Shenehon receives award for outstanding business valuation practices

The International Society of Business Appraisers (ISBA) has recognized Shenehon Company for its excellence and adherence to professional performance standards. Shenehon was recently awarded ISBA’s Gold Seal of Trust in Business Valuation.

In presenting the award, the ISBA said, “Shenehon’s Business Valuation Unit is an outstanding example of a world-class business valuation firm.” Shenehon is the only valuation organization in Minnesota to be awarded this honor and is the only recipient in the United States that has a multi-functional practice, handling both business valuations and commercial real estate appraisals.

U.S. Labor Department looking closely at ESOP valuations

The U.S. government is increasing scrutiny of valuations of employee stock ownership plans (ESOPs), looking for inflated estimates of the worth of a company’s shares, according to an article in the June 23 Wall Street Journal. The Labor Department is plaintiff in 15 lawsuits related to ESOPs, with most of the cases claiming shoddy valuations, and some alleging that appraisals were deliberately inflated, harming the plan and participating employees.

Company owners can defer taxes on capital gains when they sell all or part of a company to an ESOP, and employer contributions to ESOPs are generally tax deductible. More than 13.4 million U.S. workers were part of an ESOP in plan in 2011 (the latest year data is available), up 7.5 percent from 2006.

Valuations are an integral part of an ESOP plan, as 95 percent of the estimated 6,800 U.S. companies with an ESOP are closely held and not widely traded. Valuations are necessary when the ESOP is established and annually in subsequent years to determine the repurchase price at an employee’s retirement, departure or death.

According to the Journal article, federal officials are expected to propose new rules in 2015 to toughen standards for outside appraisers who prepare valuations for ESOPs. Currently there are no minimum qualifications for appraisers who value ESOPs or any specific guidance or rules related to how the appraisals are performed.

The Labor Department is also scrutinizing trustees with a fiduciary duty to employees participating in a plan. A settlement with GreatBanc Trust Co. spelled out practices for GreatBanc to follow, including taking “reasonable steps” to make certain that an appraiser gets accurate and current information to use in the valuation analysis.

ESOP valuations require a reasonable and well-defended valuation analysis, performed by a qualified appraiser, in order to meet the needs of the large number of ESOP stakeholders. Shenehon Company has more than 30 years of experience in business valuations and can prepare valuation analysis for use at the formation of an employee stock ownership plan as well as annual ESOP valuations. For more information, contact Bill Herber at 612-333-6533 or

Questionable Compensation for Temporary Easements

By: Phillip J. Butler

Shenehon Company has recently noticed a pattern where condemning authorities such as the Minnesota Department of Transportation, cities, and counties, establish temporary construction easements and want to compensate property owners in a way that is questionable and unreasonable.

Private land taken for a public project is often acquired in one of two formats: permanent or temporary. The most common temporary easement is a temporary construction easement. Since it is difficult to accurately determine construction timelines, condemning authorities place temporary easements for a longer time period than they actually need to complete construction. For example, a city might need a construction easement for nine months. Since it is difficult to accurately estimate construction timelines, the city might impose the right to use the nine months at any point within 48 months. Lately we are seeing cities like the one in our example offer to compensate property owners only for the nine months of use rather than the 48 months of right to the land. The city claims that since it will use the land for only nine months it must only compensate the property owner for that time.

Some may question this logic. One might argue that since that the city is imposing the right to use the land for 48 months it should compensate for the full 48-month period. Customary leasing practice in the marketplace is for a tenant to pay for the right to occupy a space for a period of time. If the tenant does not actually use the space during the time period stated in the lease, the tenant cannot reduce the rent payment due the landlord.

Using this customary approach to land use and leasing, we assert that it is improper for the city to impose rights for land use during a specified time period and then reduce its just compensation payments based on the fact that it did not actually use the land.

We appreciate the fact that condemning authorities want to save taxpayer dollars. But the approach we just described is a questionable method to trim costs. We maintain that just compensation is based on rights to land use and not actual use.

