Some people use the terms partial and fractional interests interchangeably but in the classic literature of real estate there is a distinction with partial interests (as differentiated from fractional interests) referring to such portions of the division of the bundle of rights as a leased fee (originally a fee simple now subject to a lease for a certain number of the years), a leasehold position (the lessee’s interest), a “sandwich” or “in between” position that is the lessee of a prime lessor and in turn the sub-lessor to a sub-lessee. The “sandwich” position is, in effect, a positive or negative arbitrage position.
A fractional interest denotes the ownership of a majority or minority interest in a fee simple or in a leased fee or leasehold estate. Minority interests are often characterized by lack of control; lack of effective voice in decision-making; limited marketability, consequently, longer marketing time; illiquidity; and the difficulty of utilizing such interests as collateral for financing. When there is no one controlling interest, there may be difficulties in arriving at a consensus on important decisions. Often but not always, such interests are discounted in value; however, if the various parties in interest, acting in concert, intended that an interest be treated on a pro rata basis, there may not be a discount. The concept of a control premium may sometimes be warranted for a majority interest or when one of the fractional ownership interest holders is attempting to re-assemble a fee simple interest in the entire property and there are one or more “holdout” fractional ownership interests whose cooperation is needed and a purchase premium is required to overcome resistance to sale. There are other variations in circumstances that may call for a discount or premium adjustment or for a fractional interest sale at a level equal to a pro rata share of the market value as a whole. In other words, the value of an interest in a property may be less than, equal to, or, occasionally, greater than a mathematical pro rata share of the value of complete ownership.
With the emergence of real estate loan securitization and the increasing complexity of other multiple-ownership patterns such as but not limited to tenancies-in-common, joint ventures, public-private partnerships, and syndications these valuation issues have become increasingly important.
Gerald M. Levy & Co. LLC is ready to undertake assignments featuring partial and fractional interest issues. Mr. Levy is a MAI member of the Appraisal Institute, a CRE member of the Counselors of Real Estate and an FRICS Fellow of the Royal Institution of Chartered Surveyors (London). He is also a New York State Certified General Real Estate Appraiser and a Licensed New York State Real Estate Broker and, in both instances, is eligible to be licensed in most American states.