Condo Sell-out Analysis

[hastalavista]

In Ken's defense, a prospective buyer could potentially be purchasing the (nonrefundable) deposits in addition to the remainder, which would yield a more straightforward sale and avoid the partial interests issue. As previously mentioned, if the effective date is further in the future than the deposit payments, that would probably require bringing the deposits forward at a risk-free rate. Is there market evidence that indicates that a buyer would more frequently purchase a partial interest in this type of scenario? I'm wondering if this is a case where there is more than one right answer.

Market value is always predicated on the rights being purchased.
We provide an opinion of market value under many different scenarios (fee simple absolute, fee simple subject to X, leased fee, leasehold, etc.). Only in the atypical case of fee simple absolute are those rights unencumbered by any other factors other than the four powers of government (taxation, eminent domain, police power, and escheat).

In Ken's scenario, what is being transferred? Better put, what is not being transferred? What is not being transferred is the pre-payment for the pre-sales. Other than the pre-payment monies, all other rights associated with "fee simple" are being transferred.

Question #1 is: Is there a market value for what is being transferred as-is?
I think the answer is YES.
Question #2 is: What description best identifies exactly what rights are being transferred?
It sounds to me like the report has already described the rights being transferred and how it valued those rights. What we are debating is the label to put on those rights and if those rights constitute "market value"? According to me, I've answered the market value question above. What is left is to describe those rights and put a label on them. The label I choose is "fee simple subject to pre-sale contracts". Another label wouldn't alter the description or the analysis used to conclude the as-is value. However, I wouldn't want to pick a label that would be confusing. IMO, "fee simple subject to pre-sale contracts" is clear and specific.

But regardless the label, if I have described the rights being transferred and the value of those rights (which it sounds like the original report did appropriately value those rights; it excluded the pre-sale payments from the as-is market value) I have completed a credible analysis that is reliable and for the intended use. My value is "market value, as is".

Valuing the subject without consideration to the pre-sale payments that are not being transferred would conclude a fee simple market value, but it would not be an as-is value. To do so, one would need to employ a HC because the analysis is assuming conditions that are not factual to what is known.

All in my humble opinion, of course!

 

[Gobears81]

What is not being transferred is the pre-payment for the pre-sales. Other than the pre-payment monies, all other rights associated with "fee simple" are being transferred.

IF that is a specifically outlined condition, then yes, I'm on board with yours and Howard's thoughts. But, I'm only pointing out that, depending on the circumstance, there might be more than one correct way to do this. Either value it exclusive of deposits, and as outlined above would be a partial interest, or value the entire fee simple interest based on the purchaser also buying the deposits.

 

[hastalavista]

But, I'm only pointing out that, depending on the circumstance, there might be more than one correct way to do this. Either value it exclusive of deposits, and as outlined above would be a partial interest, or value the entire fee simple interest based on the purchaser also buying the deposits.

I don't disagree that there may be more than one way to skin a cat.
I think the skinning, described by Ken, that the report under review applied works; it accurately describes the scenario, it credibly analyzes the valuation, and the conclusion is reasonable and therefore reliable.

 

[Gobears81]

I don't disagree that there may be more than one way to skin a cat.
I think the skinning, described by Ken, that the report under review applied works; it accurately describes the scenario, it credibly analyzes the valuation, and the conclusion is reasonable and therefore reliable.

Probably true. But as none have seen the report, the philosophy and valuation framework may be acceptable, but there would have to be a LOT of clear communication and a lot of concepts to be correct on from the appraisal under review for me to feel comfortable to OK it. This is the type of assignment that would require a top notch report just to be acceptable. For example, does it specifically outline that it is a partial interest appraisal? If more than the income approach is used, is the deduction appropriately quantified?

 

[Ken B]

The hypothetical investor would receive the fee simple interest in the property. While that interest may, in fact, be subject to the contracts, already in existence, to purchase end units, this would be the case regardless if the investor would receive 100% of the price paid for those end units or 10% of the price paid for those end units. The agreement of the investor to accept a percentage of the sales price of the end units, with the developer to receive the remaining percentage of the sales price of the end unit, has nothing to do with the rights of ownership in the property.

The investor does not receive partial interest in the property. They will receive the entire bundle of rights associated with the property, regardless of what they pay the developer.

The investor is simply agreeing to accept something less than 100% of the price paid for the end units at the closing of those end unit contracts. And the value of the cash flow the investor will receive from closing contracts and accepting something less than 100% of the price paid for the end units cannot represent the market value of the fee simple estate; it would represent something less than market value of the fee simple estate.

The terms of the sale to the hypothetical investor is that the developer will retain 20% of the price paid for the end units. Does it make any difference if that 20% is sitting in an escrow account and will be disbursed to the developer at closing or if the 20% has been paid directly to the developer in advance of closing? Either way, the investor has agreed to accept 80% of the price paid for the end units. The value of that cash flow to the investor cannot represent market value of the fee simple estate.

I am convinced of this, in part because of the defects in the arguments being made that the value of the cash flow to the hypothetical investor represents market value of the fee simple estate. If there are those who are not convinced of this, we will have to agree to disagree.

