Market value appraisals are used for partner/shareholder buyouts, estate settlements and taxation and many other purposes. Such appraisals are often based on market data, which is fine when data involving obviously comparable properties or interests are available; but, what if they are not? Say the interest being valued is a 25% interest in Colorado farm land, and the only available transactions involve a 65% undivided interest in Mississippi timberland and a 10% interest in an orange grove in Florida. Are they meaningful for the Colorado appraisal? Does the appraiser have other choices? (Yes!)
The courts and professional literature often place high importance on actual transactional data when evaluating expert opinions of fractional interest values. This may make intuitive sense, but is it practical? Analyzing fractional interest transactions is far more complex than analyzing sales of entire properties, because the comparisons must be made to the ownership structure and a lot of other facts and circumstances, on top of any relevant property characteristics that might have influenced the discount (location, land use, soils, etc.). What was the buyer’s intent? What were his or her options for exiting the position? Transactional data might seem like a Holy Grail, but they are fraught with problems and can easily lead to unsupportable and unconvincing opinions of value. We recommend proxy methods that can be consistently applied, that incorporate explicitly facts and circumstances that might otherwise be elusive. Publications on this website can be used to gain an understanding of such methods, and facilitate reliable and convincing value opinions. Basic analysis of sale transactions and the partition process are included in Valuing Fractional Interest in Real Estate: Partnerships and Cotenancies and techniques for applying proxy data, based on specific facts and circumstances, are presented in Advanced Modeling for Holding Company Valuation.