Minority premium model may not apply to all properties

BVWireIssue #107-1
August 3, 2011

Last week’s item ’Minority premium’ model may not comply with FMV standard,” drew a response from James B. Lurie (CapVal-American Business Appraisers, LLC):

Depending on the type of property, and assuming that the holder of the 1% interest has an undivided right to use the $2 million property that Mills-Mazer presents as an example, it might be unreasonable for the holder to sell the fractional interest at anything other than a substantial premium. 

For example, if the subject property is a house on the beach, the utility of the undivided 1% interest would be far greater than $20,000, and the potential for impairing the 99% interest utility could be far greater than 30% (if, for instance, the 1% interest holder habitually sits in his underwear in the living room smoking cigars). By the same token, if the property is timberland that can be subdivided without impairing the value, maybe not. 

As always, it depends on the facts and circumstances, and neither IRS engineers nor independent appraisers can establish hard and fast policies that apply to all situations.

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