Opinion ID: 2763968
Heading Depth: 2
Heading Rank: 2

Heading: Mr. Burns’s Appraisal

Text: ¶18 The district court overruled URI‘s objections to Mr. Smith‘s initial valuation, but did so without prejudice and permitted URI to offer its own expert testimony. Consequently, URI retained Francis Burns to perform a fair value appraisal. Mr. Burns agreed with Mr. Smith that Mr. Smith‘s amended valuation did not accurately reflect URI‘s fair value. He also largely agreed with the asset value Mr. Smith derived in his first valuation. He concluded it was appropriate to consider tax adjustments and transaction costs in deriving net asset value because URI planned to sell its real estate assets and any hypothetical investor would similarly discount URI‘s value. ¶19 Mr. Burns calculated two different values for URI‘s shares — market value and adjusted net asset value. He concluded that the market value of URI was $11,127,127. He derived this number by looking first to prior transactions involving URI‘s stock. He found that the most recent transaction involved stock sold by Mr. Fife to a company controlled by Mr. Morgan for $2,750. Mr. Burns concluded that ―it is clear the $2,750 per share price was an established market price between parties negotiating at arm‘s length.‖ But Mr. Burns 8 Cite as: 2014 UT 59 Opinion of the Court also concluded that ―this price would need to be adjusted to remove the impact of discounts for lack of control and lack of marketability.‖ Based on data of transactions of real estate limited partnership interests, Mr. Burns concluded that the prior transaction price of $2,750 represented a forty-two percent discount for lack of control and lack of marketability. Accordingly, he concluded that the adjusted fair market value was $4,741 per share. Mr. Burns also noted that he attempted to identify guideline companies comparable to URI by searching Bloomberg, but he concluded that ―there were no public companies that fit URI‘s profile sufficiently enough to be used as guideline comparisons.‖ ¶20 In addition to market value, Mr. Burns provided an ―adjusted net asset value‖ for URI‘s shares. He explained that he could not provide a traditional income value for URI‘s shares ―because URI‘s historical earnings did not reflect the earnings it could expect in the future from selling its large portfolio of real estate.‖ So he calculated adjusted net asset value instead. He explained that this value blends ―the income and asset methods — with appraised property on the balance sheet capturing future revenues and liabilities capturing future operating expenses and taxes.‖16 He then concluded that URI‘s adjusted net asset value was $15,700,365. The following table summarizes Mr. Burns‘s calculations: 16 Mr. Smith testified that Mr. Burns‘s approach of projecting asset sales and discounting the result to present value was ―certainly one way to do it.‖ 9 URI v. MTC Opinion of the Court After Built-In After Operating After Control & Capital Gains Expenses & Booked Asset Asset Value Marketability (Losses) Tax Liabilities Adjustments Adjustments Adjustments Real Estate $15,653,500 $14,792,55817 $12,165,97418 HHA Interest $1,501,000 $1,170,78020 Royalty $15,700,36519 $2,456,00021 $2,456,000 $2,456,000 Interests Other Assets $4,552,346 $4,552,346 $4,552,346 Total $24,162,846 $22,971,684 $19,174,320 $15,700,365 Total $10,295 $9,788 $8,170 $6,690 per Share Mr. Burns reduced the value of the real estate by 5.5 percent to 17 account for broker commissions and closing fees that would be incurred in selling the property. Mr. Wright applied the same deduction in his initial valuation. Mr. Burns adjusted the value of URI‘s real estate and interest in 18 HHA for the projected capital gains and losses that would result by liquidating each of those assets. He estimated a capital gain of $13,291,947 for the real estate and a capital loss of $305,352 for the HHA interest. He then discounted the projected capital gain based on management‘s projection that it would take ten years to liquidate the real estate. Ultimately, accounting for built-in capital gains and losses reduced the combined value of the two assets by $3,797,364. Mr. Burns reduced the value of URI‘s assets by $3,104,682 to 19 account for ongoing operating expenses. He noted that this was appropriate because URI would ―continue to incur operating expenses as it managed and liquidated its [assets].‖ He also reduced asset value by $369,273 to account for estimated booked liabilities. Mr. Burns reduced the value of URI‘s minority interest in HHA 20 by twenty-two percent to account for a lack of control and lack of marketability. Mr. Smith likewise discounted URI‘s interest in HHA, but by only fifteen percent. Mr. Burns agreed with Mr. Smith that the income capitalization 21 approach was an appropriate way to value the royalty interests. But he adjusted the value derived by Mr. Smith upwards by $56,000 because, according to him, the royalty income figures provided to Mr. Smith by URI were already net of production expenses. In effect, he believed Mr. Smith double counted the expenses. 10 Cite as: 2014 UT 59 Opinion of the Court ¶21 Mr. Burns assigned relative weights of sixty percent and forty percent to adjusted net asset value and market value, respectively. This resulted in his ultimate conclusion that the fair value of URI‘s shares was $5,910 per share. ¶22 In sum, the district court had a variety of appraisals of URI‘s fair value before it. The table below summarizes those valuations: Asset Value Investment Market Value Fair Value Valuation per Share Value per Share per Share per Share Mr. Wright $5,644 $4,908 $2,750 $5,25022 Mr. Smith $7,571 None offered None offered $7,571 Mr. Smith $10,722 None offered None offered $10,722 (Amended)23 Mr. Burns $6,690 None offered24 $4,741 $5,91025 ¶23 The district court ultimately accepted only Mr. Smith‘s amended valuation, holding that any adjustment for marketability or taxes was improper as a matter of law. Accordingly, the court entered judgment against URI for the difference of Mr. Smith‘s amended valuation share price and what URI paid the Dissenters in 2004 ($10,722 – $5,250 = $5,472 per share difference), plus interest. URI paid part of the judgments in the amounts of $750,000 to MTC and $185,000 to Mr. Hansen. In the letter delivering the payment, URI stated that it did not intend to waive its current appeal and that 22 This value was proposed by URI and confirmed by Mr. Wright as a fair value. 23 As explained above, Mr. Smith used the income and market approaches in valuing certain assets held by URI. Supra ¶ 14 n.11. But he did not provide separate income and market values for URI as a whole. 24 As noted above, Mr. Burns concluded that he could not value URI using a traditional income approach because he could not accurately estimate future cash flows. But he noted that the ―Adjusted Net Asset Value‖ he derived for URI was a ―blending of the income and asset methods‖ because it captured future revenues and future expenses. 25Mr. Burns‘s valuation relied on the appraisal done by the Fortis Group. He also provided a fair value of $5,333 based on Porter‘s appraisal. 11 URI v. MTC Opinion of the Court it was paying only to abate interest and reduce the threat of postjudgment enforcement proceedings. The Dissenters accepted the payments and filed partial satisfactions of judgment. URI now appeals the district court‘s determination of the fair value of its shares. We have jurisdiction pursuant to Utah Code section 78A-3- 102(3)(j).