<div class=”d4p-bbt-quote-title”>CaptainMusky wrote:</div>
Maybe commercial property is different than residential…
It is.
First of all, as an officer of a legal entity like a corporation, you have a legally binding obligation not to commit fraud. And you sign a lot of paperwork that acknowledges this obligation and what the penalties are if you break it.
Weather or not that fraud, in your opinion, actually harmed another person or entity is not material. You are legally required not to engage in fraud, full stop.
Businesses are different from personal finance. Legal business entities have a long list of legal obligations that they must adhere to and they agreed to do this because of the legal protections that these entities are afforded in return. The integrity of our system of business and how those businesses are governed and protected relies on this adherence.
Secondly, the value of commercial property has as much to do with the owners business plans and future plans as it has to do with the current state of the property. For example, I may own an older apartment complex full of working class tenants and say it’s currently valued at $5 million. But what if I tell you I have plans to bulldoze the whole complex and turn it into a gated community of luxury homes within 3 years? What’s the value now? Most would say a lot more because of these plans. But of course I cannot commit fraud by making up these future plans that I have no intention of executing just to increase your perception of value. Again, material misrepresentation is fraud.
You can’t justify fraud by turning around and saying well the other party didn’t catch me at it or wasn’t harmed by it so it doesn’t matter.
Banks big enough to finance these properties aren’t looking at “stated plans” to base their lending decisions off. They are looking at current & prospective cash flow which, along with Cap rates, drive property values.
When you finance commercial real estate there are various add-backs to cash flow that are either deemed non-cash or nonrecurring items that are used to lower your taxable income. When those expenses are added back, the appraised value gets inflated because you are increasing your NOI – appraised value is your NOI divided by the Cap Rate. For instance, if you are running NOI of $500,000 and a Cap Rate of 5% your income cap value is roughly $10,000,000. So what I assume the prosecutor is trying to prove is that the income statement was including deductions that went above and beyond the tax code to avoid income taxes. On the financial statements, the corporations are saying those subject expenses were non-cash or nonrecurring and should be added back to the cash flow for a higher property value. That’s where you get different “stated” values.
Appraisals get too much credit & reliance when in reality it’s just a point-in-time value.