PARTIAL
INTERESTS & COOWNERSHIP – ANZ NOTE
Reproduced
with permission
1.0
Introduction
1.1
Purpose
The
purpose of this guidance note is to provide members with an awareness
of some of the principal issues to be considered in the valuation of
a partial interest in a property held within a co-ownership
structure.
Status
of Guidance Notes
Guidance
notes are intended to embody recognised ‘good practice’
and therefore may (although this should not be assumed) provide some
professional support if properly applied. While they are not
mandatory, it is likely that they will serve as a comparative measure
of the level of
performance
of a Member. They are an integral part of ‘Professional
Practice’.
1.2
Scope
This
guidance note applies to partial (fractional) interests in property
held (jointly) in co-ownership structures.
This
guidance note does not apply to strata title, community title or
other similar divisible title property or a part share in the common
property thereof.
This
guidance note does not apply to interests that are not partial
interests in property held in co-ownership structures.
Accordingly,
this guidance note does not apply to such interests as that of a
single lessor and a single lessee under a lease. (Refer IVGN 2
Valuation of Lease Interests).
1.3
Definition
A
partial interest may be described as a divided or undivided ownership
right in property that represents less than the whole.
1.4
Freehold or Leasehold
There
are many forms of co-ownership structure. Partial interests may be in
a freehold or leasehold co-ownership structure.
Leasehold
co-ownership may be comprised under a ground lease, development lease
or similar leasehold interest usually subjugating the interests of
the freeholder for an extended period of time.
1.5
Sector
Partial
interests may occur in a wide range of property sectors, including
residential, small and large commercial and retail, leisure, rural
and others.
Plant
and Machinery Assets are also sometimes held in joint ownership.
1.6
Entity
The
valuation of partial interests is becoming increasingly common,
particularly amongst members who undertake valuations for listed
property trusts, wholesale funds, family law and estate matters.
2.0
Instruction
2.1
Clarity of Instruction
In
accordance with Rule of Conduct 1.20, members should ensure clarity
of instructions concerning the interest that is to be valued.
2.2
Subject of Instruction
The
subject of the potential instruction to value may comprise:
•
all or part of the
physical underlying asset unencumbered by the co-ownership structure;
•
all or part of the
physical underlying asset encumbered by the co-ownership structure;
•
the form of entity
comprising the co-ownership structure; or
•
a partial interest in
the form of entity comprising the co-ownership structure.
2.3
Competence
In
accordance with Rule of Conduct 1.6, members should not accept
instructions beyond their competence.
2.4
ASIC Licence
In
Australia, Members should not value securities unless they are
licensed to do so by the relevant licensing authority (ASIC).
2.5
Exclusion
Unless
holding a relevant licence (being an Australian Financial Services
Licence in Australia), members should assure themselves that the
partial interest in a property held in co-ownership to be valued does
not comprise an interest for which such a license is required.
3.0
General
3.1
Distinction
For
the purposes of valuation, the property (3.2, below) is
distinguishable from the co-ownership structure (3.3 and 3.4, below),
which are each distinguishable from the property held in a
co-ownership structure.
3.2
Property
The
property comprises the physical underlying asset, which may be valued
subject to relevant Practice Standards and Guidance Notes (4.0,
below).
3.3
Co–Ownership
The
co-ownership structure comprises the form of entity in which the
property is held. This may include a joint tenancy, tenancy in common
(divided or undivided), companies, trusts, unincorporated joint
ventures, partnerships or other form of entity (5.0, below).
3.4
Rights and Obligations Created
The
co-ownership structure may create rights and obligations for
consideration that impact upon the value of the co-ownership interest
(6.0, below).
3.5
Property in Co–Ownership
The
valuation of a partial interest in a property held in a co-ownership
structure represents a combination of consideration of the issues
impacting upon the value of the physical underlying asset and the
issues impacting upon the value of the interest in the co-ownership
structure.
