Partial Interests
For those of you who are inclined to utilize standard discounts based solely on Sales Comparison data of other undivided partial interest sales you have run across, I would recommend that you re-consider.
I have done a fair number of undivided partial interest discounts over the years and find it amazing how many appraisers just include some sale transactions and make a guesstimate based on those and run with some poorly rationalized number grabbed out of the air.
As Walt Humphrey has told me (Walt is very knowledgeable and experienced in partial interest appraisals) if you travel far and wide enough you will find discounts from the 100% interest evidenced by sales data in the ridiculously wide range of 0% to 95%. So I guess we can argue 'til the cows come home about what the appropriate discount is if it were based solely on sales data comparisons. The problem I see with sales data is the widely ranging circumstances, locations, knowledge, and other nuances involved in instances where TIC's are actually sold and also pinpointing what the actual 100% value of the property was at the time of the sale in order to formulate an opinion of the discount from the transaction itself.
I think the important thing to remember is that each property (or group of properties) is unique and should warrant a separately analyzed discount. There is no universal number or rule of thumb and there shouldn't be. I believe one article I read (perhaps it was Walt's) that indicated one Tax Court case threw out an appraiser's conclusion due to the fact that he supported his number based on other tax court discounts as opposed to individually analyzing and determining the appropriate discount for the particular asset at hand.
The underlying assets of undivided partial interests have widely varying characteristics. Some of these include:
1) Cash flow vs. No Cash Flow
2) Capitalization - Large Cap vs. Small Cap or Micro Cap or Extremely Micro Cap (i.e. a small $500K land parcel versus a multi-state or multi-region portfolio of improved, cash-flowing apartment communities)
3) Geographic diversification - a single property location versus a portfolio of properties in different locations
4) Professional Management - Small, local properties often have unsophisticated, non-professional property managers overseeing a property. Conversely, large regional or national portfolios of properties typically have seasoned, experienced, and professional property managers.
There are other factors I don't even remember or haven't mentioned above that may also play a role in the appropriate market discount. The factors above are beyond the typical discounts cited for lack of control and lack of marketability and suggest why the typical discount is fairly significant.
My wife is a CPA. (Ergo...my forced experience into this wild and wooly side of the appraisal profession).
Many appraisers look at the Partnership Profiles Partnership data to further support or enhance their discounts. Of course, the information they provide is interesting and helpful, but I must confess that I find the marketability of such interests typically way superior to those undivided partial interest parcels we are typically asked to appraise for estate or gift tax purposes.
What would you rather have? A 75% undivided interest with Joe Schmo in a vacant speculative parcel with a 100% interest worth $1,000,000 in Las Vegas or a Real Estate Limited Partnership interest controlling $750,000 in Net Asset Value of a $1,000,000,0000 portfolio of high-grade cash flowing office and retail properties scattered throughout the southwest and northeast United States? I'll take the Limited Partnership Interest, as I would not discount that as highly as the 75% interest in Joe Schmo's property...
Remember, many of the typical Real Estate Limited Partnerships tracked by Partnership Profiles contains a large capitalization portfolio of properties. These Limited Partnership interests have an identifiable and readily available market-place. You and I can begin the process to buy these interests tomorrow if we wish to. They are not as liquid as publicly traded stocks and bonds but they are much more liquid than the typical undivided partial interest (i.e. TIC interest) that we are often asked to appraise. At least there is an established market out there for the Real Estate LP interests.
One could make a good argument that the Partnership Profiles (PP) Limited Partnership sales data shows largely only a control discount. This is because, in comparison to the typical small local TIC interests we are typically asked to appraise, the PP data still lacks a serious accounting for discount elements often inherent to your typical local small TIC interest appraisal such as 1) Cash Flow 2) Capitalization (very small cap, micro cap, etc.) 3) Geographic Diversification and 4) Professional Management Acumen.
It is also important to note that the LP's in the PP data are increasingly announcing short-term liquidation plans which solidifies the expected holding period and, thus, has reduced the required market discount. Discounts in the PP data have become lower over the years due, in large part, to the "winding down" of operations of many of the major Real Estate LP's covered in the study by PP. Conversely, the typical TIC interest we are asked to appraise does not have any announced "sunset date" that allows a purchaser to readily predict a likely holding period for the TIC interest.
Every year PP does a typical discount study on real estate limited partnership data with regards to LP transactions compared to the larger 100% Net Asset Values of the Limited Partnership. I recall the discount numbers generally ranging from an average of about 25% to 40% over the last 10-20 years or so that they have been publishing the information. I also know that some accountants rely solely on these numbers. I also know that I think these folks are wrong. If a real estate limited partnership that has an established market requires 25% to 40% discounts from Net Asset Value why wouldn't a much smaller single location TIC interest in non-cash flowing vacant land owned and managed by a few regular Joe's have a materially larger discount?
Please recall that most LP's in the PP study trade on the APB trading platform so there is a marketing vehicle for these things. Compare that with a partial interest in your hometown. Call a broker and see if he'd even list the darn thing... Many consider it a waste of time and effort due to the very limited market.
This has been my general philosophy about TIC interest appraisal over the years. Helpful resources that I highly recommend to quantitatively support your TIC discounts can be borrowed a bit from our brethren in the business valuation community. There is another species out there called the Family Limited Partnership (FLP). There is a whole school of valuation for these entities and many of the schools of thought and methodologies employed for FLP's can be applied to TIC's. Namely, they both have control and marketability issues. Of course, there are significant differences, too...
Anyhow, for those that want to educate themselves and become better at quantitatively supporting their TIC discounts through means other than wide-ranging sales comparison data, I would recommend the following:
1) Comprehensive Guide for the Valuation of Family Limited Partnerships (Go to
http://partnershipprofiles.com/) - 1st, 2nd, 3rd, 4th Editions etc. are all helpful and outstanding reading...
I think you will find their example treatment of real estate FLP's enlightening with their outlined techniques / methodologies for determining an appropriate LOCM discount. There are certainly stark argumentative similarities between the lack of control and marketability (LOCM) between a TIC interest and an FLP interest.
2) Ibbottson's 2012 Yearbook - Valuation Edition
http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1415.xml
Helps in developing an income based approach discounts. I typically do a Sales and an income approach in all my undivided partial interest appraisals. If you don't know how to do an income approach on each and every interest you appraise, I would suggest you may not have the required expertise and knowledge in the first place. And yes, you can do an income approach on raw lland. See Item #1 above for some pretty good examples of how to do so in their book.
3) The Partnership Profiles Minority Interest Discount Database
http://partnershipprofiles.com/
4) Any of Walt Humphrey's various past professional journal articles on partial interests searchable on-line at the Lum Library's index:
http://www.appraisalinstitute.org/resources/lum.asp
(Note: I especially enjoyed the one article where Walt pointed out some significant USPAP Standards issues that should be addressed that I see many appraisers ignore or just failing to consider due to their relative lack of experience in preparing Partial Interest appraisals. That article should be required reading for all doing partial interest appraising work that needs to comply with USPAP standards.)
I also recommend the AI's book that you also referred to so I won't repeat that above. It's their partial interest valuation book. Good foundation reading there as well.
Sincerely,
Charles E. Jack IV, MAI
