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Flotation Cost Adjustments to the Cost of Capital in …

24 INSIGHTS • SUMMER 2017 www .willamette .com Flotation Cost Adjustments to the Cost of Capital in Unit Principle Valuations Casey D. Karlsen Property Tax Valuation Insights

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24 INSIGHTS SUMMER 2017 www .willamette .comFlotation Cost Adjustments to the Cost of Capital in Unit Principle ValuationsCasey D. KarlsenProperty Tax Valuation InsightsValuation analysts are often called on to perform flotation cost studies used in the estimation of the cost of capital for property tax valuation purposes. Flotation costs are the security issuer s cost associated with the public sale or the private placement of either debt capital or equity capital. Adjusting the cost of capital for flotation costs may have a material effect on the subject property value conclusion, particularly with regard to unit principle valuations. This discussion (1) summarizes the factors that influence the level of flotation costs and (2) explains the potential effect that a flotation cost adjustment can have on both the cost of capital and the property value conclusion in a unit principle the cost of capital in unit principle valu-ations prepared for property tax purposes may be a contentious issue between the taxing authority and the taxpayer property owner/operator. This is because small changes in the cost of capital may have a material effect on the concluded value of the subject taxable in the cost of capital often result from differing assessments and estimations of risk. One factor that may be considered in the estimation of the cost of capital is an adjustment for debt and equity flotation costs are the security issuer s costs associated with the public sale or the private placement of either debt capital or equity capital. Flotation costs include the security offering man-ager fees, underwriting fees, brokerage and selling concessions, and other expenses related to the sale of debt or equity are often called on to perform flotation cost studies to estimate the flotation cost adjust-ment that may be appropriate in a specific taxing jurisdiction or to a specific of a flotation cost adjustment may affect both (1) the taxpayer s cost of capital and (2) the value conclusion of the unit principle flotation cost percentage is often mea-sured as the company s flotation costs calculated as a percentage of the total amount of the debt capital or the equity capital example, let s assume that an industrial or commercial taxpayer issues $100 million of com-mon equity in a public stock offering. Let s assume that the total offering manager fees, underwriting fees, and selling commission fees ( , the flotation costs) equal $2 on these assumptions, the flotation costs calculated as a percentage of sale proceeds equals 2 percent ( , $2 million of flotation costs $100 million of the sale proceeds from the security offer-ing).Flotation cost percentages vary due to factors such as the following:1. The size of the security offering2. The date that the securities are offered for sale3. The type of the securities offered4. The characteristics of the entity offering the securitieswww .willamette .com INSIGHTS SUMMER 2017 255. The underwriter of the securities offering6. Other factorsGiven the variability in flotation costs and their potential effect on the property value conclusions, it is important that analysts understand the factors that affect flotation of ToTaL fLoTaTion CosTsFlotation costs include the security offering man-ager fees, underwriting fees, brokerage and selling concessions, and other expenses incurred in con-junction with the sale of debt or equity securities. Underwriting fees often comprise a significant portion of the total flotation costs. Underwriting fees are the fees paid to investment bankers in connec-tion with the issuance of underwriter of an issuance of securities is typically an investment bank that receives a com-mission in return for:1. pricing the securities and2. assembling groups of fees are often referred to as the gross spread or underwriting discount. Underwriting fees may comprise a significant por-tion of the total flotation credibility and name recognition may be particularly important to maximize the value of a securities offering. The selection of a prominent underwriter may positively influence underwriting and expenses related to initial public offerings in the United States increased after the Sarbanes-Oxley Act (the Act ) was enacted in 2002. The Act was enacted to improve financial disclosures and increase transparency and account-ability of publicly traded companies. However, the Act resulted in substantial costs associated with meeting the regulatory published study concluded an increase in the cost of going public was associated with the enactment of the Act. This Kaserer, Mettler, and Obernberger study concluded, This increase is almost entirely due to an increase in accounting and legal fees, while the underwriting fees are almost unaffected by [the Act]. 