It is necessary to establish an agreed upon breakdown (between Buyer and Seller) of the land-building-equipment/chattels being purchased in a typical commercial real estate transaction. Will say it at the start - it is best done through the Agreement of Purchase and Sale, and as a straight term of the sale.
The Purchase Price Allocation (PPA) is a tax reporting requirement on the sale of a commercial property. Whether done early in the process or at closing (or beyond), tax officials look to verify the information as being the ‘same'.
Consider the issues from both the Seller’s and Buyer’s perspective:
LAND
Seller - Value Establishes Capital Gain
Buyer - Value Sets Acquisition Base Price
BUILDING
Seller – Value Establishes Recapture/Capital Gain Costs
Buyer - Value Establishes Base Price From Which To Depreciate
EQUIPMENT/CHATTELS
Seller – Value Establishes Recapture/Potential Loss or Income
Buyer - Value Capitalizes A Figure For A ‘New Start on Depreciation’
Given different tax needs and priorities, it is easy to see how both Buyer/Seller may end up at cross-purposes on this matter. Best practices, is that it become a matter of negotiation, as with any other term of the sale . Beyond agreeing to the breakdown, you must also ensure that the PPA breakdown is realistic within your market and defensible based on comparable sales.
We advise clients to consult with both their lawyers and accountants with respect to PPA, to ensure they understand the requirements and the related costs.
As always, consult with an experienced commercial broker in your market to assist you in the Purchase of Commercial Properties.
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