Let’s separate the facts from the fiction on valuation.
Valuation is an important issue in the world of business that is used in the evaluation process by sellers and buyers in the sale and acquisition of companies and assets, as well as by lenders and borrowers in the issuance of loans.
Unfortunately, the valuation methods commonly utilized including, without limitation, discounted cash flow, comparable transaction, comparable company, comparable asset and comparable property, are all flawed. All of these methods and others have broad parameters, few if any rules, contain variables, involve projections and, most importantly, are subject to the judgement of the party conducting the valuation, making the process susceptible to manipulation.
As to be expected, a party undertaking a valuation will choose the most advantageous method and use the ability to manipulate the process to arrive at a beneficial outcome. This leads to opposing parties in a business deal arriving at very different valuations of a subject transaction, company, asset or property.
The legal community is of little help. Courts largely accept this broad view of valuation as applied by the business community. Judges are often placed in the position of listening to the valuations performed by opposing parties and required to make a determination. The problem is that judges generally do not possess the background required to review a valuation. This dynamic can lead to poor determinations.
By placing a hostile political overlay on top of the valuation process as reviewed by a judge without the required business background, you arrive at the Donald Trump civil fraud case brought by New York Attorney General Letitia James before Judge Arthur Engoron. The pivotal issue in this case was valuation, and less than sufficient attention has been paid to the valuation process. Judge Engoron determined that Trump and his organization fraudulently inflated the value of his real estate holdings to secure low-interest loans, and imposed a penalty of more than $354 million plus accruing interest.
An example of Judge Engoron’s folly and lack of understanding of valuation was on display with his consideration of Trump’s Mar-a-Lago property, which is a highly publicized and central Trump holding. Mar-a-Lago, located in Palm Beach, Florida, is the former president’s 126 room primary home set on approximately 17 acres that stretches from the Atlantic Ocean to Lake Worth. In addition, it functions as a private club, beach resort and carries a designation as a National Historic Landmark. The property carries certain development limitations.
The Palm Beach County tax appraiser’s valuations of Mar-a-Lago over the years have ranged from $18 million to $37 million, with a current value of $37 million based on its annual net operating income as a club and not on its resale value as a residence or its reconstruction cost. Mar-a-Lago is one of nine private clubs in Palm Beach County valued and taxed in this special manner.
Multiple Palm Beach real estate agents who specialize in high-end properties have valued Mar-a-Lago from $300 million to in excess of $1 billion, which is consistent with the valuation Trump has attributed to the property. There are no comparable properties to Mar-a-Lago in Palm Beach. As a former president, Trump’s ownership of the property would only increase its value.
So how did Judge Engoron get the valuation so wrong?
Simple. Judge Engoron lacks knowledge and experience in the area of valuation, and his decision was politically motivated.
A review of Judge Engoron’s education, career and background provides no reason to believe that he has any knowledge or experience in the area of valuation.
Judge Engoron overlooked the variable aspects of each of the valuation methods, put aside that tax appraisals do not correlate on an equivalent basis to fair market value, did not consider the special manner in which Palm Beach County taxes clubs like Mar-a-Lago, disregarded the unique qualities and special circumstances attributable to the property, refused to take notice of the disclaimer on the Trump valuation, and ignored the evidence supporting a fair market value, to side with the philosophically like-minded James and declare that Mar-a-Lago carried a value consistent with the county’s tax appraisal from past years of $18 million.
While Judge Engoron’s misguided conclusion may be in part attributable to his lack of understanding of the area of valuation, his politically motivated overtones cannot be ignored. In fact, the absence of any valuation knowledge or experience in Judge Engoron’s background provides him with cover for his poor judgment.
We can only hope that the judges hearing this case on appeal show greater competence and are not politically motivated.
In summation, we must consider the facts and not be fooled by the fiction.
And that’s my take.
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Perry V. Kalajian is an attorney, consultant, and analyst with extensive experience in the areas of banking, finance, and restructuring. He possesses multiple degrees in each of the areas of business and law. Mr. Kalajian has had numerous appearances on Newsmax TV.
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