2The Kaserer, Mettler, and Obernberger study also stated, We show that the increase in flotation costs is to a large extent an increase in fixed costs. 3fLoTaTion CosTs in The properTy TaxaTion ConTexTFlotation costs are often considered in property tax valuations, particularly with regard to unit principle valuations of utility-type properties. The cost of capital in unit principle valuations may be derived through an analysis of publicly traded securities , there are a number of underlying dif-ferences between (1) publicly traded securities transactions and (2) tangible property need to consider these transactional differences. Some of these differences are presented in Exhibit the cost of capital for flotation costs in unit principle valuations can mitigate some of the underlying investment attribute differences between publicly traded securities and tangible to Pratt and Grabowski, Another type of adjustment applied in certain states is a flotation cost adjustment. This adjustment recog-nizes that the cost of capital for an illiquid taxable property is greater than the cost of capital for public companies. 5Before making a flotation cost adjustment, ana-lysts should consider the level of risk assessed through the cost of capital prior to a flotation cost adjustment. Analysts should also consider if a flota-tion cost adjustment would accurately reflect the risk of the subject taxable property. This is because flotation cost adjustments to the cost of capital may have a material impact on the concluded value of the subject taxable of a flotation cost adjustment to the cost of capital is a recognized procedure dis-cussed in property valuation example, Property Assessment Valuation published by the International Association of Assessing Officers explains, The discount rate, also known as the overall yield rate [Y0], is the weighted average cost of capital for a particular investment and incudes the costs associated with issuing debt and equity. 6The Ibbotson SBBI 2013 Valuation Yearbook also discusses the adjustment for flotation costs in the context of rate setting for regulated to Ibbotson, Although the cost of capital estimation techniques set forth in this book are applicable to rate setting, certain adjustments may be necessary. One such adjustment is for flota-tion costs (amounts that must be paid to underwrit-ers by the issuer to attract and retain capital). 726 INSIGHTS SUMMER 2017 www .willamette .comWhile many analysts agree that flotation costs are appropriate to include in the cost of capital used in unit principle valuations, this adjustment is not universally accepted. Some analysts believe that by including a flotation cost adjustment, the analyst incorrectly relies on the source of funds rather than on the risk of the subject taxable , some analysts believe that a flota-tion cost adjustment incorrectly equates the oppor-tunity cost of capital with the allowed rate of return on invested analyst should, therefore, consider the level of risk assessed through the cost of capital prior to a flotation cost adjustment in order to assess whether a flotation cost adjustment would accurately reflect the risk of the subject taxable of fLoTaTion CosTs by Taxing auThoriTiesTaxing authorities may espouse differing views with regard to a flotation cost adjustment to the cost of capital in unit principle Western States Association of Tax Administrators Committee on Centrally Assessed Property Appraisal Handbook (the WSATA Handbook ) states, There really is no disagree-ment that there are costs associated with the issuance of stock and debt, the issue is whether it should be reflected in the capitalization rate. Flotation costs are not part of the opportunity cost of capital. . . . Flotation costs should be treated as incremental (negative) cash flows; they do not increase the required rate of return. Flotation costs are the result of a financing decision and are a cost of doing business but do not affect the opportunity cost of capital. 