SUBTRACTION BY DIVISION
by Matthew Roberts, Certified General Real Estate Appraiser
March 2017
For many purposes, farm appraisals providing an opinion of value for an entire farm property and rights of ownership are sufficient. Many farm appraisers are primarily experienced in appraising complete ownership interests in a farm property because it is most commonly requested. Other divided interests include “partial interests,” such as interest divided by leases or easements. By contrast, “fractional interests” are undivided interests in the farm real property.
WHAT IS FRACTIONAL INTEREST?
A fractional interest of ownership in real estate exists when two or more parties each own an undivided fractional share of real property. This interest arrangement is also known as tenancy in common. Undivided fractional interests often occur as the result of inheritance or transfers between family members and by family or business owners acquiring farm real estate without an ownership structure already in place.
In the absence of a written ownership agreement specifying otherwise, all owners can possess and use the entire farm property. Each owner will have the right to enjoy the farm and have a share of the property’s income and expenses. While each owner has equal right to use the real estate, they cannot partition or designate a part of the farm as being their own, nor can they exclude other co-owners. The more fractional owners that a property has, the more diluted one undivided interest may become.
THE QUESTION WE GET MOST OFTEN
The unique traits of fractional interest can lead to some unique farm appraisal work, which in turn gives rise to some commonly asked questions. For example, I recently appraised a 25% undivided fractional interest in a farm property. As with many fractional interest appraisals, we were eventually asked a question like this: “Why would the value of a 25% fractional interest not be exactly 25% of the overall property’s market value?” The short answer is risk.
Undivided fractional interests often suffer a discount when they are bought or sold on the market, due to the lack of ownership control and the lack of marketability. When comparing this type of ownership with 100% fee simple ownership, there is understandably less desirability and more risk from the standpoint of a potential owner or investor. Attracting a willing farm buyer commonly requires a discount to the proportional share of the overall property value. For these reasons, a fractional interest often has a market value below its pro rate share. Attorneys, accountants, courts, and the IRS have all recognized that a discount should be considered for the market value of a fractional interest.
WHY AN APPRAISAL OF FRACTIONAL INTEREST MAY BE USEFUL
A fractional interest may need to be appraised for several reasons. In the event of a gift or inheritance, a farm appraisal may be required for compliance with estate tax regulations, but could be beneficial ahead of time for estate planning. Or perhaps you are involved in a potential sale; whether buying or selling a farm with a partial interest in real estate, an appraisal can keep price negotiations reasonable and add leverage when dealing with the other parties involved.
We have experience in appraising fractional interests in farm land real estate. With reliable data and credible methods, we are able to determine the effect on market value of particular interests and arrangements. If you require the valuation of a fractional interest, please feel free to call. Also see what other customers are saying about our service on our Customer Reviews page.
Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.
