Financial Reporting for Real Estate Transactions

A market leader, the Kroll Real Estate Advisory Group provides valuation services to fulfill financial reporting requirements for real estate transactions under Accounting Standards Codification (ASC) 805-50 Acquisition of Assets Rather Than a Business. With unmatched expertise in real estate transactions, we provide comprehensive purchase price allocations that encompass both tangible and intangible assets, as well as liabilities.

Our team specializes in determining fair value, establishing remaining useful lives (RULs) and applying proven valuation methodologies—including the income, sales comparison and cost approaches—to ensure compliance with ASC 805 and ASC 820 fair value reporting standards. By combining technical precision with deep industry insight, we help clients achieve transparency, accuracy and confidence in their financial reporting.

ASC 805 and Purchase Price Allocation for Real Estate Transactions

We determine the fair value of real property tangible assets, intangible assets and liabilities. We also provide the economic lives used to determine the RUL of the acquired assets.

Real Property Valuations

• Land
• Buildings
• Site improvements
• Tenant improvements
• Furniture, fixtures and equipment (if applicable)  

Intangible Assets/Other Assets and Liabilities Valuations

• Leasehold interests (above/below-market leases, including ground leases)
• Lease-in-place value
• Leasing commissions, legal and marketing fees (origination costs)
• Favorable/unfavorable management agreements Favorable/unfavorable component of debt
• Tenant relationships
• Contingent consideration

Our Approach

We combine the application of the income, sales comparison and cost approaches with our extensive expertise and years of experience in real estate transactions and fair value measurement. We are committed to excellence and innovation in delivering continued value for our clients.

ASC 820 Fair Value Reporting

In ASC 820-10, the fair value is the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants on a specific measurement date. This price is also known as the exit price. ASC 820 is based on the exit price, not the transaction price or entry price.

ASC 820 also specifies that the reporting entity must have access to the principal market, if there is one. If there is no principal market, or the entity can’t access it, fair value should be based on the price in the most advantageous market. This is the market in which the entity would receive the most for selling an asset or pay the least to transfer a liability.

ASC 820 also has a fair value hierarchy that requires entities to categorize assets and liabilities into Level 1, Level 2 or Level 3. Level 1 includes the most liquid investments in an active market, such as publicly traded stocks or government bonds that are frequently traded. An active market is a platform in which the asset or liability is regularly traded, providing continuous information about prices.

The Kroll Real Estate Advisory Group considers the sales comparison approach, income capitalization approach and the cost approach when estimating the fair value in compliance with ASC 820-10 in the valuation of real property.

Sales Comparison Approach

The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as a price for comparable property. This approach is based on the principle of substitution, which states that the limits of prices, rents and rates tend to be set by the prevailing prices, rents and rates of equally desirable substitutes. In conducting the sales comparison approach, we gather data on substitutable property and adjust for transactional and property characteristics. The resulting adjusted prices lead to an estimate of the price one might expect to realize upon sale of the property.

Income Capitalization Approach

The income capitalization approach simulates the reasoning of an investor who views the cash flows that would result from the anticipated revenue and expense on a property throughout its lifetime. The net income figure developed in our analysis is the balance of potential income remaining after vacancy and collection allowances, and operating expenses. This net income is then capitalized at an appropriate rate to derive an estimate of value or discounted by an appropriate yield rate over a typical projection period in a discounted cash flow analysis.

Cost Approach

The cost approach is a valuation technique that uses the concept of replacement cost as an indicator of fair value. This is the premise of the cost approach: If it were possible to replace the asset, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence encompasses physical deterioration, functional (technological) obsolescence and economic (external) obsolescence.