Akron Business Consultants

According to this article at Cleveland.com, “The cases involve major violations at eight properties and less significant ones at five others. The earliest complaints date to January 2008. The judge calculated the fines from the number of violations, the number of days they continued, and the maximum daily fine amount, $1,000 to $5,000.”

Contact the Real Estate and Construction Group at Skoda Minotti, a CPA, business and financial advisory firm with offices in Cleveland and Akron, at 440-449-6800. 

The First Time Homebuyer credit has been extended, but not everyone is eligible to continue to take advantage of this credit. Only buyers who were under contract prior to the previous deadline of April 30 can take advantage of this extension to close by September 30 and receive the $8,000 credit.

One of the main reasons for the extension is that there are a high volume of short sales under contract but not scheduled to close by June 30^th. This is mainly due to short sales requiring seller side bank approval. As many banks are inundated with these requests, this backup could have caused buyers to miss out on the credit without the extension to September 30th.

For more information, see this article on examiner.com.  

Have questions about the First Time Homebuyer credit? Contact the Real Estate and Construction Group at Skoda Minotti, a CPA, business and financial advisory firm with offices in Cleveland and Akron, at 440-449-6800.

Click here to view Part 1 of our series and learn more about the stock option landscape or Part 2 to learn more about the accounting and tax ramifications of issuing stock options.

What To Do?

As discussed above, there are significant risks that a company brings upon itself if it decides to issue stock options without properly valuing the options and the equity of the company. Rather than issuing stock options, if a company wants to offer an employee the opportunity to obtain an ownership interest, the most efficient and “clean” method may be to allow the employee to purchase shares from the company or from existing owners. There is no valuation requirement in this case (unless a party wants to hire an expert to ensure that they the transaction price is fair and reasonable) which also eliminates the out-of-pocket cost for the employer. In fact, a business actually recognizes a cash inflow when an employee purchases shares directly from the company. 

I am a valuation expert and I directly benefit from work associated with the valuation of stock options, so why am I telling you to consider alternative routes of compensation? Too often, the companies that issue stock options without having them professionally valued are the same companies that will fight against having their options valued at all due to the cost associated with the valuation. I simply want to spread awareness that there are other avenues of compensating employees and giving them opportunities for equity ownership that may be more cost efficient for companies that are under the illusion that issuing stock options does not require a cash outlay.

If you take anything away from this article, remember that issuing stock options is not a “cashless” expense. Consider that there are other alternatives for compensating employees other than using stock options. Remember that there are transaction costs associated with issuing stock options, specifically, hiring a valuation expert, that will create real out-of-pocket cost for any company. Unless you are ready to comply with the valuation requirements associated with issuing stock options, you may be better off simply not using them and compensating employees in another manner. Finally, just like selling a home, if you are going to issue stock options make sure that you bring in an expert to ensure that the value of the company and options are determined and documented appropriately – and be prepared to pay the “commission” for these services.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

Accounting and Tax Ramifications of Issuing Stock Options

 Click here to view Part 1 of our series and learn more about the stock option landscape.

To give you more perspective, first let us review the accounting treatment for the issuance of stock options (rest easy - this will not be too painful). When stock options are issued, an expense must be recorded based on the value of the option. A stock option’s value is derived from a variety of factors, two of which are the value of the stock as of the date of the option grant and the exercise price of the option (the price at which the option holder can purchase a share of stock). Determining the value of a company’s stock is not difficult when it is publicly traded, but privately-held companies do not have readily available market prices, which necessitates the services of a valuation expert. Unless the option is properly valued, a company cannot correctly record the associated compensation expense. If a company is unable to correctly record the results of its operations, it may find obtaining a clean audit opinion to be a difficult, if not impossible, task.

Now that I have warned you about the headaches that you may encounter on the “accounting” side of issuing stock options, let me further alarm you with the tax ramifications. If a company sets the stock option exercise price lower than the fair market value of its stock on the grant date, the stock option could be deemed to be deferred compensation according to Internal Revenue Code 409A. Under 409A, such deferred compensation would be immediately taxable to the employees receiving the grant and subject to regular income tax rates plus 1%. Perhaps even more distressing, a 20% penalty plus interest would also be triggered. In addition, employers would be responsible for withholding income taxes for employees on these types of option grants, which if not done, could result in additional tax penalties. The immediate taxability, penalty and withholding requirements do not apply when the stock option exercise price is equal to or greater than the fair market value of the company’s stock on the grant date. It is impossible to compare the exercise price of a stock option to the fair market value of a company’s stock unless a valuation of the company’s stock has been performed. In addition, when a valuation has been performed to establish the fair market value of a company’s stock, the burden of proof shifts to the IRS to disprove the appraised value. Therefore, unless there is documentation to support the fair market value of a company’s stock near the option grant date, there could be significant tax issues in addition to the accounting issues alluded to earlier.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 3: What to Do?