9However, the view stated in the WSATA Handbook, that flotation costs should be excluded from the cost of capital, is not uniformly held by all taxing jurisdictions, even in the western United state tax assessment authorities prepare publicly disclosed annual capitalization rate stud-ies that include discussion of flotation cost adjust-ments. State tax assessment authorities often consider input from taxpayers and analysts as a part of the development of these capitalization rate following discussion summarizes five selected state capitalization rate studies. These five capitalization rate studies conclude an estimated capitalization rate promulgated by the state taxing authorities. The results of these studies may (or may not) be upheld in The 2016 Capitalization Rate Study by the California State Board of Equalization (the California Study ) considered flotation costs in the estimation of the cost of capital for the state s major industry California Study explains, Flotation costs effectively reduce the net proceeds that a firm will Public Securities Transactions Tangible Property Transactions 1. Generally homogenous properties that are competing for investment funds 1. Substantially heterogeneous properties competing for investment funds 2. Large number of buyers and sellers 2. Few buyers and sellers in any one price range 3. Relatively predictable, stable, and low transaction prices 3. Relatively unpredictable and high transaction prices 4. Relatively few government restrictions on secondary market participants 4. Secondary market participants and transactions subject to regulations, registration, and legislation at all levels 5. Fairly balanced supply of and demand for the subject properties 5. Volatile demand for, and sluggish supply of, the subject properties Exhibit 1Differences between Public Securities Transactions and Tangible Property Transactionswww .willamette .com INSIGHTS SUMMER 2017 27receive from issuing securities. The cost of capital is adjusted upward to reflect the expected flotation costs incurred to issue securities. 10The formula used in the California Study to adjust the cost of capital for flotation costs is as follows:Cost of Capital Adjusted for Flotation Costs = ku1 fwhere:ku = Cost of capital unadjusted for flotation costsf = Flotation cost as a percentage of the value of securities issuedThe California Study also notes, Since the flota-tion costs are reflected in the weighted average cost of capital, the flotation costs should not be allowed as expenses in projecting cash flows to be capital-ized. 11In other words, an adjustment for flotation costs can be reflected in either (1) the cost of capital or (2) the expected cash flow but not in both valua-tion Nevada Department of Taxation Capitalization Rate Study Calendar Year 2015 (the Nevada Study, latest available) included a flotation cost adjustment in its estimation of the cost of debt, common equity, and preferred equity for railroad, airline, electric, natural gas, and telecommunication to the California Study, the Nevada Study adjusted for flotation costs through a flota-tion cost multiplier. The flotation cost multiplier for the cost of debt and for the cost of preferred equity was obtained by dividing 1 by 1 minus the flotation cost. 12The flotation cost of common equity was calcu-lated using the following formula:K = D+gP(1 f)where:K = Cost of common equity adjusted for flota-tion costsD/P = Dividend yieldf = Flotation cost percentageg = Growth rateWyomingThe Wyoming Department of Revenue 2016 Capitalization Rate Study (the Wyoming Study ) adjusted the concluded capitalization rates to include flotation Wyoming Study estimated capitalization rates for airlines, communication companies, railroads, electric companies, and natural gas Wyoming Study did not indicate the for-mula used to adjust the cost of capital for flotation costs. MinnesotaThe Minnesota Department of Revenue 2016 Capitalization Rate Study, Revised (the Minnesota Study ) did not include flotation costs in its estima-tions of the cost of capital for utility, pipeline, and railroad operating Minnesota Study notes, The yield rate and direct rate are not recovery mechanisms for the costs of doing business. Flotation cost adjustments were not made to the yield rate or direct rate in this study. 14OklahomaThe Oklahoma Tax Commission Capitalization Rate Study (the Oklahoma Study ) estimated capi-talization rates for the airline, electric, natural gas, railroad, telecommunications, and water industries. Similar to the Minnesota Study, the Oklahoma Study did not adjust the concluded capitalization rates for debt or equity flotation Oklahoma Study states, Financial theory suggests and evidence supports that firms do not typically issue new common equity as a matter of common practice. Therefore in determining a capitalization rate, no adjustment will be made in the capitalization rate or the income stream for hypothetical flotation costs. Flotation costs actu-ally incurred may be accounted for in the income stream. 