Appraisal Economics has conducted a transfer pricing study and determined the arm’s length royalty rates for intellectual property licensed between U.S. and Canadian entities. We determined separate royalty rates for trademarks, patents, and unpatented proprietary technology (trade secrets). The licensee is generally allowed a tax deduction for royalties paid, and the licensor generally reports the royalties received as taxable income. It is therefore necessary for related parties to fairly apportion taxable earnings in each tax jurisdiction. We reviewed market data for fair rates of return on intellectual property, as well as internal financial data that helped quantify the economic benefits of each class of the IP portfolio. Our concluded royalty rate for each category of intellectual property was supported by independent research of third-party data and a reasonable allocation of the profit margin among licensor and licensee (referred to as a “profit split”). The results of our analysis were used for tax reporting in the United States and Canada.
Appraisal Economics has determined the fair market value of a split-dollar receivable in connection with a second-to-die joint life insurance policy. The trustees of the policy entered into a split-dollar agreement with the beneficiary of their life insurance policy. The policy was funded with a single premium payment, and the Split-Dollar Agreement would pay the beneficiary upon the realization of the policy (the “Receivable”). The first step in valuing the Receivable was to determine the appropriate discount rate to use to calculate the present value. Next, we considered the lack of an active trading market for such an instrument. Our concluded value was used for the purpose of the trustee’s gift and estate tax planning.
Employee Stock Purchase Plan (ESPP)
Appraisal Economics has determined the fair value of an employee stock purchase plan (ESPP), for financial reporting under ASC 718 for a publicly traded real estate investment trust (REIT). The purchase price under the Type B plan was established as a 15 percent discount to the lesser of the stock’s publicly traded price on the grant date and its publicly traded price at the end of the ESPP. The award was economically analogous to a financial instrument known as a “look-back option.” We determined the fair value of the look-back option and, therefore, the ESPP using a synthetic option structure and the Black-Scholes-Merton Model. Our concluded value considered the six-month lock-up that participants were subject to after the end of the ESPP’s term.
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Appraisal Economics has determined the fair market value of restricted blockchain tokens that are not yet publicly traded in connection with Section 83(b) of the Internal Revenue Code. The blockchain technology underpins cryptocurrencies such as Bitcoin and Ether, and the recent surge in popularity has resulted in other entities issuing blockchain-based units, often issued as compensation to employees and advisors. As part of our valuation, we reviewed the firm’s white paper, management’s projections, the restricted token award agreement, and the advisor agreement. Then, we analyzed the failure rates of new companies and rates of return by venture capital investors that invest in early-stage, high-risk investments similar to the tokens to determine the probability-weighted expected payoff to a holder of the tokens and a discount rate to account for the time value of money. Our report was used to facilitate a Section 83(b) election for federal income tax purposes.
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Appraisal Economics has determined the fair value of the property and equipment of a large hospital in California for financial reporting under ASC 805. We determined the fair value of the land by conducting a sales comparison analysis. All comparables were verified by several sources, including brokers, municipal officials, tax searches, and real estate commercial services. Buildings and improvements, furniture, fixtures, and equipment were valued using the cost approach. As part of our analysis, we made adjustments to the values of the subject property and equipment to account for their physical depreciation, functional obsolescence, and economic obsolescence.
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RIGHTS AGREEMENT (NOT-FOR-PROFIT HEALTH MEDICAL JOURNAL)
Appraisal Economics has determined the fair market value of a bundle of intangible rights associated with the publishing of a scholarly journal in the health and medical field. These rights included the limited use of certain intangibles including trademark, subscriber list, and advertiser relationships. We used the income approach to determine the aggregate fair market value of these rights. Key issues included the probable term of the agreement, given the option of extensions, as well as the projected growth in the various revenue streams, in view of the recent historical decline. Another key issue was the tax status of a willing buyer for the rights, as the payment of income taxes would reduce the income derived from the rights and thus the net rate of return to be realized.
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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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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 kits 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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