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conclusions.
— We have no present or prospective interest in the property that is
the subject of this report, and we have no personal interest or
bias with respect to the parties involved.
— Our compensation is not contingent on an action or event
resulting from the analyses, opinions, conclusions in this report
or the use thereof.
— Our analyses, opinions, and conclusions were developed, and
this report has been prepared, in conformity with the Uniform
Standards of Professional Appraisal Practice and the Business
Valuation Standards of the American Society of Appraisers.
— No one has provided signi¬cant professional assistance to me.
— I have passed the USPAP examination and am certi¬ed through
2001. Additionally, I am an Accredited Senior Appraiser (ASA)
with the American Society of Appraisers. My certi¬cation is
current through the year 2000.
Sincerely yours,


Jay B. Abrams, ASA, CPA, MBA


BIBLIOGRAPHY
Chaffe, B. H., III. 1993. ˜˜Option Pricing as a Discount for Lack of Marketability in Private
Company Valuations,™™ Business Valuation Review (December).
Mercer, Z. Christopher. 1997. Quantifying Marketability Discounts. Memphis, Tenn.: Pea-
body.




CHAPTER 9 Sample Appraisal Report 317
INTRODUCTION
Purpose of the Report
Valuation of Considerations
Sources of Data
HISTORY AND DESCRIPTION OF THE LLC
Signi¬cant Terms and Legal Issues
Conclusion
ECONOMIC OUTLOOK
Economic Growth
In¬‚ation
Interest Rates
State and Local Economics
Summary
FINANCIAL REVIEW
Commentary to Table 9-2: FMV Balance Sheets
Commentary to Table 9-3: Income Statements
Commentary to Table 9-4: Cash Distributions
VALUATION
Valuation Approaches
Selection of Valuation Approach
Economic Components Approach
Commentary to Table 9-5: Calculations of Combined Discounts
Section 1: The Combined Discounts
Section 2: Discount for Lack of Control
Commentary to Table 9-5A: Delay-to-Sale
Commentary to Table 9-5C: Calculation of DLOM
Buyer™s Monospony Power
Transactions Costs
Final DLOM
Commentary to Table 9-6: Partnership Pro¬les Approach”1999
Comparability of Partnership Pro¬les to the Subject Interest
Statistical Methodology
Regression Results of Partnership Pro¬les Database
Commentary to Table 9-6A: Correlation Matrix
Applying the Regression Equation
Adjustments to the Discount
Commentary to Table 9-7: Private Fractional Interest Sales
Comparability to the Subject Interest
Statistical Methodology
Regression Results of Partnership Pro¬les Database
Commentary to Table 9-8: Final Calculation of Fractional Interest
Discounts
2.80% Member Interest



PART 3 Adjusting for Control and Marketability
318
Final Calculation of FMV of Fractional Interests
Conclusion
STATEMENT OF LIMITING CONDITIONS
APPRAISER™S QUALIFICATIONS
APPENDIX: TAX COURT™S OPINION FOR DISCOUNT FOR LACK OF
MARKETABILITY
INTRODUCTION
THE COURT™S 10 FACTORS
APPLICATION OF THE COURT™S 10 FACTORS TO THE VALUATION




CHAPTER 9 Sample Appraisal Report 319
These considerations are outlined and described in Revenue Ruling 59-
60, 1959-1 CB 237, as modi¬ed by Revenue Ruling 65-193, 1965-2 CB 370,
and Revenue Ruling 77-287, IRB 1977-33. Although Revenue Ruling 59-
60 speci¬cally addresses itself to stock valuations for gift and estate tax
purposes, the principles set forth may be applied to a wide spectrum of
valuation problems, including those related to stockholder buy/sell
agreements, mergers and acquisitions, Employee Stock Ownership Plans,
corporate reorganizations, marital dissolutions, and bankruptcies. This re-
port will discuss these factors and address other items relevant to the
member interests to determine their effect upon the fair market value of
the LLC interests.


