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What is it Really Worth?
Staff Writers
If real-estate constitutes a large portion of your estate, as a mature physician, you should be familiar with how fractional interests are valued. This may be especially true during the current sub-prime mortgage debacle in this country.
It’s all About Control and Marketability
Fractional interests are generally subject to two general categories of valuation adjustments: [1] lack of control and [2] lack of marketability.
Lack of Control Discounts
Typically, appraisers first determine the value of the underlying real-estate asset as a single interest, applying one or a combination of approaches, including (1) the income approach, (2) the replacement cost approach, or (3) the comparable sales approach.
Determining Factors
In analyzing a fractional ownership interest, the appraiser needs to understand what investment risk and return factors change as the physician investor moves from fee-simple ownership to a fractional interest.
And, when the fractional interest is in the form of a partnership or other unincorporated business format, additional analysis will be necessary since these organizational forms are based upon contractual agreements among the investing parties, and upon state statutes that apply to each type.
It is usually somewhat difficult to obtain meaningful valuation data for fractional interests, and the total discounts realized are usually not separable into lack of control and lack of marketability factors. Numerous studies have been conducted by reputable valuation firms; with often ambiguous results.
Probably the most reliable data in determining lack of control discounts are those derived from the sale of minority blocks of stock of a real-estate corporation and those for publicly traded REITs.
Lack of Marketability Discounts
With respect to lack of marketability discounts, the best source appears to be sales of restricted stock, which show larger discounts for OTC stocks versus NYSE or ASE securities. These restricted stock studies cover a span from the late 1960s through today and traditionally indicated an average price discount of 35% until a few years ago. Today of course, this discount has increased with recent events.
Additional evidence comes from studies of IPOs by comparing the IPO stock price with the price at which the company’s stock traded in private transactions prior to the IPO. These studies indicate lack of marketability discounts of 40% to 50%, or more, in some cases today.
Assessment
Data from past studies provided appraisers, and physician-investors, with a solid arsenal of analytical weapons and data to draw from when a fractional ownership interest was to be appraised. Again, the situation has drastically changed in 2008, and into the near-future, at least.
Conclusion
Do you own any other fractional investments; like plans or boats? In today’s environment, how do you value fractional interests in real estate? Please comment and opine; the more experiential the better.
Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Physician Financial Planning: http://www.jbpub.com/catalog/0763745790
Medical Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Health Administration Terms: www.HealthDictionarySeries.com
Physician Advisors: www.CertifiedMedicalPlanner.com
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Filed under: Alternative Investments, Estate Planning, Financial Planning, Investing | Tagged: fractional interests, real-estate, REITS |
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Do you have any idea what the current mood of the IRS is with respect to these discounts?
-Thanks for your response.
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Be careful. I have a fractional interest in Mexico and the interpretation of the by-laws by the governing body is different than in the US states. We are considering litigation, so read carefully.
And, we (the owners) are trying to sell for a 33% discount from the list to get out from this debacle. I say they are worthless.
-Dr. Greg Amarantos
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