

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PREFERRED STOCK WITH EMBEDDED DERIVATIVE

Appraisal Economics Inc. has determined the value of the “embedded derivative” in convertible preferred securities issued by the operating partnership of a large publicly traded real estate investment trust (REIT). The preferred securities receive quarterly dividend payments and also contain an embedded derivative to convert into shares of the publicly traded REIT’s common stock, which is effectively a call option. We determined the fair value of the embedded derivative using binomial models and a “with and without” valuation method. We used a binomial model to determine the fair value of the aggregate preferred security and a second binomial model to determine the value of the preferred assuming that it was not convertible into common stock. The value of the embedded derivative is the difference in value indicated by the two models.

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PATENT PORTFOLIO

Appraisal Economics has valued a portfolio of patents and patent applications used to manufacture photovoltaic cells in the solar power industry. The portfolio was transferred as part of a legal settlement between two U.S.-based chemical companies that operate in China. One of the companies had developed a patented process for printing hot melt ink onto the substrate of a silicon wafer to manufacture solar cells. The other company developed similar procedures for manufacturing solar cells. Upon being made aware of the existence of the patented procedure, the second party filed a motion with the Chinese Patent Re-examination Board (CPRB) to invalidate the pre-existing patent. The CPRB rejected the request, upon which an agreement was reached to compensate the first party for patent infringement. The settlement called for valuing the patent portfolio, which was performed by Appraisal Economics.

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TRANSFER PRICING

Appraisal Economics has performed a transfer pricing analysis related to the transfer of intellectual property (IP) assets to an offshore holding company set up by a U.S.-based global media company. The transfer was part of a restructuring transaction designed to broaden the company’s product offerings of print and digital media and expand licensing opportunities for the company’s trademarks and logo. Section 482 of the Internal Revenue Code requires that royalty payments between related parties in different countries be set at arm’s length terms. This is intended to prevent opportunistically recognizing revenue, expenses, and profits in a way that results in taxable income being improperly shifted to lower-tax jurisdictions and evading U.S. taxes. The transaction was also required to comply with Section 367(d) of the Internal Revenue Code, which governs certain terms of cross-border reorganizations. Appraisal Economics performed a detailed analysis to determine the arm’s length royalties between the entities and determined the business enterprise value of each entity to support company management’s efforts to demonstrate compliance with the provisions of the relevant regulations.

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