Sources of Data
1. Survey of Professional Forecasters™™ Federal Reserve Bank of
Philadelphia, November 19, 1999. Internet site http://
www.phil.frb.org/¬les/spf/survq499.html.
2. Operating Agreement of the LLC.
3. ABC Real Estate Appraisals.
4. Conversations with Bradley Jones.
5. LLC™s balance sheet and income statement.
6. Mrs. Tina Smith™s Federal Tax Returns from 1997 and 1998.
7. Survey of Professional Forecasters, www.phil.frb.org/¬les/spf/
survq499.html.
8. Houlihan Lokey Howard & Zukin, Mergerstat Review”1999, p.
23.
9. Cost of Capital Quarterly”1999, SIC Code #6798 (REITs),
Ibbotson Associates.
10. Management Planning, Inc. restricted stock data.
11. Partnership Pro¬les, Inc. secondary limited partnership data.
12. Jones, Roach & Caringella private sale data.


HISTORY AND DESCRIPTION OF THE LLC
Tina M. Smith and her four children, listed below in Table 9-1, founded
the LLC on January 6, 1999. Mrs. Smith owned several properties, which
she contributed to the LLC. The original capital contributions and mem-
ber interests are as appears above in Table 9-1.
All four 5% members are children of Tina Smith. According to Brad-
ley Jones, the member interests are the same as of the valuation date,
even though there have been additional contributions.


Signi¬cant Terms and Legal Issues
The LLC is governed by its Operating Agreement dated January 6, 1999.
According to the Operating Agreement, the LLC is to be dissolved on
December 31, 2030, unless the term is extended by amendment to the
Operating Agreement or it is dissolved earlier.



CHAPTER 9 Sample Appraisal Report 321
T A B L E 9-1

Member Interests at Inception on 1/6/96


Member Initial Capital Contribution %

Tina M. Smitha $200,000 80%
Bradley J. Jones 10,000 5%
David R. Jones 10,000 5%
Larry T. Smith 10,000 5%
Lisa C. Dubliner 10,000 5%
Total $240,000 100%

Source: Exhibit A, Operating Agreement of the LLC.
a
As Trustee under the Tina M. Smith Revocable Living Trust, and amendments thereto, 9/11/90.




Section 11 of the Operating Agreement speci¬es a three-month right
of ¬rst refusal (ROFR) in which its other members have to buy out a
member who wants to sell.
Bradley J. Jones is the Manager of the LLC and has the right to bind
it legally. However, his authority is subject to the Management Commit-
tee.


Conclusion
The LLC™s ROFR is a moderate impairment of marketability and, there-
fore, fair market value. This happens because buyers are averse to in-
vesting their time in the due diligence process when they can be so easily
outbid by having their bid matched by insiders who have legal prefer-
ence. To be slightly conservative, we do not make an explicit adjustment
for this in our ¬nal calculation of the fractional interest discount.


ECONOMIC OUTLOOK
Economic Growth
Forty-three forecasters surveyed by the Federal Reserve Bank of Phila-
delphia expect that the U.S. economy will expand at an annual rate of
3.7% in 1999™s fourth quarter and at an annual rate of 3.1% in 2000. The
forecasters see growth slipping a bit in the ¬rst quarter of 2000, to 2.3%,
but rebounding from that rate over the following three quarters. Unem-
ployment is expected to average 4.3% in 2000.3


In¬‚ation
Expectations for in¬‚ation, measured by the Consumer Price Index, over
the next 10 years are 2.50%. The expected in¬‚ation for 2000 is 2.50%.4 For
the purposes of this valuation, we forecast annual in¬‚ation at 3%.


3. ˜˜Survey of Professional Forecasters™™ Federal Reserve Bank of Philadelphia, November 19, 1999.
Internet site http://www.phil.frb.org/¬les/spf/survq499.html.
4. Ibid.




PART 3 Adjusting for Control and Marketability
322
Interest Rates
Three-month Treasury Bills are expected to average 5.1% in 2000, while
the yield on 10-year Treasury Bonds is expected to average 6.1.5



State and Local Economics
State and local economics are not suf¬ciently relevant to warrant research
in this report, as they are fully considered in the valuation of the real
estate.