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.
 

When selling your home, it is common to use an agent to list, promote and show the property. In exchange, you pay a portion of the sales price as a commission to the agent. The benefits of using an agent include: 1) the listing of your home in a database so that homebuyers can access information about it; 2) the agent acting as your middleman during the negotiation process; and 3) the incentive it gives the agent to sell your home quickly (so that her or she can earn their commission). 

Some people choose to sell their home by owner and forego using an agent. These are typically the homes that have “For Sale” signs in their yards for many months, sometimes even years (you know the ones), before they are actually sold. These people often believe that the benefit of not having to pay an agent commission on the sale of their home is worth the prolonged period it will likely take to sell the property. 

What does the choice of hiring a real estate agent or selling your home by owner have in common with private companies issuing stock options? The strange answer is: Much more than many of us realize. 

The Stock Option Landscape

More and more private companies are issuing stock options as part of their key employees’ compensation plans. This may be driven by the ideas that: 1) stock options don’t “cost” anything to the company; 2) stock options will positively influence employees’ performance; or 3) since public companies issue stock options, it must be a good idea and private companies should follow suit. Regardless of the motivation, what most private company owners and executives do not realize is that accounting for stock options, for both tax and financial reporting purposes, may actually have an out-of pocket cost that is greater than the value of the options themselves.

In order to value stock options issued by private companies, there are two major steps that must be undertaken:

1. Determining the value of the company’s equity (which is a key input to valuing a stock option)

2. Determining the value of the stock option

There are not many privately-held companies with the in-house resources or expertise necessary to perform either of the requirements above, both of which are essential in accounting for the issuance of stock options. This often puts accountants in the awkward position of trying to explain to business owners the “unseen” costs and accounting ramifications associated with issuing stock options.

Back to our analogy, hiring a valuation expert to determine the value of stock options is much like hiring a real estate agent to sell your home. A valuation expert is able to perform both of the tasks identified above that are necessary to value the stock options issued by a private company, much like a real estate agent takes care of the necessary steps to sell your home. This work is not free, however, and depending on the complexity of the company and the options issued, the cost to value a private company’s stock options can range in cost from thousands to tens of thousands of dollars. When private companies issue stock options, they often do not consider the “commission” that they will have to pay to a valuation expert to ensure that the options are properly valued. Unlike real estate agent commissions, however, which are based on the sale price of the home, valuation fees are relatively fixed. 

Just like selling a home “by owner,” some companies will issue stock options and try to determine the value themselves (or even worse, not value them at all). By not using a real estate agent, homeowners often find themselves making no headway in the sale of their home. Similarly, by not hiring a valuation expert to value the stock options that they have issued, private companies create the risk that their auditors will not sign off on their financial statements. Maybe even more importantly for business owners and employees, unsubstantiated option values leave both companies and their employees in danger of stiff tax consequences.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 2: The Accounting and Tax Ramification of Issuing Stock Options

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

You've heard about it on the radio; you've read about it in various newspapers.  The Issue 1 bond renewal, which funds the Ohio Third Frontier (OTF) program, will be on the state-wide ballot on May 4.  Some facts and figures since OTF's inception in 2002:

• 570 new companies created
• Over 300 projects state-wide
• 48,000 direct and indirect jobs created; goal of 96,000 jobs over the OTF period
• Estimated $6.6 billion in economic impact
• $2.4 billion in wages and benefits to Ohioans
• Over 65% increase in private equity investment in Ohio due to OTF
• Since 2000, the number of bioscience jobs has increased by almost 18%

Issue 1 is not a new tax, but rather an extension of a bond issue initially approved in 2005 for $500 million.  OTF funds are highly competitive, and are available throughout the state.  Large, notable beneficiaries of the funds include the Cleveland Clinic Foundation and Case Western Reserve University in Cleveland, the University of Akron, CincyTech and Children's Hospital Medical Center in Cincinnati, the University of Dayton and GE Aviation in Dayton, and the Regional Growth Partnership in Toledo.

