How special is a special purpose vehicle?

Many high-value properties, especially investment properties, are held by companies that have been created for the sole purpose of owning that property. These companies are generally termed special purpose vehicles (SPVs).

SPVs are created for two main reasons. The first is for tax efficiency in jurisdictions that have significantly higher transfer taxes on real estate compared with any tax charged on the transfer of shares in a company.

The second is that they enable multiple parties to be involved in the acquisition of high-value property, with each holding a percentage of the shares in the SPV.

Questions can arise about whether and how the fact that a property is held in an SPV should be reflected in a valuation of that property.

There are significant inconsistencies in how such properties are valued and reported, as well as some fundamental misconceptions, which I address in this article.

RICS Valuation – Global Standards (Red Book Global Standards) addresses this in VPS 1 3.2(d), which indicates that if instructed to value a property held in an SPV, the valuer should clarify in their terms of engagement that they will value the interest in the property on the assumption that it will be sold as part of the SPV's sale and will not value the SPV itself.  

If a client needs an SPV to be valued, only valuers with the 'relevant experience and qualification in business valuation and holding any statutory registrations required for advising on corporate values can accept such instructions'.

While it is clear that different competencies are needed for valuations of different types of property, there are also varying interpretations of how the property interest should be valued.

One of these differences is whether the market value of a property held in an SPV should represent the stand-alone value of the property interest or its value within the SPV.

It is helpful to consider the underlying conceptual framework for market value in International Valuation Standards (IVS) 102 A10.02, which includes the following.

• 'The method of sale is deemed to be that most appropriate to obtain the best price in the market to which the seller has access.'
• The parties to the transaction are 'reasonably informed about the nature and characteristics of the asset'.
• The parties 'use that knowledge prudently to seek the price that is most favourable for their respective positions in the transaction'.  

It is also therefore useful to look at the criteria for fair value. IFRS 13 indicates that fair value is the price that could be obtained 'in the principal market for the asset or liability; or in the absence of a principal market, in the most advantageous market for the asset or liability'.

Therefore, if a property is currently held in an SPV, a valuation based on either IVS market value or IFRS fair value should be on the assumption that it is sold as part of a sale of the SPV because this is the most beneficial market to which the seller has access.

To avoid any doubt, and as indicated in Red Book Global Standards, this assumption should be made clear in the terms of engagement and followed through in the valuation report.

It is common to see valuations of property held in SPVs provided on the special assumption that the sale will not be subject to whatever the property transfer tax is called in the relevant jurisdiction or a share deal.

This is incorrect. A special assumption assumes a fact or facts different from those that exist on the valuation date or something that would not be assumed by a typical market participant.

If a property is currently held in an SPV and this is the most beneficial way for it to be transferred, no special assumption is required because this is the status quo.

Conversely, if the property is currently held in an SPV and it is the norm for similar property in the same market to be held and transferred within SPVs, it would be a special assumption to assume that the transfer would be of the property interest alone.

This is because assuming a sale that would not result in the best price in the market to which the seller has access, as required by IVS 102 A10.02(g) or the principal or most advantageous market as required in IFRS 13, is not an assumption that would be made by a typical market participant.

Notwithstanding the above, there can still be good reasons for a client to require a valuation on the special assumption that a property was sold out of the SPV to a third party.

A common example would be a valuation for a lender who may have a fixed charge over the property but no charge over all the SPV's voting shares. Thus, in the event of a default, the lender may have to take possession of the property and sell it without the benefit of the SPV wrapper. 

Requiring an additional valuation on this special assumption would be the necessary and prudent course of action to adopt so that the lender receives an appropriate alternative valuation to enable them to undertake a proper risk assessment.

Frequently, I see reports that simply calculate this based on the difference in the applicable tax between a property sale and a share sale. I suggest this is too simplistic and, in many cases, will be wrong.

Firstly, unless the valuer in the rare position of being asked to value the SPV has the relevant skills and qualifications, they will not necessarily be aware of other assets or liabilities that could affect the SPV's share price and cause the difference between the values of the stand-alone property and the SPV to be more or less than simply the tax difference.

Secondly, and more importantly, if valuing a high-value property that it is beneficial to hold in an SPV, most of the relevant comparable evidence will have been derived from open-market sales of other SPVs.

Consequently, if data from this evidence is used to calculate the market value or fair value of the stand-alone property and then an addition is made to reflect the assumed tax differential, there will be double-counting of the SPV benefit. In some countries this could result in the value being overstated by more than 10%.

If so, they need to have close regard to the provisions in Red Book Global Standards VPS 1 3.2(d) in their terms of engagement and valuation report. They also need to take care to establish (as far as possible) whether or not the data used in their valuation is derived from transfers of similar property held in an SPV, to ensure that like is being compared with like.

Finally, valuers should never give the impression that a higher figure than the market value or fair value at the valuation date can be obtained by selling shares in an SPV.