FILED: NEW YORK COUNTY CLERK 10/25/ :59 PM INDEX NO /2016 NYSCEF DOC. NO. 11 RECEIVED NYSCEF: 10/25/2016

Transcription

1 FILED: NEW YORK COUNTY CLERK 10/25/ :59 PM INDEX NO /2016 NYSCEF DOC. NO. 11 RECEIVED NYSCEF: 10/25/2016 APPRAISAL OF A 4.5% INTEREST IN AN ENTITY OWNING ONE PROPERTY 241 W. 14th Street New York, NY IN AN APPRAISAL REPORT As of June 30, 2016 Prepared For: 1633 Broadway New York, NY Prepared By: Valuation & Advisory 1290 Avenue of the Americas, 9 th Floor New York, NY C&W File ID:

2 1290 Avenue of the Americas, 9 th Floor New York, NY (212) timothy.barnes@cushwake.com Andrew T. Solomon, Esq Broadway New York, NY Re: APPRAISAL OF A 4.5% INTEREST IN AN ENTITY OWNING ONE PROPERTY 241 W. 14th Street New York, NY C&W File ID: Dear Mr. Solomon: At your request, we have estimated the value of a 4.5% interest in the entity owning the captioned property effective June 30, The market value of the real estate was previously estimated under separate cover at $17,300,000 in an appraisal made by Marc J. Nakleh, MAI, and the undersigned of our New York office. The standard of value is fair value which is the amount at which a property interest would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts, but without regard to a lack of control due to it being a minority interest Our analysis incorporated a review of relevant court cases, a review of empirical studies, and a study of economic and financial market conditions prevailing as of the valuation date. The fractional interest discount reflects a lack of marketability. A marketability discount generally reflects the loss of liquidity experienced by holding an interest that is typically difficult to market. No consideration is given to lack of control, if any. There is compelling evidence that fractional interests in partnerships and corporations sell at a discount to value. 1 The existence of such discounts is recognized not only in valuation literature and case law, but has been historically reflected in the relatively rare sales of such interests. Some authorities contend that lack of control and liquidity are not necessarily separate and distinct issues (Simpson, 1991). Nevertheless, when considered individually lack of liquidity is highly significant in determining marketability discounts. Other relevant influences include: 1 Please refer to a list of partial interest references that follows.

3 Page 2 restrictions on sale deadlock provisions rights of first refusal alignment of interests financial condition of the entity quality of underlying assets history of distributions reputation of other members leverage level of overall risk Healy (1998) reported that the average rates of discount were 25% for publicly traded partnership units and 35% for private offerings. The range of the price-to-value discount in the public market was 17% to 45%. The reported range of discount of privately traded partnership units was 20% to 50%. Humphrey (1997) presented several case studies demonstrating that the market for fractional interests is far from perfect. Nevertheless, the discounts cited were significant for the debt and equity offerings surveyed. Hall (1989) refers to a study conducted by the SEC in 1971 and one that he performed concerning transactions between 1983 and Hall s work also indicated substantial discounts, which he attributed to the lack of control and a lack of liquidity. Available literature suggests that price-to-value discounts in the aggregate generally range from 15% to 67% with many transactions in the 20% to 50% range. The applicable discount consists of a control component and a liquidity component as well as other factors enumerated earlier. It is within this context that an appropriate discount for the subject fractional interest must be considered. The magnitude of such a discount depends on the specific circumstances of each. A marketability discount reflects the difficulty a fractional interest holder faces if he or she desires to liquidate a fractional interest in real estate. The ability to sell is hindered by the relative unattractiveness of the interest to outside parties, as well as the hesitancy of banks to lend funds to purchasers of fractional interests. The limited number of fractional interest transactions that have occurred historically illustrates this lack of liquidity. The ability to sell an interest is further hindered by a potential investor s reluctance to enter into an arrangement with an unrelated party. To estimate an appropriate marketability discount for the entities, we looked at various published studies that examined the discounts associated with common stock that is restricted from immediate sale. In 1977, the Internal Revenue Service issued Ruling , Valuation of Securities Restricted from Immediate Resale. This ruling and its conclusions were consistent with the SEC s earlier study that recognized that a marketability discount was associated with shares that did not have immediate access to an active public market. Following adoption and revision of SEC Rule 144, which regulates the public sale of restricted shares by requiring a minimum holding period of one year (previously two years) before such