Shenehon Company appraiser will be published in The Appraisal Journal

Congratulations to John Schmick, Vice President and Director of Special Projects at Shenehon Company. The Appraisal Journal, the appraisal profession’s premier technical and academic publication, has accepted an article submitted by Schmick and co-author Jeff Jones, MAI and Chief Appraiser of the Alabama Department of Transportation. The article challenges the widely accepted practice of using the across-the-fence methodology in valuing railroad land. The piece illustrates how the practice does not comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and will be published later in 2014.

Schmick has previously been published in Real Estate Review and Right of Way magazine.

Morningstar discontinues the Ibbotson SBBI Valuation Yearbook at the end of 2013

By: Chris Olson, MBA

Morningstar discontinued the publishing of its annual Ibbotson SBBI Valuation Yearbook at the end of 2013, so now what should valuation professionals use as a replacement?

Currently, there are two leading sources to replace the outgoing SBBI data source. The first option is the Valuation Handbook by Duff & Phelps; this is a new offering and is intended to be a comparable replacement for the Ibbotson SBBI Valuation Yearbook. The second option is the Implied Private Company Pricing Line (IPCPL) by Bob Dohmeyer, ASA; Pete Butler, CFA, ASA; and Rod Burkert, CPA/ABV, CVA.

The Valuation Handbook by Duff & Phelps offers valuation professionals source information in a similar format as the discontinued Ibbotson SBBI Valuation Yearbook, so the transition should be fairly seamless. Valuation professionals will still be able to have a break out of each risk component within the build-up method to arrive at the weighted cost of capital (WACC). However, it is still too soon to definitively comment on this source.

The other option is the Implied Private Company Pricing Line, which was discussed in the September 2013 BVR Business Valuation Update newsletter (

Using the Implied Private Company Pricing Line is an innovative way to assist valuation professionals in calculating a company’s WACC using the calculator (, and all that is required is the company’s revenue. For example, the cost of capital for a company with $100,000 in revenue is 23.73%, while the cost of capital for a company with $100 million in revenue is 18.48%, assuming a 0% tax rate for both. The cost of capital difference between the two examples is 5.25%.

Based on what we have seen thus far, it appears that the Duff & Phelps data would be most likely used in a given valuation engagement, given that the IPCPL is only a recent development, and therefore not fully vetted.

Can a Single Market Indicator Predict Rental Demand?

By: Brad Dulas

In any given year, a certain number of clients will ask an appraiser, land planner, consultant, or other estate professional to estimate how long it will take a planned apartment complex to reach stabilized occupancy or how long it might take an entire overbuilt apartment market to reach equilibrium in terms of balance in demand and supply. As new apartment construction pipelines swell throughout the United States and within the local Twin Cities apartment market, client requests for an accurate estimate of supply and demand trends have become more common and the professional’s conclusion begins to hold more weight. Professionals involved in these assignments rely on a wide range of techniques, methods, and formulas, with varying degrees of success, to reach their respective conclusions.

This begs the question of which technique, method, or formula is most successful in forecasting rental demand, and whether there is a single market indicator that can, in fact, predict apartment demand. In an article titled “Using Historical Employment Data to Forecast Absorption Rates and Rent in the Apartment Market”, published in Real Estate Issues1, the authors describe a simple forecasting technique based on the relationship between net new jobs created and apartment absorption rates. Charles Smith, Ph.D., Rahul Verma, Ph.D., and Justo Manrique, Ph.D., suggest that if one divides average annual job growth figures by average annual absorption of apartment units, one can forecast absorption rates over time.

We believe this technique bears further study. In the next edition of Valuation Viewpoint, we will investigate the proposed technique and explore additional options in forecasting apartment absorption.

1Volume 37, Numbers 2 and 3, 2012 of the Real Estate Issues Counselors of Real Estate Charles Smith, Ph. D., Rahul Verma, Ph. D., and Justo Manrique, Ph. D.