Tax Saving Ideas The following is a list of often overlooked expenses and tax deductions that pertain to the real estate industry and could improve after tax cash flow. Appraisal fees for charitable donations or casualty losses Appreciation on property donated to a charity Casualty losses Commissions and closing costs on sale of property Dues to labor unions for property staff Property improvement costs Investment advisory fees Lead paint removal Mortgage prepayment penalties and late fees Points on a home mortgage and certain refinancings Real estate taxes associated with the purchase or sale of property Seller-paid points on the purchase of a home Special equipment for the disabled for ADA compliance State personal property taxes Theft or embezzlement losses Trade or business tools with life of 1 year or less Self-managed real estate 401K for the self-employed

Valuation and Litigation The Deloitte & Touche Real Estate Newsletter for Attorneys Published Spring, 2000 Considerations for Valuation and Litigation By Mark Pomykacz Perhaps today, litigating our differences has become a normal business venue. Certainly, experience indicates that even the best intentions and the most prudent management practices can offer no guarantee of avoiding litigation. Given that real estate is one of the most expensive business and personal activities, it is not surprising that subtle differences between parties lead to disputes over large dollar amounts. Disputed real estate valuations often range in the millions of dollars and sometimes in the $10’s of millions. Even leasing disputes can amount very large, disputed valuations. Over a seven-to-ten-year lease period, many aggregated lease payments will exceed the value (sale price) of the property. Furthermore, the complexity of real estate valuation unfortunately leaves room for dramatically different opinions of value, rent, and damages. The scale of real estate valuations and the complexity of such valuations require the use of real estate valuation experts. Some sample valuation for litigation issues include: Bankruptcy and Reorganization Issues Property Tax, Estate Tax, Transfer Tax, Other Tax Issues Contract Disputes, Contract of Sale Issues, Landlord-Tenant Issues Partnership Disputes, GP Mis-management, Partial Interest Issues Environmental Damages, past and future lost income, stigma and cost to correct Condemnation and Takings Insurance Claims Once a dispute over real estate valuation is recognized as possibly destined for court, our advice is to prepare earlier, prepare intensely, use the right professionals, and interact deeply with your litigation team. Presented below are basic considerations when working on litigation involving valuation issues. While some disputes are centered on a valuation, most are cases where valuation issues arise in the context of proving a contractual default and/or where once a default has been established, the dollar damages must be estimated. The term “valuation” herein is intended to also include income and yield analysis and estimation. Many of the biggest cases never require a value (sale price) estimate. Partnership disputes, insurance claims, poor management and the resultant poor yield, and lost income often involve disputes over expected income and yields, all of which real estate appraisers are suited to handle. Also discussed below are some of the more common mistakes made by clients, appraisers, and litigators. The considerations below are not arranged in order of either chronology or priority, except for the paramount consideration, which immediately follows. It is paramount to maintain the appraiser’s independence and objectivity. Even the perception of tainted objectivity could destroy their effectiveness as an expert witness. Identify and Clarify the Valuation Issue Unless a client and/or their attorney are experienced with the particular valuation issues at hand, the valuation experts should be consulted as early as possible. Also, unless the appraiser is experienced with the particular valuation concerns surrounding legal issues at hand, the attorney should be consulted as early as possible. Neither the appraiser nor the client and their attorney should make assumptions about the appraisal methodology, the scope of the problem, or the legal strategy without first consulting the other. ♦ The “Full