External Obsolescence in Property Tax Leveraging Market Conditions - PowerPoint PPT Presentation

External Obsolescence in Property Tax Leveraging Market Conditions to Reduce Real and Business Personal Property Valuations Personal Property Valuations presents presents A Live 110-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Ki Kieran Jennings, Partner, Siegel Siegel Johnson & Jennings , Cleveland, Ohio J i P t Si l Si l J h & J i Cl l d Ohi Kevin Reilly, Senior Manager, Real Estate and Related Assets Group, American Appraisal Associates , Milwaukee, Wis. Tony Barna, Principal, Kelly-Rielly-Nell-Barna Associates Inc. , Pittsburgh John Dyslin, Member, Property Tax Services Group, Ernst & Young , Houston Jason Chao, Senior Manager, Ernst & Young , Los Angeles Thursday, February 18, 2010 The conference begins at: 1 pm Eastern p 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View , select Navigational Panels , and chose either Bookmarks or Pages . If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10

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External Obsolescence in Property E t l Ob l i P t Tax Webinar Feb. 18, 2010 Kevin Reilly Tony Barna American Appraisal Assoc. Kelly-Rielly-Nell-Barna Assoc. kreilly@american-appraisal.com acbarna@hotmail.com John Dyslin Jason Chao Ernst & Young Ernst & Young john.dyslin@ey.com jason.chao@ey.com Kieran Jennings Siegel Siegel Johnson & Jennings kjennings.siegeltax.com

Today’s Program • Factors Leading To Economic Obsolescence, slides 3 through 16 ( Kevin Reilly ) • General Principles Of Economic Obsolescence, slides 17 through 31 General Principles Of Economic Obsolescence, slides 17 through 31 ( Tony Barna ) • Relevant Accounting Guidance, slides 32 and 33 ( John Dyslin and Jason Chao ) Jason Chao ) • Picking Your Battleground, slides 34 through 38 ( John Dyslin and Jason Chao ) • • Effectively Selling Your Company’s EO Analysis slides 39 through Effectively Selling Your Company s EO Analysis, slides 39 through 48 ( Kieran Jennings ) 2

3 Factors Leading To External Obsolescence Obsolescence

What Is External Obsolescence? A What Is External Obsolescence? A Quick Refresher I Is the loss in value of a property caused by factors external to the h l i l f d b f l h property?  Economics of the industry  Availability of financing  Loss of material and/or labor sources  Passage of new legislation g g  Changes in ordinances  Increased cost of raw materials, labor or utilities   Reduced demand for the product Reduced demand for the product  Increased competition Source: Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets S V l i M hi d E i t Th F d t l f A i i M hi d T h i l A t 4 4

External Obsolescence: Start To External Obsolescence: Start To Finish  Identifying  Is EO present, and why?  Quantifying  What is causing EO helps dictate methods to quantify  Explaining – “Telling a story”  Why is your property’s or asset’s value reduced 5

The Current Economic Downturn The Current Economic Downturn And Its Effect On EO  Given the current economic environment, EO has become a BIG issue  Conservative cash: Reductions in corporate spending   Consistent or increasing capacity vs. reduced demand Consistent or increasing capacity vs reduced demand  Obvious examples of EO:  Auto industry – Lack of demand  Real estate – Credit issues  Petrochemicals and refining – Overcapacity, competition  Power generation – Gross margin (lack of profitability)  Many industries have been affected 6

Manufacturing Industrial Production And Capacity S Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision F d l R St ti l R l G 17 (419) 2009 A l R i i Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing. 7

Manufacturing Industrial Production And Capacity (Cont.) S Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision F d l R St ti l R l G 17 (419) 2009 A l R i i Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing. 8

Manufacturing Industrial Production And Capacity (Cont.) S Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision F d l R St ti l R l G 17 (419) 2009 A l R i i Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing. 9

M Manufacturing Industrial Utilization f t i I d t i l Utili ti Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision S F d l R St ti l R l G 17 (419) 2009 A l R i i 10 10

