Chapter 23 Partial Interest Valuation

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Chapter 23Partial Interest Valuation
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Situations

• Percentage of Interest
• 75 ownership interest on an LP
• Condemnation
• 35 foot strip of land along frontage
• Single Condo in a Condo Development
• Sum of REIT share vs. Real Estate Values
• Overhead transmission lines

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Cases Previously Discussed

• Debt Equity
• Leased Fee Leasehold
• Subdivision of Acreage into Lots

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Key Question

• Does the Sum of the Values of the Partial
  Interests equal the Value of the Whole?
• If yes, a residual approach works.
• Is value added/destroyed by separating the
  interests?

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General Premise

• Dont Assume Sum of the Parts Value of Whole
• Value of partial interest should be established
  with market evidence
• Problem Market data tends to be scarce

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What do Economic Principles Say

• One Price theory Arbitrage
• If Sum of Parts gt Whole, market forces would
  subdivide properties to maximize value
  eliminate arbitrage situations
• In real estate, its not arbitrage because it is
  never risk free and there are substantial
  transaction costs

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Grocery Store Example

• A whole melon costs less than two 1/2 melons
• Cutting melons adds value
• Cutting melons costs money
• Conditions for added value
• Unmet demand for parts, customers will pay more
  (Demand side Premium)
• Dividing costs money and adds risk (Supply side
  Cost)

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Real Estate Applicationsof Grocery Store Analogy

• Condominium development
• Costs more to divide and sell than rent as
  apartments
• Buyers cant self-divide
• Positive Benefits of Owning vs. renting
• Land Sub-division
• Plottage

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Financing

• Minimal Transaction Costs
• Clustering of LTV around 60-80 suggests market
  imperfections (taxes, regulations)
• V V(unlevered)V(financing side
  effects) -V(financial distress costs)
• Typical LTV is the condition where marginal
  benefits and costs balance

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Financing

• Because debt financing is so widely available, it
  does not affect value of individual properties
• Market Value Definition
• typical financing
• If financing is atypical, it can affect value

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Limited Partnerships

• Value of IPO of LP shares vs.Value of underlying
  real estate
• Any added value is value attributable to
  financial services
• That value may not remain if the shares are
  re-sold
• Liquidity/Marketability risks
• Control risks

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Railroad Example

• Fee simple value vs. trackage rights
• Value in Use vs. Value in Exchange
• Value gained by Buyer vs. Value lost by Seller
• Utility corridor easements

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Summary

• Make a distinction between value added to the
  real estate vs. value of a financial service
• Value of subdivision - real estate
• Value of LP shares - financial service
• Typical financing - market value condition
• Rely on market support for any partial interest
  valuation, not a of whole value

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