The Cost of Tax Reporting and Compliance Valuations: Real Estate Holding Companies and Tenants In Common Interests

For the majority of my career, I’ve guided clients through tax reporting and compliance valuations, and helped them find services that fit their needs and budget. The type of valuation you need plays a large part in the total cost, tenants in common interest valuations costing much less than valuations of LLCs or LPs that hold real estate. And both of these cost less than valuing an operating company, which will be covered in a future article.

There are many reasons you may need a business valuation firm for tax reporting and compliance. Some of the most common are:

  • Gift tax
  • Estate tax
  • Charitable donations

What’s Required for Valuations of Real Estate Holding Companies?

Business valuation firms don’t typically appraise real estate, but they do use real estate appraisers’ values to determine the Net Asset Value of real estate holding companies. To determine the minority discounts to Net Asset Value, some firms and professionals depend solely on the market approach, which uses publicly traded real estate partnership data. If I was spending the money on a valuation, I would ensure my valuation firm use a second method for solidarity, accuracy, and defensibility with the IRS. I have had outstanding results checking the market approach against an income approach, which discounts future cash flows and is how a typical investor would view the value of a minority interest investment. If you’re paying for a valuation, you’re going to want precise, defendable results.

Ranges of Valuation Fees

For real estate holding companies, I’ve seen tax reporting and compliance valuation fees range from as low as $5,000 for an LLC or LP (holding a single piece of real estate) to as much as $50,000 or even higher (for companies with over 20 pieces of real estate or multiple LLCs or LPs). Similarly, I’ve seen fees as low as $3,000 for a single tenants in common interest and up, based on the number of pieces of real estate. Although additional holdings add to the overall cost, most firms offer discounted rates beyond the first valuation because they’ll all be included in one final report. On the other hand, if you should want a report for each piece of real estate or entity, you’re probably going to pay a pretty penny.

Some factors that add to the cost of tax reporting and compliance valuations for real estate holding companies and tenants in common interest include:

  • Type of valuation: Tenants in common vs LLC/LP
  • Size and complexity
  • Number of LLCs/LPs involved
  • Amount of real estate in each LLC/LP
  • Deliverable: Full narrative report or schedules only

Tax Reporting for the IRS

For IRS purposes, you’ll most likely want a full narrative report, which includes schedules with specific point values. For overly fee-sensitive clients, we have been able to cut costs by offering schedules only, in lieu of a complete narrative report for planning engagements where an IRS-compliant report isn’t needed. This is certainly not something I would recommend, especially when dealing with the IRS.

Other Cost Factors for Tax Reporting and Compliance

Now, we’ve told you the basics of what goes into the cost for these services, there are also steps you can take to help the process go smoothly and make sure you don’t incur additional costs. And it really just comes down to having your ducks in a row. Your valuation firm will need the real estate appraisals or broker opinions of value to complete their work, so get those parties involved as early as possible. If you have multiple real estate properties with unconsolidated financials or have off-balance sheet or non-operating assets, the process could take extra time and effort, resulting in a bigger bill. Having a mortgage amortization schedule already completed is also helpful.

If you’re looking for more information on business valuations or just need some advice, contact us today.

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cheryl-kesslerCheryl Kessler is a Director at Vantage Point Advisors, Inc. She is an Accredited Senior Appraiser (ASA), a Chartered Financial Analyst (CFA), and the President of the San Diego Chapter of American Society of Appraisers. Cheryl has held Series 7, 24, 63 NASD Licenses and has over 20 years of experience in business valuation.