Basically, if you have an applicable financial statement, you would use that method. If you do not is when you would rely on the alternative method.
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What’s the best way to value a QOF’s leased property?
Are there any pros or cons to using either the applicable financial statement valuation method or the alternative valuation method?
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Depends on the lease. If both methods are available, both have to be modeled.
Depends very heavily on your situation. Keep in mind the AFS method is only available to taxpayers who actually have an AFS. This decision would be based on an in-depth discussion with your advisors. There is no blanket answer.
Maybe. You need to pass the various tests, One method may be better than the other. No generalization.
This isn't really an answerable question. Inherently, the two different approaches are likely to yield two different numbers. Most of our clients are using the applicable financial statement if they have financial statements available to use and the alternative valuation method when financial statements aren't prepared already (i.e., it’s a cost-based decision, then if you already have financial statements then using that has no additional cost, if you don't have financial statements the alternative valuation method is cheaper to undertake than creating financial statements).
I'd use the income approach to value the leasehold interest. Calculate the present value of the beneficial lease terms over the life of the lease. Multiply the annual savings generated by the relatively lower rent expense by the appropriate present value factor. The applicable financial statement valuation likely will be easier to generate. I'm not the best to answer this question but know that there is a robust market for good ground leases.
Smaller QOFs will likely not have audited financial statements; therefore, the alternative valuation method may be your only choice. Obviously the certainty of the financial statement is likely best method since there will be no argument with the IRS when running your QOZ and QOZB testing. As reflected in the Tranche II Regulations, Treasury proposed using a net present value concept for valuing leased assets. Commentators on the regulations also suggested valuing such assets at $0, assuming the lease terms are at arms-length rates. Assuming the leased assets are 100% used within the an OZ census tract, a higher value will improve the chances of passing the 90% and 70% tests. If the assets are used outside the zone, then a low value is better.
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