Intangible value is a term that many investors have heard of, but never fully understood. However, determining intangible value is something that comes up quite frequently in commercial real estate.
For example, let’s say you decide to sell a commercial property. Since the value of the property will depend heavily on the tenant, there may be certain factors that increase the uniqueness or viability of the tenant, and hence the value of the property.
Or for some example, what if you decide to increase your cash flow and decrease your taxes by depreciating assets on your tax returns. Tangible assets – such as an HVAC system – can certainly lose their value over time.
But what about intangible assets? They too can be depreciated – if you know what they are.
Property taxes are also affected by intangible assets, and an assessment that fails to take them into account might affect you adversely – or positively.
First, let’s define what assets are. According to the IRS, assets must have three features: One, they must be able to provide economic benefit in the future, and two, the owner must be able to receive that benefit and prevent others from accessing the benefit.
And last, there must be an event (like a contract or a will) that has occurred that has given the owner the right to receive the benefit.
But that still doesn’t tell you what intangible value or assets is, so to understand it better, let’s talk first about what they are not.
What Are Intangible Assets?
Colloquially when people think of the word “intangible,” they think of something that can’t be touched or held – an item that possesses no physicality.
“Market potential” or “heritage” or “uniqueness” are some examples of what many people as intangible values – merely because they add value to the property even though they aren’t tangible.
However, that’s not how the IRS defines intangible value.
According to the IRS, things like a competitive edge, size, or first to market are merely attributes of the property. Even though the may influence the value of the property, they are things that describe the property… but they can’t be separated from the property itself.
For example, the color red may describe an apple, but the “red” color cannot be separated from the apple. Red is, therefore, an attribute of the apple, not an intangible value.
In the same vein, let’s assume your Quick Service Restaurant is being leased by a business that has a monopoly for 50 square miles around. That monopoly will surely affect the success of the business, which in turn will increase the value of the property.
But the “monopoly” can’t be separated from the property itself, and thus it isn’t an intangible value.
Interestingly enough, “goodwill” of an individual or a corporation is considered an intangible asset. That’s because even though it can’t be separated from the business, it can be separated from the property – which is how the IRS defines intangible assets.
Examples of Intangible Assets
Here are some additional examples of items that are not intangible assets:
1.High market share
2.High profitability or high-profit margin
3.Lack of regulation
4.A regulated (or protected) position
5.A breadth of customer appeal
7. Discount prices (or full prices)
8. Positive image
9. Technological superiority
10. Consumer confidence or
12. High growth rate
13. High return on investment
15. Economies of scale
20. Proximity to transportation
21. Proximity to downtown
22. Easements, rights of way
25. Air, water, etc., rights
26. Subsurface rights
27.Favorable rental rates
The IRS’ Definition Of Intangible Assets
The IRS calls assets intangible because even though they can’t be seen or touched, they can still have value. Their value doesn’t stem from a physical substance (or lack thereof), but because of the “rights and privileges” awarded to the owner.
These are the six characteristics of an intangible asset:
• It has a specific description and can be uniquely identified
• It is subject to the law and can be protected under the law
• It can be owned by a private owner, who also has the authority to sell his or her rights to it
• There must be tangible proof that it exists
• You must be able to point to a time when it was created, and how.
• Rights to it can be ended at a particular time or as a result of a specifc event (such as being sold)
Examples Of Intangible Assets:
• Non-competition agreements
• Contract-based intangible assets
• Licensing, royalty, and standstill agreements
• Advertising, construction, management and service or supply
• Lease agreements (whether the acquiree is the lessee or the
• Construction permits
• Franchise agreements
• Operating and broadcast rights
• Servicing contracts such as mortgage servicing contracts
• Employment contracts
• Use rights such as drilling, water, air, timber cutting, and route
• Any license, permit, or other right granted by a
governmental unit or an agency or instrumentality
Let’s see how these would apply to a typical commercial real estate medical building.
If you’ve acquired special operating licenses or permits, and the medical administration has managed to woo specialist staff with whom they’ve entered into professional employment agreements… then those are considered intangible assets.
Likewise any special operating licenses or permits for your facility, and professional non-competition agreements, agreements with suppliers or equipment manufacturers, and so on.
Using The Power Of Intangible Assets To Boost Property Value
If you own a property with a franchise in place, then when you sell your property, the value of the franchise name cannot be included as an intangible asset attached to the property – it doesn’t belong to you, but to the business owners.
On the other hand, if you own a freestanding retail property that is well-known, but not a franchise, then there are very likely intangible assets that can be included in the sale.
In general, when a commercial property and the business that occupies it are one and the same – for example, a senior care facility or hotel – then the income and intangible assets from the business would be considered when valuing the property.
As you’ve discovered, intangible assets play a critical role in determining the value of your property… but they also help differentiate your commercial property from others that are similar.
It is important not only that you identify and quantify what they are, but that you also determine who has ownership of each one. When in doubt, it’s always a good idea to consult your account or a knowledgeable broker, particularly before you buy or sell a property.Tags: commercialrealestate, commercialrealestateinvesting, Intangible assets