4 Page 3 shares can be sold in a public market, various experts re-examined the price relationships between restricted and non-restricted shares. In the Spring of 1983, Standard Research Consultants (SRC) published, Revenue Ruling Revisited in its SRC Quarterly Reports (Volume 10, No. 1). The article reviewed an analysis based on 18 private placements of restricted common stock from October 1978 through June The study found that discounts from the price of the publicly traded stock ranged from 7 percent to 91 percent, with a median of 45 percent. Additionally, SRC concluded that the earnings pattern of the issuer was an important factor associated with the size of the discounts. Companies that displayed five or more years of successive profits were able to sell their securities at substantially smaller discounts (a median of 34 percent) than companies with one or more years of losses in the five years prior to sale. Furthermore, companies with the largest revenues were accorded the smallest discounts (a median of 36 percent). In another study, the results of which were published in The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock (Business Valuation Review, September 1997), John Emory analyzed 46 initial public offerings in order to determine the relationship between the price at which the stock was originally offered to the public and the price at which private sales had been transacted within five months prior to the initial public offering. The results of this study were that the private buyers paid, on average, 45 percent less than the price at which the stock subsequently came to market. The private sale prices reflected a range of discounts from 6 percent to 79 percent, with a median of 45 percent. The studies mentioned above suggest that marketability discounts for interests in the equity of publicly traded companies range from 30 to 45 percent. This range must be adjusted appropriately to reflect specific characteristics of the subject interest. I have specified certain characteristics that will be utilized to derive a discount for lack of marketability. The specific attributes are as follows: The ease or difficulty of selling; Any restrictions on the ability to sell or transfer the property; The difficulty of a prospective purchaser to obtain financing; and The type of property. Ease/Difficulty of Selling The real estate market has proven very robust. In the appraisal of the real property it was concluded that the implicit marketing time would be 12 months. Therefore, the marketing time for a fractional interest could easily range from 12 to 18 months. Restrictions on the ability to sell or transfer the property The need to secure a majority of the other members consent could protract the sale process, as could the responsibilities of the Managing Member. Difficulty of Prospective Purchaser Obtaining Financing The ability to sell an undivided fractional interest in real estate may be hampered by the difficulty of potential investors to obtain financing. Lending institutions are hesitant to lend to fractional interest holders, largely due to the difficulties in selling these interests to cover mortgage liability and the inability to obtain a primary security interest in the property. A fractional interest in this entity would likely be difficult to finance under prevailing conventional underwriting standards.

5 Page 4 Type of Property The empirical studies mentioned above focused on partial interests in restricted public company stock while the subject is commercial real estate with a proven recent cash flow record. Furthermore, the property has a relatively low level of debt and distributable cash flow in the long term. This fact mitigates the risk associated with the other factors. In summary, the lack of marketability (LOM) discount of a fractional interest in real estate reflects the difficulty in monetizing such an interest. Although real estate is typically quite liquid, the ability to sell a fractional interest is hampered by a prospective purchaser s concerns about such an interest, as well as the difficulty in obtaining financing. The discount studies referenced above, in conjunction with my adjustments, suggest a marketability discount of 20% is supportable, inclusive of risk associated with capital gains, if any, which, in the case of a partial interest, may not be deferred by means of a 1031 exchange. The indicated value of a 4.5% interest in the property in question comes to $330,000, rounded, including pro rata cash on hand. The calculations of value are shown on the following page. Thank you for the opportunity to be of assistance. If you have any questions, please feel free to contact the undersigned. Respectfully submitted, CUSHMAN & WAKEFIELD, INC. Timothy Barnes, CRE, FRICS Senior Managing Director NYS Certified General Appraiser License No timothy.barnes@cushwake.com (212) Office Direct

6 Page 5 BURNTISLAND, LLC 06/30/16 PARTAIL INTEREST VALUATION PROPERTY ADDRESS/ MARKET OUTSTANDING INDICATED OWNERSHIP PRO RATA MARKETABILITY CASH DISCOUNTED MEMBER VALUE OBLIGATIONS EQUITY INTEREST VALUE DISCOUNT VALUE VALUE 241 W. 14th Street $17,300,000 $8,230,539 $9,069, % $408, % $4,483 $330,984 New York, NY/ Falkland, LLC ROUNDED $330,000

7 Partial Interest References IRS Revenue Ruling IRS Revenue Ruling Internal Revenue Service Ruling , Valuation of Securities Restricted from Immediate Resale. Standard Research Consultants (SRC) published, Revenue Ruling Revisited in its SRC Quarterly Reports (Volume 10, No. 1), Spring of 1983 Davidson, Brad, Valuation of Fractional Interests in Real Estate Limited Partnerships--Another Approach, The Appraisal Journal, 1992, Emory, John, The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock (Business Valuation Review, September 1997)````` Hall, Lance S., Valuation of Fractional Interests: A Business Appraiser s Perspective, The Appraisal Journal, 1989, Hall, Lance S., Minority Interests in Closely Held Real Estate: Lessons from the Estate of Berg, Journal of Real Estate Taxation, January 1993, Harper, Jr., John S., and J. Peter Lindquist, Quantitative Support for Large Minority Discounts in Closely Held Corporations, The Appraisal Journal, 1983, Healy, Jr., Martin J., Valuation of Partial Interests, The Appraisal Journal, 1988, Humphrey, Walter H. and Bruce B. Humphrey, Unsyndicated Partial Interest Discounting, The Appraisal Journal, 1997, Keating, David Michael, Appraising Partial Interests, Chicago: Appraisal Institute, The Valuation of Partial Interests In Real Estate (ASA Valuation, December 1983) Oliver, Robert P, Valuing Fractional Interests in Closely Held Real Estate Companies, Real Estate Review, 1986, Quan, Daniel and Chang N. Xuan, Pricing Limited Partnerships in the Secondary Market, Journal of Real Estate Research, May-June 2002, Schoenfeld, John A. and William Epstein, A Partial Interest in Real Estate: How Is It Valued?, The Real Estate Finance Journal, 1996, Simpson, David W., Minority Interest and Marketability Discounts: A Perspective, Part I, Business Valuation Review, 1991, Simpson, David W., Minority Interest and Marketability Discounts: A Perspective, Part II, Business Valuation Review, 1991, Thompson, Mark S. and Eggert Dagbjartsson, Market Discounting of Partial Ownership Interests, The Appraisal Journal, 1994, Webb, Dennis A., Minority Interests Discounts: A Quantitative Approach for Real Estate Limited Partnerships, The Appraisal Journal, 1999, Weil, S. Douglas and Richard J. Hindlian, Valuing Partnership Interests in Real Estate Companies, Real Estate Issues, 1994,