OTF supports research, entrepreneurship, private investment, and jobs by focusing on technology and innovation.  Some of the programs OTF funds include:  Advanced Energy, Entrepreneurial Signature Program, and Biomedical Research and Commercialization.

Despite the economic impact, there are numerous barriers to passage: 

• The stigma of "stimulus", and bigger government hand-outs
• The long-term payback of such endeavors
• The need for funds throughout the state for transportation and infrastructure

If you asked my Grandpa what the rate of return on his investments is, he would probably scratch his head and say, “Huh?” The only return that he knows (even though he doesn’t necessarily understand it) is the .5% that he earns on his savings account with the local bank. If you asked my Dad the same question, he might say that he earns a few percentage points per year. His investments are being allocated in a more conservative fashion as he nears retirement. In my case, most of my retirement investments are in equities. My investments have much greater risks than my Dad and Grandpa’s, but they also present opportunities for much greater returns.

Out of my family’s three generations of investments, the “safe” savings account investment of my Grandpa (which could be debated in light of the wave of bank failures over the past year), has the lowest levels of both risk and return. My Dad’s investments have a higher level of risk, but a correspondingly higher rate of return. Finally, my investments have the highest rate of return out of the group, but also the most risk that the return will not be realized (leaving me with less money than I invested).

The concept of risk vs. return is important in the valuation of any business. The lower the risk associated with an investment, the lower the required returns. In contrast, the riskier that an investment is, the higher the return it should provide to an investor. The value of an ownership interest in a company typically moves opposite of the level of risk and required return, as summarized below:

High Risk = High Required Returns = Lower Company Value

Low Risk = Low Required Returns = Higher Company Value

One of the abilities that a valuation analyst brings to the table is his or her ability to determine an appropriate rate of return for an investment in a company. As discussed above, once the rate of return is determined (as a function of the level of risk), it plays a key role in concluding on the value of a business. Keeping in mind the general relationship between risk and return can help anyone better understand the value of a business, regardless of their level of valuation experience. 

Looking for business valuation assistance in Cleveland or Akron? Contract our Business Valuation Group at 440-449-6800 for more information.

There are many tales behind the origin of the phrase “rule of thumb”, some of which are more realistic than others. The story that is the most widely accepted is that woodworkers used to use the width of their thumb, rather than rulers, for quick measurements.  Regardless of how the phrase got its start, a rule of thumb is considered to be an imprecise, yet convenient measurement standard. Relying solely on a rule of thumb to value a business, however, can lead to unreliable valuation conclusions.

Rules of thumb used for valuing businesses are often industry specific and are stated as multiples of revenues, EBITDA, net income, or some other metric. Rules of thumb often have their foundation in industry hearsay mixed with multiples derived from actual transactions for similar companies (although which transactions and companies are anybody’s guess). Considering the unprecedented economic environment today, older rules of thumb may no longer be reliable regardless of their predictive power of value in previous years. In addition, rules of thumb often do not take into consideration the profitability of the company being valued, the industry outlook, the depth of management, and many other factors that are considered when a full business valuation is being prepared. Finally, nearly every professional valuation association (if not all of them), does not allow for a rule of thumb to be used as the primary valuation methodology. As a result, relying on a rule of thumb alone to value a business will result in a value that will not be defensible before the IRS or in litigious situations.

Although using a rule of thumb is frowned upon as a primary valuation method, rules of thumb may still be beneficial to business owners and valuation analysts.  For business owners, rules of thumb offer quick and dirty estimates of value that can be useful for high-level strategic planning.  For valuation analysts, rules of thumb can be used a reasonableness check for the value of a company determined by asset, income, and market-based approaches.

The important thing to remember is that a rule of thumb is a great shortcut for a business owner to use to determine the value of his or her company for strategic planning. If a defensible value is required, however, a rule of thumb should be used as no more than a cross-check against the more traditional valuation methods, such as the capitalization of earnings/cash flow method, discounted earnings/cash flow method or private company transaction method.

Looking for business valuation assistance in Cleveland or Akron? Contract our Business Valuation Group at 440-449-6800 for more information.

When you think of a crystal ball, what types of people come to mind? Prophets? Magicians? Shady fortune tellers? While all of these people are associated with the act of attempting to predict the future using a crystal ball, there is another group of people who still today rely on their figurative crystal balls whether they know it or not: business owners.

