Partial Interest Valuation - By: Patrick OConnor

Partial interest valuation values the ownership of a portion of a property, limited partnership,

general partnership, corporation, LLC or LLP. Partial interest valuation is more complex than most

valuation problems and requires intense analysis and seasoned judgment. Reasons for performing a partial

interest valuation are typically related to estate tax valuation or estate tax planning but could

involve divorce, business dissolution or valuation of collateral for a bank.

Partial interests are almost always worth less than an undivided interest. This is because they are

illiquid and lack control. Partial interests are illiquid since it is difficult to sell a limited

interest in a property or nonpublic company. In addition, the sale of a partial interest in many

entities is subject to approval by other owners. In many cases, other owner’s can choose to not allow

the sale in their sole discretion without providing a reason.

The owner of a partial interest has less control than the owner of the entire property or entity.

Even if someone owns a controlling interest their actions are subject to review and scrutiny by the

owners of the balance of the property or entity. The owner of a noncontrolling interest typically has

very limited ability to control decisions or influence the management and policies for a property or

entity. Following are some of the detrimental effects of not having control of a property or entity:

• Cannot make decisions regarding selling the property, perhaps in advance of a declining market or
  
  for personal reasons;
  
• Limited or no ability to impact the quality of management or to choose a different management
  
  company;
  
• Limited or no ability to impact business policies;
  
• Limited or no ability to impact strategies or tactics;
  
• Limited or no ability to impact refinancing the property;
  
• Limited or no ability to impact the level of financial leverage.
  
• Discounts for a partial interest are often 20% to 50% of the proportionate value of the entire
  
  property or entity.

Some of the factors determining the degree of discount for a partial interest include the percentage

of ownership, whether it is a controlling interest, asset performance, the number of partners, the

relationship between the partners, issues with the property (such as risk, condition and financing),

market conditions and trends, and the quality of the general partner.

The steps involved in a partial interest valuation are as follows:

1. Value the entire property or entity;
   
2. Calculate the value of the proportionate share in the property or entity (value of the entire
   
   property times percentage owned);
   
3. Determine the appropriate discount for the partial interest; and
   
4. Calculate the value of the proportionate share after the discount for a partial interest.

O’Connor & Associates is the largest independent appraisal firm in the southwestern US and has

over 40 full-time staff members engaged full-time in partial interest valuation and market study

assignments. Their expertise includes valuing partial interests, business personal property, real

estate, business enterprise value, purchase price allocation for businesses, valuation for property tax

appeals, estate tax valuation, expert witness testimony and valuation for condemnation. They have

performed hundreds of partial interest valuation assignments.

About the Author

Our services benefit owners of all commercial property types including multi-family housing, retail stores, hospitals, hotels, industrial properties, manufacturing facilities, medical offices, commercial offices, restaurants, self-storage units, shopping malls, shopping plazas & warehouse/distribution centers.

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