Narrative, FIRREA” type report is often not appropriate for litigation purposes. Appraisals prepared for one purpose and use (or for one litigation case) are often not appropriate for (another) litigation. Appraisal methods and reporting formats vary dramatically and this is appropriate as appraisal issues vary dramatically from case to case. ♦ A preliminary analysis is often helpful for measuring the scope of the problem and testing valuation and legal strategy, but great care must be exercised to avoid the reality and perception of an expert with tainted objectivity. ♦ Different practical appraisal problems require different appraisal methodologies, procedures, and reporting formats. Often the supply of data to be analyzed in the appraisal, or lack thereof, drives the appraisal methodology. Thus, the expert appraiser and the attorney experienced in one type of case may not be able to predict the valuation needs of another case, at the outset. ♦ There must be a continual dialogue beginning in the earliest stages of the case, between the appraiser, the client, and their attorney to resolve and sharpen the legal strategy and appraisal methodology. Protect Client-Attorney Privilege Clients should not hire the appraiser directly and should limit their discussions until the attorneys have hired the appraiser. All working documents prepared by the appraiser for a case should be labeled “draft”, “confidential”, or “prepared for counsel in connection with litigation”. Select Valuation Experts that Meet the Needs of the Case and Round out the Team ♦ Is a designated (MAI) appraiser required? ♦ Is a state licensed appraiser required? Will the expert’s report need to be USPAP and/or FIRREA compliant? ♦ Will other types of experts be needed to support the valuation opinions, e.g.: accounting, environmental, engineering, architectural, zoning, financial or brokerage. Ensure that the Legal Strategy Matches the Most Defensible Valuation Methodology Some valuation methodologies preferred by investors and owners, like the discounted cash flow (DCF), are commonly disbelieved by judges and juries. Conversely, sometimes legal precedents vary sufficiently from the circumstances in the case at hand to warrant another methodology. ♦ Valuation theory can be elaborate. Valuation models are sometimes highly complex and sensitive. Seemingly minor changes in methodology and modeling can dramatically change the conclusions. ♦ Ensure legal instructions are appropriate. Hypothetical assumptions are appropriate and acceptable in some situations, but not all. Maintain an attorney-expert relationship that’s conducive to the free exchange of ideas, questions, and concerns, since it is common that neither the attorney or the appraiser will fully understand initially the impact of their instructions to the other. ♦ Ensure that appraisal terms match the definitions in law and to the layman. If not, care must be exercised to keep communications clear to all, especially to the judge and jury. Give the Valuation Experts Enough Time and Resources For example, it takes 4 to 6 weeks to complete a “full analysis” appraisal on a single asset. Some require less, others a lot more. ♦ Remember that beyond the essential correct methodology, a valuation is dependent on market data, which takes time to collect when it must be gathered from third party sources. ♦ Also appraisers, if given the opportunity, can sometimes substantially increase their accuracy over that of nonlitigation appraisals by employing techniques that, due to their obscurity, complexity and/or cost, they are rarely asked to provide. These techniques should be considered early in the case for best results. Involve the Valuation Experts in Deposing and Crossing of the Opposition’s Experts and in Analyzing the Testimony of the Opposition’s Experts and in Analyzing the Opposition’s Valuation Strategy ♦ Recognize that most cases settle. Then employ the valuation experts in establishing the case’s probability of winning a valuation judgment or verdict and in setting appropriate settlement terms. ♦ Involve the appraiser in the search for, review of, and interpretation of valuation related documents. Research the Judge’s history on Valuation Issues Does the judge have experience with valuation issues? Does the judge dislike certain valuation techniques, such as the discounted cash flow or others?