Summary
The economic forecast for the United States appears moderately positive,
with modest growth and low in¬‚ation.



FINANCIAL REVIEW
Commentary to Table 9-2: FMV Balance Sheets
Table 9-2 consists of a historical balance sheet of the LLC in column B
and a fair market value balance sheet in column C, both dated December
25, 1999, the valuation date. The source of the historical 1999 balance sheet
and income statement is the LLC™s internally generated statements as of
December 14, 1999.
Bradley Jones stated that he expects no other income, expenses, or
payments for the remainder of 1999, with one exception. The LLC will
pay his accrued salary of $1,600 on December 15. Additionally, there
would be another payment of his salary at the end of December, which
is after the December 25, 1999, valuation date. Technically, we should
accrue another ten days of his salary to the valuation date, but the dif-
ference is immaterial. Thus, we show an accrual of $3,200 for his entire
December salary in row 20.
The only difference between the amounts in columns B and C is that
we substitute the appraised fair market values for the properties in col-
umn C in place of the cost basis in column B. The historical balance sheet
is not relevant to the valuation analysis, and we present it in order to be
complete.
All fair market values of properties are appraised by ABC Real Estate
Appraisals, with the exception of Dover Field (Row 15), which is 2.77
acres of land and one studio. Bradley Jones estimates its fair market value
at $40,000.
The fair market value of the properties are $1,387,000 (C16), which
is approximately $667,000 above their cost basis. The net asset value, or
fair market value of the equity, is $1,389,185 (B22).


5. Ibid.




CHAPTER 9 Sample Appraisal Report 323
T A B L E 9-2

Balance Sheets 12/25/99 [1]


A B C

4 Assets: Historical FMV [2]

5 Cash 11,234 11,234
6 Computer equipment-net 1,251 1,251
7 Real estate:
8 4627-35 Bass St. 370,000
9 88 Apple Road, Julian 95,000
10 000 Pumpkin Patch [3] 40,000
11 37830 & 37848 Geese Rd., Ranchita 135,000
12 4463-65 Grape St. 215,000
13 852 Brown Ave. 300,000
14 1351 Kansas St. (80% owned by LLC) [4] 192,000
15 Dover Field 40,000
16 Total real estate [5] 719,254 1,387,000
17 Total assets 731,739 1,399,485

18 Liabilities
19 Security deposits 7,100 7,100
20 Accrued manager™s salary payable 3,200 3,200
21 Total liabilities 10,300 10,300
22 Total capital 721,439 1,389,185
23 Total liabilities & capital 731,739 1,399,485

[1] The source of the historical balance sheet (and income statement) is the LLC™s internally drafted statement as of 12/14/99. Brad-
ley Jones expects no other income, expenses, or payments through the end of the year, with the exception of his own salary of
$3,200 per month. Technically, we should accrue that salary through 12/25/99. However, to facilitate the income statement analysis
for an entire year, it is preferable to accrue his salary through 12/31/99. The difference of six days of salary is immaterial to the
valuation.
[2] All properties appraised by ABC Real Estate Appraisals as of 12/30/98 or 12/3/98, except for Dover Field, which is 2.77 acres of
land, plus one studio. Bradley Jones, LLC Manager, estimates its FMV at $40,000. All other assets and liabilities are per the LLC™s
12/14/99 Balance Sheet.
[3] This is vacant land.
[4] Four gifts of 5% each 20% Tenants-in-Common interests were already gifted to Bradley Jones, David R. Jones, Larry T. Smith,
and Lisa C. Dubliner. This is 80% of the appraised FMV.
[5] The historical numbers consist of the following:
Total buildings 494,005
Less accumulated depreciation-bldgs (116,310)
Buildings-net 377,695
Construction in progress (Brown Ave.) 44,864
Land 296,695
Total real estate 719,254
Bradley Jones reports that ABC Real Estate Appraisals told him verbally that the appropriate FMV for the Brown Ave. property,
which is the one with the construction-in-progress, is still the $300,000 at which it was appraised in 1998.