Every day, business owners must make estimates and guesses about the future of their companies with the intent to position themselves to take advantage of whatever opportunities may arise. Whether through preparing budgets for next year or creating 5 year projections for use in business planning, business owners often need to gaze into their crystal balls and attempt to predict the future.

Getting business owners to dust off their crystal balls is essential during the business valuation process. Owners or management are often hesitant to provide projections or estimates to business valuation analysts, sometimes under the notion that if the analyst has access to the company’s historical financial statements, they have all that they need to properly determine the company’s value. While historical financial statement analysis is a key component of any reliable business valuation, it is the future operating expectations of a company that truly drive its value.

Imagine being presented with the option to invest in either of two companies for the same price. Company A generated $10 million in annual cash flow up to the valuation date, but due to changes in the industry, is only expected to generate $1 million in annual cash flow going forward. Company B only generated $1 million in annual cash flow up the valuation date, but is expected to generate $10 million in annual cash flow going forward due to the development and release of a new product. Which company would you rather invest in? Obviously, considering the limited facts presented, the rational investor would choose to invest in Company B due to its superior operating expectations compared to Company A.

Value is driven by future operating expectations, not historical results. Only in cases in which management’s expectations are that future results will mirror the company’s historical operations can historical results reasonably be relied upon to determine a company’s value. Historical results can also be relied upon to determine the reliability of a company’s projections.

Therefore, if a business owner is in need of a business valuation, it is important that he or she dust off their crystal ball and spend some time thinking about the operating expectations for their company. While none of us can predict the future with any certainty, obtaining some sort of expectation for a company’s future operating results is essential to the development of any properly performed business valuation.

Looking for business valuation assistance in Cleveland or Akron? Contract our Business Valuation Group at 440-449-6800 for more information.

As a kid, baseball and football trading cards were my life. I would absorb the stats on the back of each card and rattle them off at school like it was a homework assignment. I have boxes and boxes of cards that I accumulated over the years, as I am sure that may of you do (if your mom hasn’t tried to throw them away yet). What do baseball cards have to do with the value of your business? More than you think.

Magazines such as Tuff Stuff and Beckett quote estimated prices for nearly every sports trading card available. These prices are representative of what we in the valuation world would call “fair market value”. This is the price at which a willing buyer and a willing seller, with all material facts about the card known to them, would likely transact. A majority of business valuation engagements, including those for IRS gift and estate tax reporting purposes, divorce proceedings, and as directed by many operating agreements, require fair market value to be used as the standard of value. Fair market value typically contemplates that the purchaser is a “financial” buyer (someone who is making an investment in the business with no means to create synergies or other economies of scale), unless certain circumstances dictate otherwise.

When many business owners contemplate the value of their business, however, they often think of a larger company similar to their own paying a premium for their business. The assumption made by the business owner is that the purchaser will be able to recognize certain post-transaction efficiencies, which will allow the acquirer to pay more for the business than a “financial” buyer. This is called “strategic value” or “investment value” (the value to a specific buyer), which is not the standard of value required to be adhered to in many business valuation engagements.

For example, I have a 1994 Kenny Lofton Upper Deck card that has a quoted value of $.10 according to Beckett. Someone who has the entire 1994 Upper Deck set except for the Kenny Lofton card that I own may be willing to pay a premium above the card’s $.10 “fair market value” because that owner can derive additional value by completing their set. This premium price is the “strategic value” or “investment value” to that specific owner, but is not reflective of the card’s “fair market value” in the general marketplace. 

While a business’ underlying assets are the drivers its value, the perspective from which that value is determined can have a significant impact on the final number. When business owners are in need of valuation services, it is important that all of the parties understand what standard of value is being used, whether it is “fair market value” or something different, so that the value of the business is considered in the correct context. 