Managing Commercial Real Estate Before and During Economic Recessions The United States economy and real estate markets have been healthy for an unprecedented period of time. Unfortunately, national economies and real estate markets are subject to economic cycles. Now, due to the unforeseen COVID-19 pandemic in combination with underlying market conditions, the chances of a significant economic recession are increasing. Best practices for effectively managing commercial real estate holdings in the next several years will be different than those for the last ten years. While it remains everyone’s goal to maximize profits and yields, sometimes the short-term goal is to minimize losses. Both before and during a recessionary downturn, best management practices require specialized knowledge and experience in order to minimize losses. In their decades of professional practice, senior management at Federal Appraisal LLC has lived through several significant recessionary periods. This market experience allows them to advise businesses and investors on how best to preserve profits and minimize losses during challenging economic times. Federal Appraisal provides the following appraisal and consulting services to assist their clients with preserving value during recessionary periods and economic downturns: Property tax appraisal and consulting services during economic downturnsreducing property taxesproperty tax assessment appeals litigation/expert testimony Identification of potential surplus property for pre-transactional or re-positioning due diligence Analysis of opportunities for investment in distressed properties Appraisal and consulting services for gift and estate tax planning and reporting purposes Feasibility studies for development, renovation, and/or changes in real estate highest and best use Marketability studies for the impact of recession on demand (for multifamily, office, retail, industrial properties, and more) Case Study One – Concrete Pipe Manufacturer Federal Appraisal advised a regional manufacturer on the value of its various real estate holdings, identifying surplus property to be sold and for how much, and what property was to be preserved and maintained to maximize value to the company. The process identified millions of dollars in untapped, idle value which could be redirected to core business activities. Case Study Two – Property Tax Appeals on Commercial Real Estate Investment Portfolio The senior management at Federal Appraisal reviewed the investor’s portfolio, identified the properties deserving property tax reductions, completed property tax appeals, negotiated tax reductions for some properties, and provided expert testimony in trials for tax reductions for others. The process saved the client more than $10,000,000 in property taxes. Case Study Three – Opportunity Investor Federal Appraisal provided pre-acquisition appraisals and due diligence support to an investor buying a portfolio of troubled power plants, earning the investor yields greater than 25%. Read more at Impairment Studies.

Lease Audit/Analysis Federal Appraisal provides expert lease audit and lease analysis services. Commercial real estate leases are often very complex.  They often include unspecified rent and expenses beyond the base rent.  These include rent escalation clauses, operating expense passthroughs, real estate tax passthroughs, common area charges (CAM), electricity charges, other utilities charges, insurance charges and many others.  These rents and passthrough could have any number of methods of calculation, including a net passthrough, a pro rate share, a specified (non-pro rata) share, and the methods can change from year to year. They can have minimums and maximums and they can be based on changes over a base amount or index.  Even base rent calculations are often complicated, with periodic base rent adjustments such as steps, CPIs, and mark-to-market clauses. Analyzing leases is thus, difficult for the inexperienced.  Since lease payments can equal the market (sales) value of the real estate in as short as seven years, the consequences of not auditing a longer term commercial real estate lease can result in substantial losses. Services to Tenants Leased Fee or Leasehold Appraisal Federal Appraisal LLC provides appraisals of any type of lease interest, leased fee or leasehold interests, for any accounting or legal reasons. Lease Audit Lease audits examine the payments requested by landlords to determine their appropriateness.   Lease audits help identify errors and recover overcharges. Our process includes the analysis of the lease, the landlord's payment requests, the landlord's records to the extent permitted by the lease.  It can include a results presentation to and negotiations with the landlord to recover overcharges.   Lease Analysis Since the sum of the lease payments over a term of about seven to ten years can equal the market (sales) value of the real estate and since lease payments are often so complicated, all negotiations for longer term leases should be conducted with the counsel of expert real estate analysts, such as those at Federal Appraisal LLC.  We can provide buy/rent decision analysis, lease to lease cash equivalence comparisons, and other due diligence support and reporting. Services to Landlords Lease Audit Lease audits examine the payments requested by landlords to determine their appropriateness.   Lease audits help identify errors and recover undercharges. Our process includes the analysis of the lease, the landlord's payment requests, and the landlord's records.  It can include a results presentation to and negotiations with the tenants to justify the charges. Lease Analysis Since the sum of the lease payments over a term of about seven to ten years can equal the market (sales) value of the real estate and since lease payments are often so complicated, all negotiations for longer term leases should be conducted by expert real estate analysts, such as those at Federal Appraisal LLC.  We can provide buy/rent decision analysis, lease to lease cash equivalence comparisons, and other due diligence support and reporting. Services to Buyers and Sellers - Due Diligence We also provide and/or certify rent rolls, lease cash flow projections, and net present value calculations of lease income.