15Summary of State Capitalization Rate StudiesAs indicated in the five capitalization rate studies summarized above, consideration of flotation costs 28 INSIGHTS SUMMER 2017 www .willamette .comin the cost of capital may vary from state to state. These five capi-talization rate studies demonstrate the var-ied perspectives with regard to consideration of flotation cost adjust-ments to the cost of taxpayer may benefit from review-ing the appropriate state capitalization rate study to understand if and how the state tax assessment author-ity adjusts the cost of capital for flotation a flotation cost adjustment is allowed by the subject taxing authority, it is important to reflect the adjustment in either the taxpayer cost of capital capitalization rate or the expected cash flow, but not in both valuation CosT perCenTage TrendsThree studies that analyzed the historical trends in flotation cost percentage trends are summarized below. All three of these studies were performed with regard to the flotation costs of securities offered through initial public offerings ( IPOs ).A comprehensive flotation cost study may not be limited to IPOs, which may have higher flotation costs than secondary security studies summarized below are presented to illustrate general trends in flotation costs. These studies may not be appropriate in a specific taxing jurisdiction or to a specific taxpayer property Cost Percentage and IPO SizeThe first study summarized was a study published in 1987 by Jay Ritter (the Ritter Study ). The Ritter Study analyzed the relationship between IPO size and the IPO flotation cost percentage and whether flotation cost percentages may be affected by econo-mies of is, flotation costs may not increase at the same rate as increases in the amount of debt or equity securities offered for sale. Some of the costs associated with the sale of debt or equity securities may be relatively fixed, such as legal Ritter Study noted an inverse relationship between IPO gross proceeds and total IPO-related cash expenses ( , flotation costs). The Ritter Study was performed for two types of investment banking contracts:1. Firm commitment IPO offers2. Best efforts IPO offersIn a firm commitment IPO offer contract, after a final prospectus is issued, investment banks guaran-tee to deliver proceeds (net of commissions) to the issuing firm regardless of whether or not the offer is fully subscribed. In a best efforts IPO offer contract, the issuing firm and investment bank agree to an offer price and a minimum and maximum number of shares to be the minimum number of shares are not sold within a specified period of time, the offer is with-drawn, the investors money is refunded, and the issuing firm doesn t receive any results of the Ritter study are presented in Exhibit presented in Exhibit 2, the Ritter Study indi-cates an inverse relationship between IPO gross proceeds and flotation costs. That is, as the amount of gross proceeds increase, the percentage of flota-tion costs decrease. The second study summarized was a study published in 2012 by PricewaterhouseCoopers LLP (the PwC Study ). The PwC Study noted an inverse correlation between IPO gross proceeds and the underwriter discount as a percentage of gross study is summarized in Exhibit Ritter Study and the PWC Study indicate that as IPO gross proceeds increase, underwriter fees and other flotation costs generally decrease. Secondary issuances of securities have similar cost structures to IPOs. The results of these studies are, therefore, generally indicative of the flotation cost trends for the issuance of primary and second-ary Flotation Cost PercentagesFlotation cost percentages have not remained con-stant over time. In fact, there has been a generally decreasing trend in flotation cost percentages. This is because flotation cost percentages are sensitive to changes within the financial industry, such as technological changes, regulatory changes, and the level of competition in the investment underwriting industry. [I]t is important to reflect the [flotation cost] adjustment in either the taxpayer cost of capital capi-talization rate or the expected cash flow, but not in both valuation variables. www .willamette .com INSIGHTS SUMMER 2017 29In fact, in 2000, Ritter noted that decreases in flotation cost