In connection with company restructuring, in recent years we have seen companies dividing the manufacturing activities from asset management.
Real estate spin-off into a separate entity brings numerous advantages, the biggest being:
- more efficient company management processes and lower costs
- easier bank financing
- increased asset liquidity
- assets become more attractive for potential sale of the real estate
- simpler company restructuring
- possibility to update the book value of the real estate to be spun off.
Real estate (and other assets) is usually spun off into a company, ensuring its management and lease. The asset management companies take care solely of the correct operation of the real estate, while the affiliate from which the real estate was spun off can be fully engaged in the manufacturing. The owner of the structure knows exactly what costs are associated with the manufacture only and what costs are associated with the management and operation of real estate required for the manufacture.
There are in fact two answers to the question “what the value of real estate upon spin-off is”. The real estate is part of assets to be spun off and its value should be determined in compliance with the Restructuring Act. Nevertheless, for determining the value of a company’s assets, the Act does not provide any definition of the value to be determined in an expert opinion. Valuers’ practice shows that the target value of a spun-off part of assets is the fair value which gives the best view of the relationships between two specific entities – in this case, the owner of the structure and the lessee (user).
The other answer to the question is the calculation of fair value. Here it is important to be aware of the situation as at the preparation of the expert opinion. While the current owner of the real estate is known, the new owner will be established either during the spin-off process by the formation of a new company or as a result of a merger with an existing company. In general, no lease agreement between the future owner and a future lessee may exist upon the spin-off. From a valuation perspective, the real estate can be viewed as a vacant facility suitable for lease. Hence, the valuation can be based on an estimate of fair rent less the vacancy rate usual for the given type of real estate. However, this approach leads to a distortion of the value because the real estate will in fact not be vacant after the spin-off but be used by the original owner, who will become a lessee. Consequently, the valuation should reflect the fact that from the spin-off onwards, the real estate will be used at least for the period necessary to continue manufacture. The valuation will reflect the loss of rent only after the manufacture is closed down, when the real estate can become a non-essential asset.
Although the real estate is not leased upon the spin-off, we think it is important to consider the real estate leased, at least for the period for which the use of the real estate by the current owner is guaranteed. Therefore, the fair value of the real estate determined using the income approach will be higher than the value of an unleased property. On the other hand, upon spin-off, the real estate (and other assets) carries tax effects that must be calculated in the form of a deferred tax liability/ asset. If bank financing is to be provided for the real estate, the spun-off part of assets will probably also include the liability arising from a loan or guaranty. If the real estate is intended for sale to the company into which the assets were spun off, tax tests must be carried out. Even with a relatively simple task of valuing real estate to be spun off, maximum attention should be given to the real estate itself and deferred tax and other components that form the spun-off part of the assets.
RSM TACOMA Valuation has extensive experience in real estate valuation. We are ready to provide assistance and support if you need to appreciate the separated part of the assets, property or determine the amount of rent. We would be happy to assist you in this area.
Please contact us for more information.