A Growing Need for Specialty Practices Combining Real Estate and Business Appraisal —New England Real Estate Journal

Understanding Both Sorts of Appraisal is Critical to Valuing Minority, Partial Interests in Holding Entities that Own Real Estate and Other Assets that are Gifted, Sold, or Otherwise Transferred  

Randolph Glennon, MAI, CRE, MBA, and president of Eastern Appraisal & Consulting in Portland, Maine, explains in the New England Real Estate Journal why there’s growing need for appraisers who understand both real estate appraisal and business appraisal.   An excerpt:   

For the past two decades there has been a large uptick in the transfer of partial interests, particularly between family members in partnerships or closely held businesses. The complexity of the concepts and valuation methods for minority fractional interests makes the preparation of Federal and State Income Tax Returns look mundane in comparison. The ability to create asset holding entities that are structured to restrict control and limit marketability of ownership interests can result in substantial value discounts and transfer tax savings. Although diminution in value is possible for majority interests, most of the transfers involve minority positions. The tool is often used to gift or sell real estate and other assets in increments and gradually reduce the size of an estate for advantageous tax purposes. This is now regarded as a reasonable way to retain ownership and use of assets in a closely held, family-oriented vehicle. It is no longer regarded as merely a tax avoidance ploy.

There are several types of ownership commonly used for holding and transferring partial interests in undivided, closely held real estate or business assets. Direct ownership of real estate as tenants in common remains typical. But, most are family limited partnerships (FLPs); family limited liability corps (FLCs); and S or C corporations, with S corps enjoying many of the tax benefits of partnerships and avoiding double taxation.

The partial interest valuation process begins with a separate appraisal of the real estate market value as of the date of transfer. For an income generating property, the income approach to value is usually most appropriate, with periodic net operating income before debt service yield capitalized with a property discount rate that reflects an appropriate return on the entire debt and equity investment.

Glennon goes on to explain specifically how an appraiser with real estate expertise is required for the partial interest appraisal estimation piece of this puzzle, and how an appraiser with business valuation experience is then charged with evaluating the type of property and its competitive market, ownership type, and partnership or shareholder agreements in the full piece.  Read it here. 

There’s a growing need for specialty practices combining both real estate and business appraisal