percentages were affected by the fol-lowing:1. Competition between commer-cial banks and investment banks for investment underwriting con-tracts2. Changes in technology with the innovation of the Internet and online investment underwriting trends in flotation costs related to IPOs are summarized in a sec-ond study published in 2016 by Ritter (the 2016 Ritter Study ).The results of this study are summa-rized in Exhibit 4 on the next indicated in Exhibit 4, the mean gross spread generally decreased from a high of percent in 1982 to percent in IPO flotation costs are likely higher than flotation costs for the secondary issuances of securi-ties, the results of this study are generally indicative Gross Proceeds ($Millions) Number of IPOs UnderwriterDiscount (%) 0-50 41 51-100 115 101-200 115 201-300 45 301+ 73 Source: Martyn Curragh, Henri Leveque, and Neil Dhar, et al., Considering an IPO? The Costs of Going and Being Public May Surprise You, PricewaterhouseCoopers LLP (September 2012), (accessed March 29, 2017).Exhibit 3PricewaterhouseCoopers Study regarding the Costs of an IPO IPO Gross Proceeds [a] ($000) Number of TransactionsConsideredUnderwritingPrice Discount [b] (%) Other Flotation Costs [c] (%) Total IPO-Related Cash Expenses (%) Firm Commitment IPO Offers 100 1,999 68 2,000 3,999 165 4,000 5,999 133 6,000 9,999 122 10,000 120,175 176 All Offers 664 Best Efforts IPO Offers 100 1,999 175 2,000 3,999 146 4,000 5,999 23 6,000 9,999 15 10,000 120,175 5 All Offers 364 [a] Gross proceeds categories are nominal; no price level adjustments were made. [b] The underwriting discount is the commission paid by the issuing firm. [c] Other flotation costs include legal fees, printing costs, and other flotation costs. None of the expense categories include the value of warrants granted to the underwriter, a practice that is common with best efforts offers. Source: Jay R. Ritter, The Costs of Going Public, Journal of Financial Economics 19, no. 2 (January 1987): 269 2Ritter Study regarding the Costs of an IPO30 INSIGHTS SUMMER 2017 www .willamette .comof historical flotation cost trends for all security of fLoTaTion CosT adJusTmenTsAn adjustment to the cost of capital for flotation costs can have a significant effect on the concluded value of the subject taxpayer tangible property. Let s consider the following analysis for a hypotheti-cal taxpayer, Natural Gas Distribution Company ( NGDC ). NGDC is located in analyst has determined that a flotation cost adjustment would accurately reflect the risk asso-ciated with the illiquid subject taxable property. Exhibit 5 summarizes the effect of a flotation cost adjustment on the value indication of the income approach, direct capitalization presented in Exhibit 5, adjusting the NGDC cost of capital for flotation costs decreases the indi-cated total unit value by $22 cost adjustments to the cost of capital may also affect (1) the level of economic obsoles-cence cost in the cost approach analysis and (2) the intangible asset value encompassed in a unit principle valuation of taxable example, an adjustment to the cost of capital for flotation costs may affect the indicated level of economic obsolescence. One method to estimate the level of economic obsoles-cence is the capitalization of income loss method. In this method, the analyst compares:1. the cost of capital to2. the actual return on increase in the cost of capital for flotation costs could, therefore, increase the indi-cated level of economic intangible asset com-ponent of the taxpayer unit of total operating property may also be affected by a flotation cost adjustment. Intangible assets are often encompassed in the unit principle valuation a unit principle valua-tion, the intangible asset value may be subtracted from the total unit income approach and market approach value indi-cations, where appropriate. The cost of capital is often used to estimate the entrepreneurial incentive required to develop intangible adjustment to the cost of capital for flotation costs may therefore affect the concluded intangible asset value in a unit principle a CredibLe fLoTaTion CosT sTudyIn order to develop a credible flotation cost study, it is important for the analyst to understand the fac-tors that influence the level of flotation cost percentages may vary significantly and may correlate to the following factors:n Size and date the securities are offered for salen The type of securities offeredn The characteristics of the firm offering the securitiesn The underwritern Other factorsSeveral databases are available to provide flota-tion cost data to analysts. These databases