Undivided Interests

[HawkCreekRE]

New to the forum...I've lurked for awhile but haven't posted yet. I'm looking to see if you guys have had success in finding undivided interest transactions in real estate, and in particular the discounts inherent in the price of an undivided interest for lack of control and lack of marketability. I know in searching the forums I came across some posts from poster "Eminent Domain" where he has had some success...but unfortunately he has a private email address so I have not been able to contact him directly.

So if any of you have any tips as to where you have found such data or if you are willing to share any data that you have found...I would appreciate it!

Thanks!
-Chris

 

[Elliott]

Chris,
Interesting enough I had a call today from a HO wanting me to appraise a
condo, which she was gifting to her two children. So both would get a
undivided 1/2 interest. She wanted to get 'the discount' because her
attorney/tax planner said there were discount tables, and since she
was going to have to pay gift tax on the amount she wanted the lowest
value possible.

I explained that the IRS may have tables, but the reality of the market
is that there are very few 1/2 interests that are sold in the open market
that would be either comparable to her property or her situation. So I
could estimate fee simple Market Value, and if two people had 1/2 interests, then
the value of their interest would be 1/2 of the Market Value.

She called her attorney, then called me back and said she would have to
find an appraiser who was willing to give her the 'discount.'

I was going to start a thread and ask, "So would you take this
assignment giving the HO a 'discount' for a 1/2 interest.

 

[CANative]

So the OP (a trainee - NTTAWWT) is asking how to develop a market value opinion of a partial interest?

Interesting.

 

[HawkCreekRE]

Thanks for the reply Elliott.

It is my understanding that an undivided interest in a certain piece of real estate should likely have some sort of a discount for lack of control and lack of marketability since it takes unanimous consent of the undivided interest holders to make any management decisions regarding the property. The more undivided interest holders....the harder it will be to make a decision. I know the IRS will typically look at a hypothetical partition of the property (dcf approach looking at legal fees, appraisal fees, and the timing regarding the partition) as an indication of "discount" for an undivided interest. I know there is data out there on undivided interest transactions and the discounts that they have traded at....its just a matter of finding it!

It makes conceptual sense that the undivided interest value should be less than the proportionate share of the total market value of the property due to the less attractive nature of the investment.

 

[HawkCreekRE]

Hey CANative,

To reply to your post....I have worked in the valuation industry for about 6 years doing support work for business valuations and asset holding companies....but in doing BV type projects I have had to rely on RE appraisals and study the intricacies of their methodologies so that I can with a straight face rely on them in my analysis. I have just recently started doing some support work for RE appraisals. So I am probably not your typical new appraiser trainee.

 

[CANative]

NTTAWWT

Not that there's anything wrong with that.

Is the assignment to value the fee simple interest?

 

[Paul Isolda]

I think the term you're looling for is PARTIAL INTEREST. That's a very specialized area and would suggest you work with an appraiser who has experience with that particular situation.

 

[Elliott]

Hawk,
My understanding of the issue, along with my experience, is that Congress was
lobbied to produce the 'discount' table, as a compromise, to lessen the impact
of the IRS (who would of course use strict percentages).

I've always told estate, gifting types they are more then welcome to have their
CPA or Attorney apply the discount table, but just don't expect me to find market
evidence to support a jerimandered table. Of course, I don't always make everyone
happy, except myself.

 

[Elliott]

Hawk,
More stuff:


Judicial Opinions.* Generally the courts have concluded that fractional interest discounts are appropriate in determining the fair market value of a fractional interest in real estate.* The table below shows several recent Tax Court Memorandums that applied fractional interest discounts based upon the facts and circumstances of the particular case.* As can be seen in the sample below, a wide range of fractional interest discounts have been allowed.

http://www.mercercapital.com/index.cfm?action=page.item&id=193

CAN is right, its a complicated, esoteric subject. What gets my goat is a
estate lawyer sends out their client to get a 'discount' appraisal. Not unlike
CPAs getting HO to get the appraisal for a 'learn to burn.' Seems to me
they are being either 1) lazy or 2) stupid or 3) not being professional to
their client.

 

[Terrel L. Shields]

It is a guess and how good are you at bluffing the IRS...

When FAMILY members are involved, the courts are generally RELUCTANT to give any discount. period. People have tried this in divorce cases.

In a Ranch where one son was running the show he tried to discount the value of the other siblings to buy them out. They sued. The court found the discount was zero...he had to pay market value for their share.

There are exceptions. The Bonner v. USA was one.

A LLC OTOH is generally discounted by a BUSINESS appraiser for lack of fungible title.

Old post here from 5 yr ago. http://appraisersforum.com/showthread.php?t=97758