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Whitehouse Limited Partnership and the Gross Overstatement Penalty

Posted on July 8, 2014 at 5:05 PM Comments comments (1)


The Whitehouse case is a case that has been in the news for years and one where the AVW 90 team has discussed in webinars over the past few years.  By way of background, the taxpayer sought a deduction for a conservation easement an the U.S. Tax Court severely criticized the underlying work and assessed the 40% overstatement penalty.  The taxpayer had two experts in the case --one that came up with the value of the easement, and  a subsequent expert that coincidentally (?) arrived at a value close to the initial expert.  They appealed to the 5th Circuit since the penalty was high and the U.S. Tax Court essentially said that their opinion was not changed.  In other words, pay the penalty, since there were grounds to impose the same.  The case went back to the 5th Circuit and the court concluded that the 40 penalty did no apply.

So, the taxpayer, in my opinion, got a break.  Is the lesson here effectively that notwithstanding that an aggressive position is taken and you have two or more expert almost concur, that the 40 percent penalty will not apply?  The cost is to hire an "unbiased" expert as part to the cost of doing business?  I do not know. The U.S. Tax Court and other courts are concenred with the lack of impartiality on the expert's part and have started to recommend "hot tubbing" them, are these judges being unfair to parties exercisihg their rights?  As an aside, how likely is an expert that comes up with a way lower value than that of the initial expert  going to be hired by the law firm or client the next time there is adispute?  Call me cycnical, but I doubt that expert will be called or foremost in the mind of the client the next time around.  

The link above is to the case, I will talk about this when I do the NACVA Federal and State Case Law Update later this year.  Your thought on the case are welcome and with regard to the questions asked, I am just stirring up the pot stirred by the U.S. Tax Court judges.

Multi-Family and Return on Investment Example

Posted on May 14, 2014 at 12:10 AM Comments comments (0)

The subject of commercial real estate is not one I have posted on ... so, it is time to post something on commercial real estate.  Multi-family housing seems like a good starting point.  I picked a Chelan County posting where the purported cap rate is 8.0%, which is a bit generous (currently) for this type of investment.    I ran the numbers and made some assumptions about the expenses.  Was the asking price consistent with the 8% cap rate?? No, not even close.  A buyer buying into that would have seriously overpaid.

The following is a summary of a quick analysis done to test the purported number.; the price consistent with an 8% cap rate, based on my calculation and estimates, is shown below:


Multi-family Apartment Building Acquisition - Central Washington Appraisal, Economic & Forensics, LLC

www.cwa-appraisal.com (509) 679-3668


Project Name/Address:   Chelan  Cty Apt Example

Today's Date 5/13/2014 Value

Number of Units 3 Units Lot Size 0.40 Acres

Year Built 1982 Building SF 3,000 GSF

Acquisition Uses and Sources of Funds Going-in Cap Rate: 8.03% GRM: 4.84 Per Unit

Purchase Price $48 PSF /$145,148 /$48,383

Acquisition Costs 4.00% $5,806

Renovation Budget $10,000

Total Uses of Funds (Total Cost) $160,953

% Total Cost * Interest

Total Equity (includes Acquisition Costs) 40.00%  $67,865 Annual PMT

Mezzanine Loan Amount 0.00% 12.00% $0 $0

Senior Loan Amount 60.00% 6.00% $93,089 ($6,763)

Total Sources of Funds 100.00% $160,953 ($6,763)

* Loan Amounts calculated exclude Acquisition Costs

Months to Stabilization 6 months 11/13/2014

Hold Duration after Stabilization 72 months 11/13/2020

Total Hold Duration 78 months

Global Income Growth Rate: 2.0%

Global Expense Growth Rate: 1.0%

Income TTM Actuals Pro Forma Year 7

Gross Potential Rent (GPR) $30,000 increasing to $33,785

Gross Potential Income $30,000 increasing to $33,785

Plus Vacancy and Credit Loss - 8.90% ($2,670) ($3,007)

Effective Gross Income $27,330 $30,778

Less: Expenses (See Detail below) $14,400 48.0% GPR $15,286 45.2% GPR

Net Operating Income $12,930 43.1% Op. Mgn. $15,492 45.9% Op. Mgn.

Operating Cash Flow $6,167 $8,729

Cash On Cash Return 9.09% 12.86%

Real Estate Taxes $3,000 (estimate yr 1)   $3,185 (estimate yr 7)

Total Expenses $14,400 (estimate yr 1)  $15,286 (estimate yr 7)

Disposition Sale Date: 11/13/2020 

The asking price is $299K; the modelling suggests this cap rate is overstated, as is the price.

Ready to get a serious analysis? We can assist with storage facilities, hotels, lease v buy analysis.  Call us at (509) 679-3668