Book Value and Corporate Real Estate

The decision to sell a company property should be in alignment with the company’s financial objectives. In order to achieve such alignment, parties responsible for the oversight of company real estate should investigate the value of the property on their balance sheet, or its book value, and the related impacts its sale will have on company financials.

What is Book Value

Book value, or net book value, is the value a company attributes to assets on their balance sheets. It is calculated over time by taking the fair value of the property less any accumulated depreciation.

It is important to realize that fair value is not the same as fair market value. Fair value is often described by statute or generally accepted accounting principals (GAAP), and is subject to adjustment based on certain criteria. Fair market value is the value acceptable to a competent buyer and seller without any undue pressure to buy or sell.

While the difference between fair value and fair market value is subtle, it can be significant when establishing book value. For example, fair value only considers participants in the most advantageous market, which is between the principles. In other words, it is the value that is fair between the parties. It may or may not have any relation to the fair market value, which would be established in an open market.

Book values for real estate usually change over time, mostly due to accumulated depreciation and other deducted expenses. The net of accumulated depreciation and other deductions from fair value is also called carrying value. Importantly, book value can change due to events such as partnership changes, severe issues with the property’s condition, economic conditions, or unfavorable changes to the political climate where the property is located.

Why does Book Value Matter

A property’s book value is reported as an asset on the company’s balance sheet until it is sold. At the time of sale, the difference between its book value and sale price will largely determine the gain or loss reported on the company’s income statement.

Therefore, book value is a consideration of the sale when the resulting gain or loss reported on company financials is not in alignment with company financial objectives. Losses from property sales are sometimes discouraged or prohibited in some companies, although gains may also be problematic if not anticipated. In such cases, those responsible for the oversight of the company real estate may need to postpone the sale or find alternative transactions such as leasing the property.

Not surprisingly, there are situations where book value is more likely to become a consideration of the sale, including when:

  • Fair value is significantly above fair market value
  • There is a significant percentage of un-depreciable components such as land
  • The company is public or a quasi-private entity that rolls up to a public company
  • The gain or loss of sale will have a significant impact on the company’s financials

Since property transactions should always align with corporate objectives, book value and any impacts to the company’s financial position should be investigated by corporate real estate decision makers when considering a real estate disposition.

Environmental Surveys as a Pre-Marketing Requirement #CRE #Industrial #phase1

As an industrial real estate broker for over 12 years, I have learned a few key tasks every seller of industrial real estate should undertake prior to marketing their property.  Near the top of the list is having a qualified environmental consultant complete an environmental site assessment, commonly referred to as a Phase I.  The reasons are numerous but the biggies are:

  • Reveals seller’s potential environmental exposure, if any, prior to identifying a buyer.  A seller can deal with any potential environmental concerns prior to entering into an escrow, avoiding potentially costly delays and escrow terminations.
  • Gives the seller control of the environmental review process from the beginning of marketing its property.  In most transactions, the first recent environmental review of a property being sold will be when the buyer’s consultant conducts an environmental site assessment while in escrow.  In this scenario, the buyer, not the seller, has control of the process and the seller will be in a reactionary position to whatever concerns or recommendations are made by the buyer’s consultant.
  • Makes the property more marketable and can lead to a higher sale prices in a shorter amount of time.  Perhaps nothing turns away potential buyer faster than an environmental concern.  A recent environmental site assessment showing no recommendations for further inquiry can put buyers at ease that they most likely will not encounter an environmental issue in their own investigations, saving them time and money.  In some instances, an all-cash buyer may accept the seller’s environmental site assessment and therefore save the cost of conducting one themselves.

This list can also apply to a landlord as well.  In fact, many Fortune 500 companies now require a recent environmental site assessment be performed prior to executing a lease.

Seller’s may take issue with the cost of conducting an environmental site assessment or its necessity since the buyer or its bank will often conduct one anyway.  However, in my opinion this viewpoint often does not consider the points above.  Unless the seller has conducted a recent environmental site assessment, it should always consider the performance of an environmental site assessment of their property before marketing to be a worthwhile investment and in the seller’s interest.