Understanding Purchase Price Allocation for Real Estate Acquisitions

By Elizabeth K. Lewis, CPA, Partner

Understanding Purchase Price Allocation for Real Estate Acquisitions

Determining fair value of assets and liabilities for ASC 805 compliance

When purchasing real estate, the decision to engage a specialist for a purchase price allocation or a cost segregation study depends on the needs and goals of the buyer. Although the incentive for a cost segregation study is typically tax-focused, a purchase price allocation is required under certain accounting standards, including generally accepted accounting principles (GAAP). This analysis is used to allocate the total purchase price of real estate on a relative fair value basis across various tangible and intangible asset classes as well as assumed liabilities.

The theory of a purchase price allocation lies in the concept that the purchase price of operational real estate is impacted by the value of intangibles – primarily in-place leases. Material impacts are common for complex real estate types such as multi-tenant office buildings, shopping centers, apartment complexes, and leased industrial centers.

During a purchase price allocation, the standalone fair value of all assets and liabilities are derived, including common categories such as:

  • Tangible assets:
    • Land
    • Site improvements
    • Building (as if empty)
    • Building improvements
  • Intangible assets and liabilities:
    • Above or below market-leases
    • Lease origination costs to establish the leases in place (avoided costs)
    • Tenant improvements
    • Legal costs

The importance of engaging a real estate valuation specialist

The relative fair value of each category is determined (as a ratio) and then applied as a percentage to the total transaction consideration. The resulting allocations impact classification and drive accuracy of depreciation and amortization calculations under GAAP. Therefore, understanding the technical guidance and engaging a qualified specialist to perform the valuation are imperative for accurate financial reporting and to ensure a smooth audit.

Questions on ASC 805 compliance for your real estate acquisition? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000

 

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About the Author


Elizabeth K. Lewis

Elizabeth K. Lewis, CPA, Partner

​Elizabeth is a Partner in Keiter’s Business Assurance & Advisory Services group. Her client base consists primarily of real estate investment funds, real estate companies, and not-for-profits.

Elizabeth specializes in auditing non-registered investment funds and possesses a comprehensive understanding of fund accounting and auditing services. She is also a member of the Firm’s Financial Services and Real Estate and Construction team.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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