If you have any data on fractional interests, let us know!

“I am valuing an undivided interest in real estate,” says Diane Mooney in a current thread in LinkedIn’s Business Valuation & Advisory Network (membership required). “Is anyone aware of any database with similar transactions?

An age-old question with no new answers. “To the best of my knowledge there is none,” offers Noreen Dornenburg. “Instead you have a lot of case law and a number of elements based on the specific type of real estate, number of holders, etc., on which the courts based their decisions. This is a real specialty, like valuing golf courses or nursing homes, not to be taken on lightly.”

“I agree with Noreen that (to the best of my knowledge), there is no such database,” says Rod Burkert. “But you may want to take a look at an interview Eric Nath did with theBVUpdate in September 2010,” in which he discussed the Ludwick case, which involved a 50% undivided interest in a vacation home.

“I agree with all of the comments above,” adds Pete Butler. “The discount is highly dependent upon the unique circumstances of the case,” he says, such as the type of real property; its underlying value (expected return); its ability to be partitioned; and its related tenancy agreements, debt, and size. “Even if there was a database per se, one could only anecdotally reference it,” Butler says. For instance, he just valued the same percentage fractional interest in two separate properties, but based on their unique facts, he came up with materially different discounts. That said, Butler provided the group with a list of studies that he references when valuing undivided interests:

  • Harris-McCormick-Davis study;
  • Healy study;
  • Patchin study;
  • Peterson-Hansen-Klafter study;
  • FMV Opinions Inc. study;
  • Humphrey study;
  • Eckhoff Accountancy Corp. study; and
  • Willamette Management Associates studies.

Possible new twist. In addition to these studies, Dornenburg may review the prices of time shares, “which are technically not undivided interests,” she says, “but do parallel them in a number of ways. These act as a reality check for me, but aren't to be relied upon as direct data, as usually they yield a premium over the value of the real estate, not a discount.”

BVR has been working with several of the parties above to try to collect comparable transactions.   If you are familiar with any additional data or sources, drop an email to davidf@bvresources.com.