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

As I surfed around on the internet the other night searching for Black Friday deals (who goes to stores nowadays, anyway?), I couldn’t help but wonder – how can companies sell products at just a fraction of previously listed prices?  The answer isn’t terribly complicated.  Retailers cut prices to increase interest in products and fan the flame of pent up consumer demand.  This concept, coupled with most businesses being closed on this day, results in stores being flooded with consumers on the “biggest shopping day of the year.”  In doing so, the retailer generates exorbitantly high levels of volume and, in turn, maximizes bottom line profit.  The retailer also expects that it will benefit over the course of shopping season by generating interest and momentum on this all important day.  These are all unique factors that are specific to the consumer environment on Black Friday.  There’s a lesson here that can be applied to the value of your business.  Stay with me…

In any valuation engagement, one of the first questions we ask our client is, “what is the valuation date for our work?”  Trust me, we’re not asking this question just so we can have a date on our report.  This is a hugely important factor not only from an administrative and logistical perspective, but also from a valuation perspective.  To illustrate, consider your 401(k) balance compared to that of 18 months ago.  Most of us have felt the pain of significant dilution of our investment values.  Our share holdings in those investments may not have changed much during that time, but the underlying values have changed significantly due to the economic downturn.  In other words, facts and circumstances change all the time, and with those changes, values fluctuate.

The technical valuation underpinning of the illustrations above is the concept of “known or knowable.”  That is, the valuation analyst can only consider facts and circumstances that were known or knowable as of the valuation date.  This can cause some interesting challenges and conflicts for the valuation analyst.  For example, consider a scenario where the subject company loses its best customer on March 1, 2009.  For the sake of argument, say that this customer provided 85% of the subject company’s revenues, the loss of which eventually sent the company into bankruptcy.  Also assume that the valuation date was February 1, 2009.  By the time the valuation analyst is engaged, the company may be well into bankruptcy proceedings.  However, as of the valuation date (February 1), the company may not have been showing any signs of financial difficulty.  At that time, the now lost customer was generating revenues consistent with historic levels.  Therefore, the valuation analyst cannot consider the fact that the customer was lost at a date subsequent to February 1.  However, the valuation analyst can (and should) consider the substantial risk of having such a concentrated customer base.  As such, most valuation analysts will include an additional risk factor in the discount/capitalization rate (i.e. the risk rate of return for the company).  However, even the application of a very strong risk factor will not bring us to the reality that the company is now worthless.  The fact of the matter is, while the company may be worthless (in bankruptcy) at the time the analyst performs his work, it was probably not worthless at the all important valuation date.

This is just one example of a factor that can highlight the importance of the valuation date.  However, all of the following (among other things) are considered in the same light: economic environment, the industry, capital structure of the subject, financial outlook, and even turnover of key management personnel.  The lesson here is that when you are considering undertaking a valuation engagement, do not take the valuation date lightly.  In can make a huge difference in the results of the valuation analysis.  Like prices on Black Friday, the value of a given company has very much to do with unique external factors that exist as of the valuation date.

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

It's like a game of hide and seek for wealthy Americans.  In 2001, the Internal Revenue Service estimated that Americans owed $345 billion more in tax than they paid, or about 14% of federal revenues from fiscal year 2001.  Where were these tax dollars hiding?  The U.S. government is betting a good portion is hiding in the Swiss Alps. 

In an unprecedented move, the Swiss Justice Department agreed to disclose the names of 4,450 UBS account-holders from 2001 to 2008 that contained more than $1 million Swiss francs, where there was reasonable suspicion of tax fraud.  Suspicious activity that could be interpreted as tax fraud included the use of debit cards, cell phones, or wire transfers to hide accounts. 

The legal jockeying began in June of 2008 when the Justice Department filed court papers in Miami, Florida to allow the IRS to get information from UBS.  In essence, the investigators requested to serve "John Doe" summonses to obtain information about possible tax fraud against taxpayers whose identities are not known.  A former UBS banker started the ball rolling when he suggested there could be as much as $20 billion in undeclared funds sitting in Swiss accounts.  Tax laws require that taxpayers who have financial interest in or other authority over any foreign financial accounts with an aggregate value of $10,000, at any point in the tax year, to file Form TDF 90-22.1, to declare their overseas funds.  This allows the IRS to ensure the interest generated from these assets is being taxed in the United States.  Form TD F 90-22.1, a Report of Foreign Bank and Financial Account (FBAR), is due before June 30 of the succeeding year, with no allowed extensions. Penalties for not filing the TD F 90-22.1 are up to 50% of the highest annual balance of each account for each of the last 3 years.  The 50% penalty is imposed annually and therefore can wipe out the account entirely, with the taxpayer still owing taxes and interest. 

To allow taxpayers to come out of hiding on their own free will, the IRS enacted an amnesty program beginning April 2, 2009 - October 2, 2009, extended to October 31, 2009.  Under this program, the IRS will reduce the penalty to 5-20%, depending on whether the wealth was inherited and the IRS will levy the penalty just once, on the highest balance in the accounts over the last 6 years.  Although the amnesty program is cumbersome and requires filing additional forms and amending tax returns to pay the tax on interest earned in these foreign accounts (as well as interest and late filing penalties on the tax), the number of participants has been overwhelming. 

