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July 31, 2019

Migration, Demographic Shifts and it’s effect on New England Real Estate

Filed under: the home market — Tags: , — marc @ 7:50 am

Migration, Demographic Shifts and it’s effect on New England Real Estate

By Marc P. Nadeau, SRA

Being from Connecticut, I tend to focus on what’s happening here in the Nutmeg State, and it’s not pretty. We continue to lose population, mostly to southern states and states with greater tax advantages. The Connecticut Office of Policy and Management’s 2017 paper on migration focused on several issues, the number of persons leaving the state and income levels that those former residents were part of. The bottom line is a net loss. The declining population is not exclusive to Connecticut as many of the Northeastern States are also taking a hit when it comes to population.

The graph to follow shows recent trends for Northeastern States:

What’s driving the Migration?

There are a number of factors that are driving the shift in population in Connecticut and New England for that matter. Firstly, we in Connecticut have been experiencing a relocation of employers with United Technologies, Pfizer and General Electric being at the top of the list. United Technologies, which includes companies like Pratt & Whitney, Otis Elevator, Kidde and Carrier committed to relocating their corporate and some manufacturing base to Palm Beach Gardens, Florida. The new facility, which opened in 2018 is a 224,000 square foot marvel in technology that is home to UTC’s Center for Intelligent Buildings. The local Florida municipality cites a $660 million benefit over a five-year period. That’s $660 million that is no longer impacting Connecticut. An interview with a UTC executive revealed that many of the Hartford-based employees were offered packages to relocate to Florida, and many capitalized on the opportunity.

Pfizer, the pharmaceutical giant that had long planned its landing in New London, with the City of New London being at the helm of the largest and most controversial eminent domain case perhaps in this country’s history to accommodate Pfizer’s coming. (Kelo vs. City of New London) The case involved the taking of land from private property owners for private use, in this case, for Pfizer to construct a giant office park housing hundreds of workers. Pfizer developed a fraction of the promised buildings and then fled to Massachusetts, leaving vacant buildings and in some cases barren land where homes once stood.

Finally, General Electric, the Fairfield, Connecticut based manufacturing and technology giant with a $130 billion business decided a couple years ago to up and relocate the headquarters to Boston. General Electric had been sparring with the State of Connecticut for several years, looking for greater incentives to keep their base here in the Nutmeg State. Massachusetts offered a mere $120 million in incentives along with $25 million in property tax relief and voila, GE and its giant workforce of both middle management and executives are committed to another market that will surely benefit from Connecticut’s loss. Governor Malloy’s response at the time was “This is a clear signal that Connecticut must continue to adapt to a changing business climate.”

The list goes on with the three above references being just a piece of the puzzle. Not to mention that Connecticut and New England, once the manufacturing hub of the country have lost thousands of small business to other parts of this country, foreign companies and in some cases pure attrition, with that small business just evaporating.

Change in Federal Tax Laws

Congress enacted Trump’s tax plan during 2018 which is proving to be a deterrent for many property owners, especially for property owners in many parts of New England, where taxes are historically high, especially relative to income levels. For example, in Bayville, NY, a small community on Long Island the median income is $77,800, yet local property taxes on homes typically exceed $20,000. The new tax act now limits the amount one can deduct for state and local property taxes (SALT) to $10,000.

Shift in Demographics

In as much Connecticut has seen a negative outflow of population, there have been a number of people move into the state as well. Unfortunately, the outflow is largely by those individuals that have high-paying jobs and/or are of significant wealth. Conversely, the incoming population is largely that of more service and hourly workers that can’t begin to offset the income that was formerly flowing into Connecticut’s coffers.

Massachusetts also has an overall negative population flow however, the surrounding Boston Market has been expanding for years, with a booming real estate market and what has been for a long time, increasing values. The benefits come from the expanding base of tech business and biotech companies that have migrated to the area. An interview with a recent hire in the pharmaceutical business relocated to Boston from Connecticut for a job with a foreign company who set up offices in Boston to be “near what is a confluence of biomedical and pharmaceutical giants”.

Impact upon Property Values

By and large the market in Connecticut is experiencing a wane in values with the upper end of the marketplace being most impacted. As the audience shrinks for high-end product, so do values. Along the shoreline in Eastern Connecticut, where this appraiser is located, there has been a noticeable increase in marketing times and a decline in prices for homes in excess of $500,000. Relating to marketing times, below is a graph showing a slow but steady increasing number of days it takes to complete a sale from the inception of listing.

Source: Connecticut Multiple Listing Service


This appraiser anticipates greater fallout from the migrating employers, tax limitations and what is translating into an ever more expensive place to live. As for Connecticut, it will likely take some time to right Connecticut’s economy. That new footing will have to start with a more cohesive bipartisan state government, as Republicans and Democrats have long been at odds with each other and cannot seem to agree on how to solve the state’s economic dilemma.