M Manufacturing Industrial Utilization (Cont.) f t i I d t i l Utili ti (C t ) Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision S F d l R St ti l R l G 17 (419) 2009 A l R i i 11 11

M Manufacturing Industrial Utilization (Cont.) f t i I d t i l Utili ti (C t ) Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision S F d l R St ti l R l G 17 (419) 2009 A l R i i 12 12

Current (Jan. 2010) values = Values in 2003 and 48% of 1/07 peak Current (Jan 2010) values General Trend In Commercial Real Estate Values Dow Jones US S Composite All RE EIT Index 100.00 150.00 200.00 250.00 300.00 350.00 350.00 50.00 0.00 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/30/2005 12/29/2006 Source: Dow Jones Composite All REIT Index Base Date December 1991 Source: Dow Jones Composite All REIT Index Base Date December 1991 1/31/2007 Real Estate Investment Trust Index 2/28/2007 3/30/2007 4/30/2007 5/31/2007 6/29/2007 7/31/2007 Values in 2003 and 48% of 1/07 peak 8/31/2007 9/28/2007 Dow Jones 10/31/2007 11/30/2007 12/31/2007 1/31/2008 2/29/2008 3/31/2008 4/30/2008 5/30/2008 6/30/2008 7/31/2008 8/29/2008 9/30/2008 10/31/2008 11/28/2008 12/31/2008 1/30/2009 2/27/2009 3/31/2009 4/30/2009 5/29/2009 6/30/2009 7/31/2009 8/31/2009 9/30/2009 10/30/2009 11/30/2009 13 13

Current (Jan 2010) values = Values in 2003 and 48% of 1/07 peak Current (Jan 2010) values = Values in 2003 and 48% of 1/07 peak General Trend In Commercial Real Estate Values Cont.) Dow Jones US C Composite All REI IT Index 100.00 150.00 200.00 250.00 250.00 300.00 350 00 350.00 50.00 0.00 12 2/31/2000 12 2/31/2001 12 2/31/2002 12 2/31/2003 12 2/31/2004 12 2/30/2005 12 2/29/2006 1/31/2007 1 Real Estate Investment Trust Index 2/28/2007 2 Source: Dow Jones Composite All REIT Index Base Date December 1991 3/30/2007 3 4 4/30/2007 5/31/2007 5 6/29/2007 6 7/31/2007 7 8/31/2007 8 9/28/2007 9 Dow Jones 10 0/31/2007 11 1/30/2007 12 2/31/2007 1 1/31/2008 2 2/29/2008 3 3/31/2008 4 4/30/2008 5 5/30/2008 6 6/30/2008 7/31/2008 7 8 8/29/2008 9/30/2008 9 10 0/31/2008 11 1/28/2008 12 2/31/2008 1/30/2009 1 2/27/2009 2 3/31/2009 3 4 4/30/2009 5 5/29/2009 6/30/2009 6 7/31/2009 7 8/31/2009 8 9 9/30/2009 10 0/30/2009 11 1/30/2009 14 14

Impact Of Governmental Mandates Impact Of Governmental Mandates, Legislation EO driven by special conditions in particular industry sectors EO driven by special conditions in particular industry sectors  Refining - Sulfur and emissions reduction  Power generation - Deregulation  Carbon cap and trade – Go or no go  The cost of “going green”  Increased cost of doing business g  Increased cost of electricity  More equipment, more people, more maintenance = More expense  Foreign competition in a global economy  Foreign competition in a global economy  Do other countries require similar emission standards (China, rest of Asia, etc.)? 15 15

Techniques To Increase Your Success Techniques To Increase Your Success Explaining EO To The Other Side   Use documented methods/methodology to quantify EO Use documented methods/methodology to quantify EO  Legal precedents  ASA Textbook: “Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets” F d t l f A i i M hi d T h i l A t ”  Independent outside sources (papers, articles, texts, etc.)  Be able to support your results  Things NOT to do Things NOT to do  Make assumptions  Use techniques and methods that aren’t proven or that push the envelope envelope 16 16

17 General Principles Of External Obsolescence Obsolescence