Let’s look at an example of a taxpayer who’s in the 35% tax bracket and has had a foreign financial account for six years and the highest balance over those six years was $1.3 million.  If this taxpayer came forward, they would pay $386,000 plus interest which includes tax of $105,000 – ($50,000 in interest income * .35) * 6), an accuracy-related penalty of $21,000 -- $105,000 * .2) and an additional penalty, in lieu of the FBAR and other penalties that may apply of $260,000 -- $1,300,000 * 20%.  While that seems like a lot, this same taxpayer could owe up to $4,481,000 if they did not come forward -- $2,306,000 in tax, accuracy-related and FBAR penalties and up to $2,175,000 in FBAR penalties for willful failure to file complete and correct FBARs.

Realizing this, a staggering 14,700 Americans, with assets hidden in more the 70 countries made a run for home base with their hands in the air.  (A normal year averages fewer than 100 taxpayers.) And although this outpouring does not relieve UBS of handing over the names of the American account-holders, the number of Americans playing the game has become quite apparent.  This isn't the first time the IRS has offered amnesty programs to lure those out of hiding, but this is the first time the Justice Department and the US Government used its bullying on the playground to force UBS to hand over the names of those playing.  Is this just the start of more to come?

Internal Revenue Service Commissioner Douglas Shulman was quoted as saying, "The whole game around bank secrecy, around offshore (tax) evasion is changing."  Tag…you're it.

Looking for tax planning assistance in Cleveland or Akron? Contact Skoda Minotti at 440-449-6800 or visit our web site.
 

Home-Buyer Tax Credit Seekers May be in for a Long Wait

If you’re one of the many people who are planning to or already took advantage of the home-buyer tax credit, you may be in for a long wait to actually receive your refund. Why is this?

According to this article by MarketWatch, the main reason is fraud. The article states that the IRS handed out $620 million to ineligible filers. The result? Every request for the credit is now being audited leading to long delays for those claiming the credit.

Other reasons for delays include the IRS losing some of the returns and some filers receiving a larger refund than they requested.

If you've been waiting on your refund for more than six weeks and have not heard from the IRS, it is advised that you call theme (800) 829-1040. Find the number and address for the group that is working on your original or amended tax return and send them all the proofs of purchase they require to speed up the process.

Looking for tax planning assistance in Cleveland or Akron? Contact Skoda Minotti at 440-449-6800 or visit our web site.

In today’s economy, it is crucial to keep good tenants. The following nine points will help you maintain maximum occupancy in an uncertain environment:

1. Understand the tenant’s business. Research their industry so you can credibly talk about their business, and make them feel that you understand their concerns in today's economic conditions. 
2. Respond reasonably to rent relief or downsizing. This entails a two-step process consisting of listening to the request, and then formulating a personal response within three days. Establish limits to these requests and button down your parameters. If the tenant is downsizing, request their financials or tax returns to understand that their current financial position warrants this action. Make sure not to open the floodgates to requests every month, however.
3. Happy tenant employees means happy tenants. This is as easy as keeping the common areas clean and neat.
4. Go green, well. Reducing the amount of water or soap could get employees irritated. Also, automatic motion lighting in conference rooms or offices could be more of a hassle than a money saver, whereas they may work well in a hallway or a closet. Find other ways to go green that will help the environment and not hinder employees. Also, watch individual tenant leases when attempting to pass-through Green costs.
5. Follow up with tenants. Make sure to follow up with your tenants on a timely basis. There is a difference between "quick response" and "at their beck-and-call."
6. Be consistent with responses to tenants. Tenants talk to each other. Tenants get angry when your message is not consistent, whether it be costs, timing of an event (like cleaning), rent relief, management deferred maintenance plan, etc.
7. Tightly manage your broker’s promises. The easiest way to do this is to make sure that the broker and the property manager are on the same page - enforce constant and effective communication. Understand what the broker wants or needs so you can deliver. Also, promising occupancy before the tenant has signed the contract can get you into trouble - never anticipate a tenant's intentions until it is in writing. 
8. Keep current with billing. Tenants need predictability for cash flow purposes. Keep them updated and give them an estimated time frame when to expect the invoice if it will be late. Consider personally communicating changes in pass-through estimates each year - tenants appreciate the personal touch and the advanced notification.
9. Be strong, be fair, be smart. Remember that retaining the tenant may not be in the best interest for both parties involved. Also, don’t give up too easily, but if it is clear the tenant will not make it financially, come to an agreement. If the lease is more than 10 years old, update the lease to the way the property is operated today. Items specific to the lease that could have changed are holidays, weekend hours of operation, pass-through costs, timing and collection of rents; prohibited activities, sub-leasing, etc.