Marc Nadeau, SRA is a General Certified Appraiser with 35 years of real estate appraisal, development and consulting work experience.

September 26, 2017

Demographics shifts and the impact on real estate values

Filed under: the home market — Tags: , — marc @ 9:23 am

Demographic Shifts and the Impact on Real Estate Values

by Marc P. Nadeau, SRA

The landscape is changing in Connecticut and this time we’re not just referring to trees, shrubs and coastline.  Yes, there have been obvious changes to the physical landscape by way of eroding beaches, flooding in areas that historically were not impacted by flooding and a continued erosion of our state roads and highways and, to those naysayers that think climate change has nothing to do with the physical changes to many areas within our state, I say think again!   All one has to do is to pull an older legal description of a waterfront property most anywhere in the state and one will find that the distance to the water is now much closer than it was say, 50 or 100 years ago.

In as much that the changes to the physical landscape are impacting values, this article is not so much focused on the environmental shifts in the state as opposed to the economic changes.

Real Estate Value Changes as a result of a shifting landscape of population

Seemingly, most of us have recovered from what I like to call the Meltdown of 2008, when the entire financial system experienced a hiccup like no other.  Century-old banking institutions failed, auto manufacturers went out of business, millions of homeowners just walked away from their homes and the equity markets for the most part fell off the proverbial financial cliff.  It would certainly seem as though the past events helped shape the psychological view of the buying and owning a home – which may help explain the rising demand for good rental properties versus a decline in home ownership.

Connecticut has seen a significant shift in physical population as well as income distribution.   A recently-published paper by Manisha Srivastava from Connecticut’s Office and Policy and Management entitled Connecticut’s Population and Migration Trends: A Multi-Data Source Dive succinctly dissects the changes in the population landscape.   In short, the state is losing not just population but also higher-wage earners who had become the foundation for Connecticut’s economic platform.   The following chart shows recent and projected population flow within the state.

The chart shows a migration away from the state of 20,000 to 30,000 people each year over the past few years.   What may be more important is the component of the shifting population and who they are and their place within the economic stratum.   According to the Connecticut Budget released in May of 2017, the state is reeling from the consequences of sliding tax revenues that have historically come from the financial section, most notably from hedge fund managers.  Recent figures have shown that the tax revenue from the state’s top 100 highest-paying taxpayers declined 45% from 2015 to 2016.   That drop translates into a $200 million loss in tax revenue for Connecticut.

A Deeper Look into the Migrating Population

Connecticut has become one of the most expensive states to live on nearly all fronts.  Everything from housing costs to energy costs, to the state income tax rates, Connecticut is a front-runner in nearly all of the aforementioned categories.

· Recently published energy costs reveal that the cost of energy in Connecticut is nearly twice that the national average.

· Connecticut is the sixth most expensive state to live in from the standpoint of average housing costs.

· The state ranks as the second-most expensive place to live from a tax standpoint.   The tax figure is a collective one, factoring in both state income and local property taxes.

· There has been a general growth in reporting of individual income in the northeast with Connecticut being the laggard.  The following chart compares Connecticut to other Northeast states.

In comparison to Massachusetts for example, which has had an increasing population and has benefitted from a migration of top businesses and corporations to the state, Connecticut is simply failing.   And, the reality is that much of Connecticut’s migrating income is not necessarily leaving the country but is going to other states including that of Massachusetts, Florida and other southern states.  In the past three years alone we have seen major corporations make the move to greener pastures.   These corporations include: United Technologies relocating to West Palm Beach, Florida with the benefit of no state income tax for its employees and a 10-year property tax abatement; Pfizer relocating to the Boston area from New London, Connecticut leaving behind a wake of a ravaged and unspoken for landscape of redevelopment parcels that came about by one of the worst Supreme Court Decisions in the history of this country, Kelo vs. City of New London; and General Electric Corporation announcing its move to Massachusetts after is life-long history of being headquartered in Fairfield.  These corporations are taking with them not just their employees but also the taxable income associated with those employees, most of which are upper management people earning salaries at the high end of the wage spectrum.

The effect on Real Estate and the Fix for the Problem

In as much this appraiser/author has a practice that is concentrated along the shoreline, east of New Haven, this appraiser has generally seen a slow waning of prices across the board.  That waning of prices has averaged approximately 3% annually over the past couple years.  Show below is a chart for the Town of Guilford, one of the many impacted shoreline towns.

Source: Connecticut Multiple Listing Service

Interviews with brokers in other parts of the state reveal like if not greater rates of price decline.

