Allocating Purchase Price to Real Property vs Goodwill


#1

I noticed in a recent mobile home park Purchase and Sale agreement I came across that the buyer in the agreement allocated 70% of the purchase price towards the Real Property, and the remaining 30% to the business value, or “goodwill”. They then stated that the the amount allocated to Real Property could be subject to an increase as a result of an optional appraisal which could be ordered by the buyer.

Is this a common practice? I’m assuming this is done mostly to set the bar for depreciation allowances as well as property taxes. Does anyone have experience with structuring a PSA in this way, and if so has this proved beneficial?


#2

No. This isn’t common. And it is not a good practice if I am wrong and it is.

I don’t think you were looking at a good agreement, probably one that someone grabbed from a small business sales document where goodwill is a material factor in calculating the sales price.

You want the real property to be as low as possible and the improvements to be as high as possible for depreciation purposes. An appraisal is a good thing to have in hand upon sale, and if you are financing the purchase your lender will insist on one. The second best thing to have on file is the local tax appraisal, which sometimes is skewed towards high improvements versus the land.

There is undoubtedly some goodwill in the transaction, but most park buyers don’t want it in their calculations because you cannot depreciate it.


#3

Let me respond as a CPA and park owner. What you saw is not a common practice, and the way it was done was incorrect, but it can be very useful from a tax standpoint. The agreement should have allocated the sales price to land, land improvements ( roads, sewer, electric, water, possibly cable systems), park owned homes, park owned buildings, sign, equipment, vehicles and inventory or parts. All of that should have been done at fair market value. Then, whatever was left over should have been classed as goodwill.
From a tax standpoint, the goodwill may be amortized over 15 years, the same as the land improvements. There are different lives for the other assets, and all but cost of land end up being expensed one way or another, but that’s the subject of another post.
Conclusion: what you saw was wrong, but they were on to something. It just wasn’t done right.


#4

Allocating money towards goodwill IS the smartest strategy possible. As Carl mentioned, it allows for amortization at 15 years, which is faster than real property land (no depreciation) and the depreciation for buildings. Thus, the Buyer pays less in taxes.

Perhaps more importantly, the lower the value on real property the less likely it is you are going to get a property tax increase. (If you are buying a park for $1MM that the county appraiser has on the tax rolls at $200K, which is common, get ready for the pain, unless you use this strategy.) The allocation has to be reasonable but the reality is that a large portion of the value in a MHP IS the permit (the operating business, i.e. goodwill) and NOT in the land or physical improvements. Really? Yes, would you pay $1MM+ for 10 acres of dirt on the outskirts of town? No way, as the adjacent ground is worth 10% of that. But, would you pay $1MM if it had an operating business with an NOI of $100K (grandfathered in and with permitting rules that create a barrier to entry for competition)? Yes, you would. And there you have it, you are buying intangible value - you can amortize intangible assets for income tax purposes AND you cannot be taxed on them by county appraisers (in I believe any state).

Final bonus for the seller - if the county/state have sales/transfer taxes or stamps then the seller will have to only pay these on the allocated portions of land/improvements.

Anybody who tells you not do an allocation with goodwill is ignorant or a fool.


#5

Really good thread, thank you to the posters.

Any advice on how to fairly calculate the FMV of land improvements, in order to determine what’s left over for goodwill?


#6

My sense of it is that the best way to calculate FMV of land improvements is through the use of a qualified appraiser. They should use the cost/depreciation method or the replacement/depreciated method. In essence, you look to what the cost of the property improvements was, then calculate where they are on the scale from new to dust, and peg a value there, which you then inflate to the current value of the dollar (thus taking into consideration inflation). Another approach is the replacement cost method, where you calculate what it would cost to replicate the land improvements, then depreciate them to their current standard of use or life. Both answers should be somewhat close, depending upon the assumptions made.
And, of course, the assumptions are always the most difficult part… :-0)


#7

Has anyone done a cost segregation for a park ? It would be interesting to know what their take on this is. I have a guy at my real estate meetups who does cost seg as his own business . Ill try and ask the next time I see him.


#8

I just wanted to follow up on Augustine’s point too, as it’s a pretty big one. Has anyone else had success reducing their property tax assessment with the argument that a portion of the purchase is goodwill?


#9

We have purchased several communities in which we have allocated a substantial amount of value to Goodwill. True, you cannot depreciate Goodwill, but you can Amortize it over 15 years, which amounts to the same financial benefit. We have never had a contract that allows the buyer or seller to change the goodwill allocation based on a third-party report however.