What You Really Need to Know about Complex Valuations
Fractional interests in real estate
Fractional interests in real estate refers to undivided ownership, where 100% of a particular interest (say, fee simple, leased fee, leasehold or other divided interest) is apportioned between more than one owner. Common tenancy is the simplest form of such ownership, where the interests are transferred by deed (also referred to as tenancy-in-common). There is no agreement between the parties, whose rights are established by state law. An agreement can modify those rights, as with general partnership or syndicated tenancy-in-common (TIC) agreements. More complex forms of ownership are limited partnerships, limited liability companies and corporations. This can be compounded, when, say, a partnership holds an interest in another partnership or a common tenancy interest in real estate (referred to as a tiered entity).With any of these ownership structures, the property rights associated with the real estate are limited to an increasing degree, from common tenancy to partnership and corporate entities. Valuing any fractional interest involves a) identifying the facts associated with the real estate assets, the organizational structure (including financing) and the specific owners. These facts need to be connected with market data that models the interests’ control and marketability impairments, and the story of a sometimes very complex value analysis needs to be told clearly and simply. The skills needed to prepare a persuasive valuation are interdisciplinary, including both business valuation and real estate appraisal. The facts and process are intertwined (as any partner in a real estate limited partnership can attest), and the valuation report must incorporate both views to clearly portray how the facts affect value, and mirror how a buyer of the interest would make their decision.
Special-use property is any real property that has an uncommon business use, or that has a significant intangible component to its value for that specific use. Separating out the real property, other fixed assets and intangible components of value can be a huge and vexing problem for property taxation, rent allocation for income tax purposes, eminent domain and financial reporting purposes.Real property and its attributes may enable the business to generate outsized earnings, demonstrating value well beyond what it could fetch in the market. Conversely, the property could be seriously under-utilized, and its value as a part of the business could be greatly diminished. Both these scenarios have huge implications, and getting it right can mean a lot. Both the real estate and business valuation professions have difficulty with these properties because the knowledge that will lead the appraiser to a convincing analysis comes from two different bodies of knowledge. There is no fixed way to value these types of properties – it depends on the exact situation. Primus brings an integrated understanding of multiple valuation disciplines that solves major valuation problems and delivers persuasive opinions of value. We follow the Three Keys, a framework which clarifies even the most vexing valuation issues.