***This summary was based on a webinar from the members-only section of the NAIOP website. Most of the points have been modified pursuant to the blogger's experience.

Looking for a Cleveland or Akron accounting firm that provides services to the real estate industry? Contact the Real Estate and Construction Group at Skoda Minotti at 440-449-6800.

‘Tis the season… Whether it was Monte Kiffin of the famed “Tampa 2” defense or Buddy Ryan of the ’85 Bears, NFL defensive coordinators have strived to invent new ways to confuse opposing quarterbacks. Typically they utilize a “base” defensive formation and build upon it by constructing complicated blitzing schemes. While these blitzing schemes are often complex, the “base” defense still must be considered by the opponent. 

Within the valuation arena, much like blitzing schemes, complicated valuation methods are often used to determine a subject company’s value. However, since multiple valuation methods (discounted cash flow, capitalized earnings, private and public company market methods, adjusted net asset, etc.) are available to determine a company’s value, determining the appropriate methodology for an engagement can be confusing. One of the common oversights by parties to a valuation engagement is not considering a floor value when determining the value of a company.

In the event that a company is poorly performing, the present value of its future cash flows may indicate that it does not have much value from an income or market approach. In this event, a valuation analyst should consider whether an adjusted net asset approach would provide a more reliable measure of value. This method (a balance sheet approach) values a business based on the difference between the fair market values of the company’s assets, both tangible and intangible, and its liabilities. The company should not be worth less than the amount that would remain if all the assets were liquidated and the liabilities were satisfied. Therefore, the adjusted net asset method is considered to be a company’s floor value.

No matter how complicated the defensive blitzing scheme, the base defense should always be considered. The same holds true for valuation engagements.   No matter how complicated the valuation methodology may appear to be, the adjusted net asset approach should determine the subject company’s floor value. 

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

Due to the unprecedented economic conditions of the past year and a half, many companies had to take a challenging look at whether their goodwill was impaired during their last audit or review. For those companies that did not record any impairment of goodwill in 2008, continued economic pressures in 2009 may make avoiding impairment two years in a row a difficult proposition. 

In the whirlwind of goodwill impairment discussions, however, impairment testing for other intangible assets seems to have been thrown on the back burner. When the accounting for many business combinations is executed, intangible assets are also often recorded (customer lists, non-compete agreements, trademarks, etc.), sometimes in excess of the recorded goodwill. Therefore, testing intangible assets other than goodwill for impairment can be just as, if not more, important than testing goodwill for impairment depending on a company’s asset composition.

Part of the reason for the reduced focus on intangible asset impairment testing may be the fact that intangible assets with finite lives are only considered to be impaired if the undiscounted future cash flows associated with these assets are lower than their net carrying values. This is the same “high hurdle” rule that governs whether fixed assets are impaired. As a result, the cash flows associated with an intangible asset typically need to have deteriorated significantly in order for an impairment to be recognized. Keep in mind that indefinite-lived intangibles do not have the same “high hurdle”, undiscounted cash flow test. Rather, the fair value of indefinite-lived intangibles must be determined each year, similar to goodwill, and the intangible would be written down to its fair value if it is determined to be less than its current net carrying value.

The materiality of the assets along with the risk appetite of a company’s auditors will determine the required extent of testing for the impairment of intangible assets. It should be noted that a company’s auditors are not permitted to prepare the intangible asset testing, which would result in the auditors auditing their own work. Rather, the company’s management or a third-party firm must prepare the analysis, which the auditor can then audit. 

Business owners and operators need to keep in mind that increased emphasis will be placed on the testing of intangible assets, including goodwill, during the 2009 year-end audit season. The testing of intangible assets for impairment is something that should be discussed with your auditors sooner rather than later so that a plan of attack can be developed that will address the issue to your auditor’s satisfaction and save any ugly surprises from popping up late in an engagement related to impairment concerns.