3.6
Proportional Share
It
is possible that the value of a partial interest in a coownership
entity may be greater or less than the value of the proportional
share of the physical asset held by the co-ownership entity (5.0 and
6.0, below).
3.7
Sum of Parts
It
is possible that the sum of the partial interests in a coownership
entity
may be greater or less than the value of the physical asset held by
the co-ownership entity (5.0 and 6.0, below).
3.8
Value and Worth
IVS
1 defines market value as:
Market
Value is the estimated amount for which a property should exchange on
the date of valuation between a willing buyer and a willing seller in
an arm’s-length transaction after proper marketing wherein the
parties had each acted knowledgably, prudently, and without
compulsion.
with
IVS 2 explaining worth (or investment value) to be the value of a
property to a particular investor, or class of investors, for
identified investment objectives.
3.9
Value vs Worth
Having
regard to 3.8 (above), in the valuation of a partial interest in a
physical underlying asset held in a co-ownership structure, the value
of an interest may be distinguishable from the worth of an interest.
In
determining the worth of an interest and depending upon the nature of
instruction received, debt finance taxation issues may require
consideration.
4.0
Valuation of Physical Underlying Asset
4.1
Property Valuation Approach
In
accordance with Guidance Note 1.1, the comparability of the property
comprising the physical underlying asset (3.2, above) to sales
evidence should be measured against established criteria of quality
relative to a property’s peer stock and the overall property
market.
4.2
Suitability For Co-Ownership
The
quality of the physical underlying asset should also be considered in
the context of the form of co-ownership structure and the
appropriateness of the assets ownership to such division.
4.3
Cash Flow
For
investment property, the nature, quality, divisibility, liquidity and
security of the underlying cash flow should be considered.
4.4
Value of Part
Whilst
a valuation of a partial interest may include an assessment of the
value of the physical asset underlying the partial interest, it
should only address the value of the relevant partial interest in a
property held in a co-ownership structure which may not, necessarily,
be its pro-rata value
- and
6.0, below).
-
4.5
Market Value
Where
the value of the partial interest is more or less than the
proportional ownership share, the valuation should note such variance
and comment on any potential marriage value, which may be realised in
the event of conversion to a single interest.
5.0
Co-ownership Principles
5.1
Influences on Value
The
form of entity comprising the co-ownership structure (3.3 above) may
influence the value of a partial interest in a property held in such
co-ownership structure through such aspects as:
•
the ongoing conduct
of the co-ownership relationship;
•
the process for
resolution of disputes amongst co-owners;
•
the ongoing costs of
supporting the co-ownership structure;
•
the treatment of
asset and property management costs;
•
the mechanism and
basis for treating commitments to capital expenditure;
•
the ability to use an
interest as security for debt;
•
the timetable for
unit pricing calculation, where relevant;
•
the basis upon and
timing of a termination of the co-ownership relationship;
•
the ease (or
otherwise) of disposing of the interest on the open market;
•
the cost of disposing
of an interest in the coownership structure;
•
the cost of
terminating the co-ownership structure and disposing of the
underlying asset;
•
the basis of and
terms applying to any disposal of the underlying asset;
•
the constraints and
other terms of any disposal of the relevant interest including:
–
first and subsequent
right of refusal provisions or other priorities of the co-owner;
–
any absolute
restrictions on disposal;
•
the implications of
ongoing liabilities of a co-owner after disposal of the relevant
interest; and
•
taxation
implications.
6.0
Co-ownership issues
6.1
Influences On Value
The
principal rights and obligations for consideration (3.4 above) which
impact upon the value of the co-ownership interest may include:
•
control of the
interest (being the extent to which the co-ownership interest confers
the right to direct); and
•
liquidity of the
interest (being the ease with which the interest can be converted
into cash).
6.2
Level of Control
Control
relates to the right to direct the interests of the investment at the
owner’s absolute discretion. Where an ability to direct is
diminished through co-ownership structure, the impact of that
inability to direct should be considered and reflected in the
valuation.