A good discussion, to be sure.

 

[Howard Klahr]

The investor does not receive partial interest in the property. They will receive the entire bundle of rights associated with the property, regardless of what they pay the developer.

The purchase contract creates an equitable interest in the property. Therefore, the hypothetical investor does not obtain fee simple absolute title in their purchase, but rather Fee Simple subject to the existing contracts. This is the point that I am apparently not getting across. The investor is getting less than fee simple absolute title.

 

[Ken B]

I disagree.

The purchasers of the end units have an equitable interest in the specific unit(s) they contract to purchase until such time as title for those unit(s) is transferred to them. In the case of a proposed condominium, regardless of stage of construction, those purchasers have that equitable interest in property which does not yet legally exist until such time as the declaration of condominium is recorded.

The hypothetical investor will receive legal interest in the project upon completion, not equitable interest. While I suppose there is no specific requirement, it stands to reason that the developer will record the declaration of condominium prior to the transfer, or more likely, contemporaneously with the transfer of title of the units in the condominium project to the investor. That investor will receive title to those units in fee simple estate. Once title has been transferred, the investor could refuse to honor the existing contracts signed by the developer and end unit buyer. In such case, the end users would have the right to sue the investor for specific performance by right of the equitable interest created by their purchase and sale contracts on the end units.

I will agree, in part, to the assertion that the investor will not receive fee simple absolute title, by definition. But then, by definition, I am not aware of any condominium owner who has received such title. Ever. I could say the same for any property which has any form of deed restriction, covenant, or easement recorded against it. Which covers a rather large percentage of properties for which we regularly value the fee simple estate interest.

 

[Gobears81]

I disagree.

The purchasers of the end units have an equitable interest in the specific unit(s) they contract to purchase until such time as title for those unit(s) is transferred to them. In the case of a proposed condominium, regardless of stage of construction, those purchasers have that equitable interest in property which does not yet legally exist until such time as the declaration of condominium is recorded.

The hypothetical investor will receive legal interest in the project upon completion, not equitable interest. While I suppose there is no specific requirement, it stands to reason that the developer will record the declaration of condominium prior to the transfer, or more likely, contemporaneously with the transfer of title of the units in the condominium project to the investor. That investor will receive title to those units in fee simple estate. Once title has been transferred, the investor could refuse to honor the existing contracts signed by the developer and end unit buyer. In such case, the end users would have the right to sue the investor for specific performance by right of the equitable interest created by their purchase and sale contracts on the end units.

I will agree, in part, to the assertion that the investor will not receive fee simple absolute title, by definition. But then, by definition, I am not aware of any condominium owner who has received such title. Ever. I could say the same for any property which has any form of deed restriction or covenants recorded against it. Which covers a rather large percentage of properties for which we regularly value the fee simple estate interest.

Ken, what would your take be on the post I made regarding a partitioning of cash flows (LIHTC tax credits being the best example) and how that relates to partial interests in property rights?

 

[Ken B]

I'm not an expert in LIHTC tax credit properties. However, there are no partial interests in the property rights in this subject. The investor would acquire the entire interest in the property in exchange for a percentage of the revenue earned upon delivery of end units to end unit purchasers. The interest in the property is not being partitioned; only the cash flow is being partitioned.

Because the investor is not receiving 100% of the revenue earned upon delivery of said units, valuation of the cash flow stream to that investor, only, cannot represent market value of the fee simple estate.

That said, I think the following quote from

TAJ 2010

would apply, if there were multiple partners involved in this property under discussion:

Appraisers Must Consider All the Real Property
Care must be given to valuing the correct property
interest. If the assignment is to appraise the real
estate, then all the real property benefits that flow to
the property’s direct owner must be considered, and
not just a partner’s partial interest in the entity. It is
important to remember who owns the real estate; it
is usually a limited partnership as a legal entity, not
the individual general or limited partners.

 

[Gobears81]

I'm not an expert in LIHTC tax credit properties. However, there are no partial interests in the property rights in this subject. The investor would acquire the entire interest in the property in exchange for a percentage of the revenue earned upon delivery of end units to end unit purchasers. The interest in the property is not being partitioned; only the cash flow is being partitioned.

Because the investor is not receiving 100% of the revenue earned upon delivery of said units, valuation of the cash flow stream to that investor, only, cannot represent market value of the fee simple estate.

That said, I think the following quote from
View attachment 29038
TAJ 2010

would apply, if there were multiple partners involved in this property under discussion:

Appraisers Must Consider All the Real Property
Care must be given to valuing the correct property
interest. If the assignment is to appraise the real
estate, then all the real property benefits that flow to
the property’s direct owner must be considered, and
not just a partner’s partial interest in the entity. It is
important to remember who owns the real estate; it
is usually a limited partnership as a legal entity, not
the individual general or limited partners.

I just read that article last week actually They indicated that not including tax credits in the valuation is a jurisdictional exception, though that is how it is done for ad valorem.

Not to steal your words, but this is one of the better discussions on the commercial forum in recent memory. Also, I'm not sure that there is a topic in recent memory that I've been so ambivalent on.