include Bloomberg and Thomson : Jay R. Ritter, "Initial Public Offerings: Underwriting Statistics through 2015,"University of Florida, March 8, 42016 Ritter StudyThe Mean IPO Gross Spreadwww .willamette .com INSIGHTS SUMMER 2017 31Estimated Cost of Equity by: Equity/Invested : Weighted Cost of Equity Cost of Flotation Cost Cost of Debt Cost of Equity [a] by: Debt/Invested : Weighted Cost of Debt Cost of Flotation Cost Cost of Debt [a] Yield Capitalization : Expected Long-Term Growth Capitalization Cost of Equity by: Equity/Invested : Weighted Cost of Equity Cost of Debt by: Debt/Invested : Weighted Cost of Debt Yield Capitalization : Expected Long-Term Growth Capitalization Principle ValuaitonScenario UsingIncome ApproachUnadjusted DirectDirect Capitalization Method ($000s)Capitalization RateNet Operating Cash Flow100,000 100,000Divided by: Direct Capitalization : Indicated Fair Market Value of Total1,471,000 1,449,000 Unit of Operating Assets (rounded) Less: Intangible Asset Value(400,000) (400,000) Equals: Indicated Tangible Asset Value1,071,000 1,049,000ku1 f[a] In this example, the formula used to estimate the flotation cost adjustment is the formula specified in the 2016 California Study of:Difference of $22 MillionEstimation of Unadjusted Direct Capitalization RateEstimation of Adjusted Direct Capitalization RateScenario UsingAdjusted DirectCapitalization RateAdjustments for Flotation CostsExhibit 5Hypothetical Taxpayer Natural Gas Distribution CompanyIncome Approach, Direct Capitalization MethodValue Summary with and without Flotation Cost Adjustment32 INSIGHTS SUMMER 2017 www .willamette .comBloomberg is an online database that provides financial information on:1. nearly all active and inactive publicly traded companies and2. active and inactive international , common equity, and preferred equity securities may be searched by numerous criteria including size, date, industry sectors, and Standard Industrial Classification ( SIC ) information in this database is updated frequently. More information is available at ONE is an online database that pro-vides financial information on approximately 52,000 public companies and over one million private com-panies. Debt, common equity, and preferred equity securities may be searched by numerous criteria including size, date, Global Industry Classification Standard codes, and SIC information in this database is updated frequently. More information is available at can search these databases based on numerous criteria to identify public issues of debt, common equity, or preferred equity of companies that are sufficiently comparable to the subject tax-payer example, let s consider a flotation cost study performed to assist a taxpayer railroad owner/opera-tor in determining its cost of capital. For this study, the analyst may exclude debt offerings from security issuers ( , debtors) that primarily operate in the finance or real estate offerings from the finance and real estate industries may be excluded. This is because com-panies in these industries operate under a different (and somewhat unique) regulatory environment compared to companies that operate in other may have to balance:1. narrow criteria that identify only debt or equity offerings for companies with a high degree of comparability to the subject tax-payer with2. the need for a statistically significant num-ber of data balance may require significant analyst experience and professional screening a database using the above-mentioned factors, the analyst should carefully review the indicated results for flotation cost data that do not fit the analyst s screening criteria. By reviewing the security offering prospectuses filed with the Securities and Exchange Commission, the analyst can verify that the indicated securities offerings are relevant to the subject flotation cost screening and verifying the flotation cost data, the analyst should then compile the data in a useful format. The analyst may identify meaningful estimations of the flotation cost percentage for the subject tangible property by selecting an indicator of central tendency from the compiled , a credible flotation cost study should be well documented and should provide a thorough dis-cussion of the procedures that the analyst applied to develop the flotation cost of flotation costs in the cost of capi-tal of unit principle valuations may be a conten-tious issue between taxing authorities and taxpayer property owners. This is because small variations in the cost of capital may result in material chang-es in the concluded value of the subject taxable factors affect flotation