The Fix

The fix is without question rooted in the political landscape where lawmakers need to come together in a partisan way, finding revenue sources (other than individual and corporate taxation). These revenues will be needed to restore our infrastructure, restore Connecticut’s reputation as a viable state to do business in and ultimately, draw back the needed foundation of the working population.

Author Bio

Marc Nadeau is a designated appraiser with 33 years of experience based in Guilford, Connecticut. His specialties include: appraising historic properties, water-influenced properties, appraisals for tax planning and litigation. Marc Nadeau is recently authored the book for the Appraisal Institute, Identifying Residential Architectural Styles.

July 30, 2015

Eminent Domain - An interesting case with unusual elements of taking

Eminent Domain - An interesting case with unusual elements of taking

By: Marc P. Nadeau, SRA

Over the course of an appraiser’s career one sometimes encounters appraisal problems that challenge one’s body of knowledge as well as require some creative (but logical) thinking on the part of the appraiser. Such was the case of Commission of Transportation vs. Connecticut Shellfish Company.

The case was decided upon in January of 2003 (CV000438539) but remains one of the most interesting in recent valuation history because of the elements of taking. The Commissioner of Transportation of the State of Connecticut took by condemnation a number of rights including: access; easements and otherwise burdened two parcels of land known as 20 East Industrial Road and 26 East Industrial Road in Branford, Connecticut. In connection with the takings was the relocation of an exit/entrance ramp to Interstate 95, whereby placing the ramp directly opposite the subject properties. The Commissioner’s appraiser assessed damages of $7,060.00 for the State of Connecticut, which Connecticut Shellfish questioned and decided to retain Attorney Thomas Crosby of Guilford, Connecticut and myself.

Background for the Case

Connecticut Shellfish owns and operates a commercial fresh seafood plant at 26 East Industrial Road in Branford, Connecticut. The plant employs approximately 35 persons, many of whom handle the shipping, receiving and processing of fresh seafood, all of which is loaded and unloaded on a large loading dock that has direct exposure to East Industrial Road. Also included in the ownership by Connecticut Shellfish is a vacant commercially zoned lot that is adjacent to 26 East Industrial Road.

The takings by the Commissioner as summarized as follows:

20 East Industrial Road – A Vacant Commercial Lot Containing 2.4 Acres

  • 164 feet of a total of 215 feet of access was taken leaving 51 feet remaining for access to the road.

26 East Industrial Road – An Improved Site

  • An easement area of 2,831 square feet was taken to install and maintain traffic control equipment, with the easement requiring vehicular access.

  • The new access/egress ramp was installed within 100 feet of the subject property, which ramp was previously located approximately ½ mile from the subject property.

The Obvious Taking Elements

The taking of the frontage of the vacant lot would typically result in a small fraction of the site value being reduced. The question in this case was whether the taking severely and adversely affected this vacant lot. Given that 77% of the usable lot frontage was taken, it would seem obvious that the site would suffer a material diminution in value, simply because the site utility was now changing. For example, the diminished frontage eliminated a number of potential users, especially those that require two curb cuts for say a fast-food restaurant. The court found that “the Commissioner’s appraiser fails to realistically recognize the substantial damages that resulted from this taking of seventy-seven percent of the access to the road for 20 East Industrial Road, consisting of 2.4 acres, had a fair market value of $325,000 before the taking the a fair market value of $210,000 after the taking, resulting in damages in the amount of $115,000.”

The Court also found that the easement consisting of 2,831 square feet on 26 East Industrial Road for the installation and maintenance of the traffic signal, for all practical purposes amounts to a total taking because it requires vehicular access, which under Branford Zoning Regulations, areas subject to vehicular easements are not to be included in calculating the buildable lot area. The court found that “reasonable damages were $4.30 per square foot which amounted to $12,000 for this element of taking.

Already the damages decided upon by the court greatly exceed that of the Commissioner’s estimate of $7,060. Now comes the interesting part of the taking that perhaps not seeming to be terribly adverse conditions, actually amounted to the greater part of the determined compensation to the Connecticut Shellfish Company.

The Not so Obvious Elements of the Taking

This appraiser had up this point found a number of examples where putting an exit ramp that lines up with the buildings and improvements at the end of that ramp are typically a bad recipe for disaster, if not for a concern for ongoing damage. It was this appraiser’s opinion that the subject property could potentially be subjected to a stigma of sorts where a potential buyer might opt out of buying an “at-risk” property, either out of rational or irrational concern. In my testimony I pointed to the buildings that are located at the bottom of the ramp at exit 42 in West Haven. The buildings, ironically housed “Anderson Glass”, a local window and glass repair company that were the buildings were hit several times over a number of years. Shortly before the time of trial, that particular exit was closed by the Department of Transportation to truck traffic, hitting home the concern and stigma that would likely arise from the new traffic flow and configuration. The court found that the value of the improved property at 26 East Industrial Road before the taking was $1,100,000, while the value of the property after the taking was $935,000, resulting in a damages of $165,000. (effectively[MN1] 15% of the total value of the property which was estimated by this appraiser).