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

With the crash of the real estate market some are looking to capitalize and purchase larger homes for a bargain price. In doing so, they face the problem of selling their current residence to make the move up. With the lack of buyer interest and with some people not willing to take such a large loss people are holding out for the market to rebound. This creates the problem of carrying two mortgages, which the monthly payments on two mortgages can create cash flow problems for many taxpayers in this situation. 

To help with this burden, a taxpayer may decide to rent out their prior residence to help bring in cash and cover the monthly costs on that property. If the tax payer decides to go this route there are a number of rules/guidelines that one has to be aware of. 

Rental vs. Vacation Property

The first of these rules (which would only apply to the first year of renting) is determining if the property being rented qualifies as a “rental property” or a “vacation property.” The general rule is if the home was personally used for more than the greater of 14 days or 10% of the days the dwelling is rented for the year it is classified as a vacation home and subject to the rules under code section 280A. The main difference between a rental and vacation property is the expenses that can be deducted. If it is classified as a vacation property the only rental expenses that are deductible is the portion of the year that the property was rented. If it is deemed to be a rental property all expenses are considered business related and possibly deductible. For the sake of this conversation we are assuming that this rule is met and the home qualifies as a rental property.

Depreciable Basis of a Property

After determining the home is a rental property the first step is determining the depreciable basis of the property. When a personal home is converted to business use, the total basis is calculated by taking the lower of the adjusted basis or the fair market value of the property on the date of conversion. If the property was a personal residence and no depreciation was taken for business use of home you should go back to the purchase documents of the home to determine original cost which would also be the adjusted basis. Once the total basis is calculated the land portion is broken out and the remaining portion is considered the depreciable basis. Once the depreciable basis is calculated it must be depreciated using the method and recovery period set by the IRS at the time of conversion (at this time the method to be used is straight line and recovery period is 27.5 years for residential property).

Along with depreciation expense the taxpayer must start keeping records of the income earned and expenses incurred in renting the home. The list of expenses that are deductible for rental properties is longer than that for a personal residence. Many of the costs of renting a home (mortgage interest, real estate taxes, insurance, advertising, repairs and maintenance, supplies, etc.) are deductible.

First Time Home Buyer Credit

If the home was purchased within 2008 or 2009 and the first time home buyer credit was taken on the purchase there may be additional tax consequences to consider. If the home for which the first time home buyer credit is taken is converted to a rental property within 36 months of purchase a portion of the credit will be required to be repaid. This portion will depend on how long the home was used as a personal residence. 

Selling the Property

Finally, after a taxpayer converts their former personal residence to rental property and gets to the point that they want to sell it there are more rules to be aware of. First the gain or loss must be calculated, and to do this the basis of the property must again be calculated. The basis can differ depending on if the property is being sold at a gain or a loss. If the property is sold at a gain, the basis of the property is the original cost basis to the taxpayer, plus any amounts paid for capital improvements (capitalized and not previously deducted), less any depreciation taken. If the property is sold at a loss, the basis is the lower of the original cost basis or the fair market value at the date of conversion, plus any capital improvements, less any depreciation taken. Rental property, when sold, is treated as a capital gain/loss but just because it was rented for a short period of time does not completely preclude the taxpayer from taking advantage of the gain exclusion rules for a personal residence. If the property is rented for less than 3 years before being sold, the taxpayer may still be eligible to take a portion of the personal home gain exclusion. This gain exclusion cannot be used against gain from recapture of depreciation though.

Summary

With the current state of the real estate market, renting a prior personal residence may be beneficial for a taxpayer to help wait out the recession and see some of the buyer interest and value come back. If one decides to go this route these are the rules/guidelines that should be considered at each stage of the process.

Contact our CPAs, business and financial advisors in Cleveland or Akron at 440-449-6800 or www.skodaminotti.com.

If you have purchased, constructed or invested in real estate in the last few years, you may have heard the term “Cost Segregation Study.” Although the overall concept of a cost segregation study has existed for awhile, it is still not widely utilized, nor is it completely understood how it can enhance cash flow and bet the cornerstone of a property owner’s overall tax plan.

To learn how you can take advantage of a cost segregation study, click here to read our article from the latest issue of Properties Magazine.

Interested in learning more about a cost segregation study for your business? Contact the Skoda Minotti’s Real Estate and Construction Group, with offices in Cleveland and Akron, at 440-449-6800 or visit our web site.