cost percentages. These factors include the following:1. The size of the security offering2. The date that the securities are offered for sale3. The type of securities offered4. The characteristics of the entity offering the securities5. The underwriter of the securities offering6. Other making a flotation cost adjustment, the analyst should consider the level of risk assessed through the cost of capital prior to a flotation cost , the analyst should consider if a flotation cost adjustment would accurately reflect the risk of the subject taxable on page 85www .willamette .com INSIGHTS SUMMER 2017 852. incorporating investment risk through the application of a discount related to invest-ment marketability,3. estimating the cost to cure the issue, and4. developing a risk adjustment discount derived from market-based evidence of pub-lic companies that have been subject to similar negative the FTCC analysis, based on the quality and quantity of available information, an analysis of market-based evidence from public companies subject to similar negative events was performed. This guideline publicly traded company method was referred to as GPTCRA methodology is simple to explain and easy to implement. Using a GPTCRA analysis, a market-based analysis was used to address the unique subject company issue. The results of the GPTCRA analysis provided support for a 35 percent discount application to the subject company GPTCRA analysis and the related risk adjustment discount should not be double counted in the discount for lack of marketability analysis. In other words, the discount for the lack marketability is discretely addressed and is not combined with the GPTCRA analysis risk , under this perspective approach, addi-tional pricing discounts related to the Investigation should not be double counted in a present value discount rate :1. Karpoff, Lee, Mahajan, Martin, Penalizing Corporate Misconduct: Empirical Evidence, February 4, 2004 (an update to this paper by Karpoff, Lee, and Martin, The Cost to Firms of Cooking the Books, December 31, 2006, con-curs that losses are significant and the majority of the loss is due to damaged reputation).2. Karpoff, Lee, Vendrzyk, Defense Procurement Fraud, Penalties, and Contractor Influence, Journal of Political Economy (University of Chicago, 1999).3. Ronald J. Gilson and Bernard S. Black, The Law and Finance of Corporate Acquisitions, 2nd ed. (1995), 194 Zanni is a director of the firm and is a resident of the firm s Chicago office. Kevin Zanni can be reached at (773) 399-4333 or Cost adjustmentsContinued from page 32Notes:1. Hsuan-Chi Chen and Jay R. Ritter, The Seven Percent Solution, The Journal of Finance 55, no. 3 (June 2000).2. Christoph Kaserer, Alfred Mettler, and Stefan Obernberger, The Impact of the Sarbanes-Oxley Act on the Cost of Going Public, German Academic Association of Business Research 4, no. 2 (December 2011): Robert F. Reilly and Robert P. Schweihs, Guide to Property Tax Valuation (Chicago: Willamette Management Associates Partners, 2008), 153. 5. Shannon P. Pratt and Roger J. Grabowski, Cost of Capital in Litigation: Applications and Examples (New York: John Wiley & Sons, 2011), 229. 6. Property Assessment Valuation, 3rd edition, (Kansas City: International Association of Assessing Officers, 2010), 305. 7. Ibbotson SBBI 2013 Valuation Yearbook (Chicago: Morningstar, 2013), Richard Simonds, Income Capitalization, Flotation Costs, and the Cost of Capital, Journal of Property Tax Assessment and Administration 3, no. 4 (2007).9. Western States Association of Tax Administrators Committee on Centrally Assessed Property, Appraisal Handbook: Unit Valuation of Centrally Assessed Properties (2009), III-30, California State Board of Equalization, 2016 Capitalization Rate Study (2016), Ibid. 12. Nevada Department of Taxation, Capitalization Rate Study Calendar Year 2015 (2015), Wyoming Department of Revenue, 2016 Capitalization Rate Study (March 31, 2016), Minnesota Department of Revenue, 2016 Capitalization Rate Study, Revised (May 23, 2016), 10 Oklahoma Tax Commission, Capitalization Rate Study (January 2016): Hsuan-Chi Chen and Jay R. Ritter, The Seven Percent Solution, The Journal of Finance 55, no. 3 (June 2000)17. Reilly and Schweihs, Guide to Property Tax Valuation, 266 Entrepreneurial incentive is the fair rate of return on the time and money investment in the intangible asset develop-ment project to economi-cally motivate the develop-ment Karlsen is an associate in our Portland, Oregon, office. He can be reached at (503) 243-7513 or at

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