Goldilocks and the Critical Importance of Time
The most important thing about valuing a fractional interest in real estate is time, specifically, how long will the interest-holder be stuck in its position? Interest holders care less about the current net asset value, and more about its future value. The valuer can use this to solve many issues and conclude the likely period, which is a critical element in such valuations.
The restriction period typically ends when the assets are sold and profits are distributed. This period has profound effects and it is important for the valuer to consider the circumstances that could affect the period.
Two possible dilemmas may occur when matching the model period and the period which discount rates are taken from. One dilemma is when a period seems to be “forever”: partners who intend to hold their assets forever. “Forever” would rely on future generations, which is very difficult to predict. Webb suggests that exceeding 10-15 years creates an invalid model because it is practically impossible to find discount rates that can support longer periods.
The other dilemma is the short term: when a partnership ends and partners do not want to extend. With good facts, a 2-3 year restriction period can be concluded, but short holds are not baked into yield rates.
Intangible Value in Real Estate Partnerships
Intangible value is attributed to the buyer and seller and is typically where the deal will be struck. Since, all transactions are made at investment value, which is based on the buyer’s and seller’s view of the worth of the investment to themselves. Intangible value has to have been present at the time a shared ownership arrangement is entered into. Fractional ownership is created when there are benefits realized by both parties, and these benefits are mainly intangible.
Before the buyout process, it is important to make sure all is set up for success. In order for all parties to agree on a buyout process and pricing mechanisms, it may be necessary to reduce the discount required for exit pricing.
While there are many benefits and detriments to go through before the buyout transaction, the valuer is usually able to interview the parties and figure out what should be considered. In family partnerships, internal trust and confidence is an important intangible element to craft provisions that will benefit future generations.
To learn more click the link: https://www.appraisalinstitute.org/assets/1/7/Valuing_Fractional_Interests_2_0_%20_Handouts.pdf
The Rapid Rise of Real Estate in Transition Planning:
While an enormous amount of real estate is held through partnerships and other ownership structures, future generations will struggle to preserve family legacies unless transitions provide for management and interest-holder buyouts. This places great emphasis on the importance of transition planning. Ways to accomplish this are displayed through this three part article.
Fractional interests are typically created when there are substantial benefits that can be gained. These interests are formed by investing at a premium. This may include pooling resources for purchasing and improving property or splitting the usage of a property. Asset-related transition planning is important and often overlooked by many. While selling problematic assets is typically the solution, it can be hard for partners to all agree. Clarity on the facts and circumstances is essential to foster an agreement between the parties. Webb believes it is important to become proficient at valuing fractional interests in a way that is meaningful to the clients.
To learn more click the link to the Article written by Dennis Webb, is a business and real estate appraiser, former syndicator and engineer. Webb is the principal of Primus Valuations® a specialty valuation and litigation consulting firm with offices in Los Angeles and Denver: https://www.appraisalinstitute.org/assets/1/7/Valuing_Fractional_Interests_2_0_%20_Handouts.pdf
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