Commentary to Table 9-3: Income Statements
Table 9-3 presents income statement data for three years. Column B con-
tains a complete income statement for 1999. January 6, 1999, was the
inception of the LLC, so the income statement excludes January 1 through
January 5, when the properties were still owned by Tina M. Smith as an
individual. Additionally, the 1997 and 1998 income data, which appear
in columns D and C, respectively, are partial data taken from Mrs. Smith™s
tax returns”speci¬cally from Schedule E.
Row 32 shows net income as appears on the LLC™s income statement
and Mrs. Smith™s tax returns. Net income was $27,733, $17,843, and
$28,696 in 1997“1999, respectively (D32, C32, and B32).
Next, it is necessary to subtract salary for Bradley Jones™s services to
the properties. In 1997 and 1998 he was part-time and managed only one

PART 3 Adjusting for Control and Marketability
324
T A B L E 9-3

Income Statements [1]


A B C D

4 1999 1998 1997

5 Rental income 82,170
6 Late fees 50
7 Total income 82,220
8 Expenses:
9 Fire equipment maintenance 29
10 Auto 2,905
11 Bank charges 64
12 Dues & subscriptions 72
13 Equipment rental 396
14 Franchise fees 800
15 Insurance 5,284
16 Landscaping 1,535
17 Licenses and permits 623
18 Postage and delivery 241
19 Accounting 1,380
20 Consulting 1,750
21 Legal 1,500
22 Property taxes 10,576
23 Repairs 17,854
24 Supplies 6,169
25 Telephone 505
26 Gas & electric 430
27 Water 1,502
28 Rounding error 1
29 Total expenses 53,614
30 Net operating income 28,606
31 Interest income 90
32 Net income before adjustments [2] 28,696 17,843 27,733
33 Less management salary [3] 38,400 2,443 2,708
34 Adjusted net income [4] 9,704 15,400 25,025
35 1997“1999 average net income 30,721
36 1997“1999 total net income 10,240

[1] Sources: The LLC™s 12/14/99 Income Statement provided by Bradley Jones and Schedule E™s from Tina Smith™s 1997“1998 tax
returns.
[2] This amount equals net income on the LLC™s income statement.
[3] In 1999, Bradley Jones made $3,200 per month, which is arm™s-length. His salary was recorded as a draw against earnings, but
it should be charged as an expense. In earlier years, Mrs. Smith paid an outside property manager. Bradley managed one of her
properties, without pay. In 1997-1998, we subtract the same amount paid to the property manager as Bradley™s arm™s-length salary
in those years.
[4] This income statement is 1/1/99 to 12/14/99. Bradley Jones expects no more income or expense for the remainder of 1999, with
the exception of his own salary, which we have accrued.




of the properties, and he was unpaid. For those two years we subtracted
the same amount as Mrs. Smith paid her outside property manager”
approximately $2,400 to $2,700 (C33 and D33). In 1999, Mr. Jones worked
full-time for the LLC, and we subtract his actual (and arm™s-length) salary
of $38,400 (B33), which on the LLC™s income statement was charged as a
draw against pro¬ts.
We subtract row 33 from row 32 to arrive at adjusted net income in
row 34. Adjusted net loss was $9,704 (B34) in 1999. In 1997 and 1998
adjusted net income was $25,025 and $15,400 (D34 and C34). Total ad-
justed net income for the three years was $30,721 (B35), and the three-
year average was $10,240 (B36).

CHAPTER 9 Sample Appraisal Report 325
Commentary to Table 9-4: Cash Distributions
In Table 9-4, we calculate the margins from net income and property
appreciation as well as cash distributions. We use the ¬rst two items in
our calculations in Table 9-5C, and we use the latter in Table 9-6.
We begin with adjusted net income of $9,704 (B5, from Table 9-3,
B34) for 1999 only and $10,240 (C5, from Table 9-3, B36) for the average
of 1997“1999. We then divide that by the net asset value of $1,389,185
(Row 6, from Table 9-2, C22) to arrive at the net income margins of
0.70% and 0.74% (Row 7).

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