6.3
Control Issues
Control
issues for consideration may include:
•
number of parties in
the co-ownership structure;
•
voting rights where
disproportional to the pro-rated interest;
•
cost allocation where
disproportional to the pro-rated interest;
•
revenue allocation
where disproportional to the pro-rated interest;
•
complexity of process
and time taken to direct;
•
protection at law for
minority rights;
•
use of dispute
resolution levels and mechanisms;
•
pre-emptive rights;
and
•
existence of a
controlling interest.
6.4
Liquidity Issues
Liquidity
issues for consideration may include:
•
the proportionality
of the interest - where the interest being valued is considered in
the context of the overall holding and the number of other co-owners;
•
the right to divide
an interest, unfettered, and deal with that interest - this includes
the rights of co-owners and the obligations the co-owner of an
interest to its fellow co-owners;
•
effect of pre-emptive
rights – where a co-owner has a right to acquisition of other
co-owners interests on a basis that may be prescribed;
•
non-structural
impediments to liquidity - these may include disengagement from a
co-owner or co-owners with incompatible investment philosophies and
complexity of process and timing in connection with disposal of the
interest and disposal of the underlying asset; and
•
the reasonable
selling period for the interest – both in the context of the
ownership structure and any co-ownership agreement selling
constraints.
7.0
Comparable Evidence
7.1
Comparability
Comparability
of evidence of sales transactions should be considered in the
valuation of both the physical underlying asset (3.2, above) and the
co-ownership interest (3.4, above).
In
both the valuation of the physical underlying asset and the
co-ownership structure, the precise extent of comparability of
evidence of sales transactions should be carefully considered.
7.2
Available Evidence
Some
forms of co-ownership structure may be traded on the open market and
directly comparable evidence is therefore available to the member for
consideration.
In
such cases of directly comparable evidence, the level of adjustment
of that evidence for application to the subject interest to reflect
the differences between each may be limited.
7.3
Relevance of Comparable Evidence
Members
should assure themselves that such evidence is directly comparable in
respect of control, liquidity and other relevant issues.
In
the event of differences in respect of control, liquidity or other
relevant issues, members should ensure that adjustment is made to
appropriately reflect such differences.
7.4
No Available Evidence
Some
forms of co-ownership structure may not be traded on the open market
and directly comparable evidence is therefore not available to the
member for consideration.
In
the absence of directly comparable evidence, the level of adjustment
of available evidence for application to the subject interest may be
significant.
7.5
Appropriate Adjustment
In
the absence of directly comparable evidence, the member should
consider available, relevant comparable evidence from whole or other
partial interests.
In
the event of differences in respect of structure, control, liquidity
and other relevant issues, members should ensure that adjustment is
made to appropriately reflect such differences.
7.6
Relevant Information
In
completing the valuation of a partial interest, a member should
obtain relevant information from the instructing party concerning
control, liquidity and other issues, for review.
7.7
Checklist
Such
information may include:
•
relevant documents
supporting the ownership structure, including amendments to those
documents, such as:
–
shareholders/unit
holders agreement;
–
trust deed and
trustee structural arrangements;
–
joint venture
agreement;
–
articles of
association;
–
partnership
agreement; or
–
any other similar
arrangement document;
•
co-ownership
agreement regulating the relationship between the co-owners;
including fee or other coowners remuneration arrangements;
•
notice of any
agreements between the co-owners which vary any of the terms of the
agreements including board or management meeting minutes;
•
any financing
agreements relevant to the entity;
•
financial statements,
statements of compliance with accounting standards, auditors reports
and tax returns;
•
any option or other
right of sale, acquisition agreements, first right of refusal or
pre-emption agreements between the co-owners and pertinent to the
relevant interest;
•
details of any other
agreement, arrangement or obligation likely to impact on the value of
the relevant interest; and
•
an extract of the
valuation component of the compliance plan of the single responsible
entity if the relevant interest is owned by a managed investment
scheme.
7.8
Vigilance
The
above list is not intended to be exhaustive and members should be
vigilant to seek any documents relevant to a particular ownership
structure being valued.
7