Stigma in this case proved to be a less than obvious element but none the less, a big element in the overall taking.

Air Quality

The calculated damages to the property did not stop at the stigma component. The seasoned attorney on the case, Thomas Crosby questioned whether Connecticut Shellfish Company could continue to operate their facility in the same fashion, by loading and unloading fresh fish product on an exterior loading dock that was exposed to the elements. Crosby retained a toxicologist that specialized in food products, testing the air quality both before and after the installation of the new entrance/exit ramp. The configuration of the ramp included the fact that waiting traffic would essentially que up at the traffic light that was directly opposite the subject property.

The study by the toxicologist concluded that the air quality had greatly diminished with the hydrocarbon levels rising 10,000 percent, taking into account both the before the after scenarios. Based upon the testimony from the toxicologist, the court found that the “increase of trucks and car vehicles idling and traversing in close proximity of the subject site (which) will generate pollutants associated with the internal combustion engines, as well as the increase in suspension of dust particles, etc., from the roadway surface by these vehicles. The specific pollutants associated with these two types of vehicles are: 1) Hydrocarbons (HC); or more accurately designated as Volatile Organic Carbons (VOC); 2) Carbon Monoxide (CO); 3) Nitrous Oxides (NOx); and 4) Total Suspended Particulates (TSP)”. “The Court finds that the pollutant most detrimental to the quality of Connecticut Shellfish’s product, is TSP.”

Based upon the cost of a filtration system that was built around the loading dock, an additional $189,750 was awarded by the court for “ensuring the air quality of Connecticut Shellfish’s facilities”.


The moral to this story is that it pays to retain seasoned professionals. In this case an appraiser and an attorney who together, effectively analyzed the issues at hand. The original offer of compensation was that of $7,060.00. The ultimate award to the property owner was $481,750.00 plus the cost of the appraiser (for which the court allowed and considered to be reasonable costs).

Author Bio

Marc Nadeau is a designated appraiser with 30 years experience based in Guilford, Connecticut. His specialties include: appraising historic properties, appraisals for tax planning and litigation. Marc Nadeau recently authored the book for the Appraisal Institute, Identifying and Appraising Historic Properties

March 21, 2015

Residential Market Perspective

Filed under: the home market — Tags: , , — marc @ 5:01 am

For the majority of residential real estate values in Connecticut the market has remained flat.   Lower end and mid-market properties continue to bounce along what has become a logical resting point for this market after having come down from their 2006 highs.

Within every market remain underlying factors that either drive values up or bring them down.   On the positive side, marketing times for most properties have become shorter and interest rates have remained at their historic lows for several years now, making the entry for new homeowners more affordable and perhaps opening the window for existing homeowners to step up to a more expensive price point.  On the down side are economic indicators and rising ownership costs that have essentially kept a lid on market appreciation.

Economically, Connecticut and New England have not seen any material job growth along with virtually no increase in real wages for years.   Coupled with the fact that the population in this area continues to ebb resulting in a smaller audience for area properties.   Additionally, the loss of manufacturing as well as white collar jobs has only created a gap in the market that can be difficult to fill.  Add to the mix the rising costs of home maintenance, fuel and insurance, home ownership for some has become a difficult task to balance.  On the subject of insurance, properties located in flood zones have sometimes become white elephants and have been difficult to market, especially in the wake of the recent hurricanes that caused record damage to coastal New England.

Back to the positive, upscale communities continue to flourish, quality-built homes continue to have buyers and cities and urban areas are experiencing a renewal in popularity, with many suburbanites now doing a reverse migration of what was experienced in the 1970s and 1980s, taking in many of the cultural and convenient aspects that some cities offer.  As far as the water-influenced market, low-lying homes and properties plagued with flooding issues will likely continue to wane in popularity, while the water-influenced homes, including that of water view homes that sit high and dry will likely become more sought-after and therefore, more valuable.

Looking ahead….


March 3, 2014

Life Estate - An Approach to Valuation

Filed under: Uncategorized — Tags: , , — marc @ 5:45 am

Life Estates and an Approach to Valuation

By Marc P. Nadeau, SRA

Inherent in the fee simple ownership of real estate is something that is commonly referred to as the “Bundle of Rights”. The Bundle of Rights is in effect the exclusive right, use and disposition of the property that belong to the property owner. Inherent within the Bundle of Rights can be the right to sell, the right to mortgage, the right to occupy, the right to lease and the right to enter. The owner of the Bundle of Rights typically has the ability to convey all or some of those rights to another. The conveyance of the right to another person that enables them to occupy a property for the duration of their life is commonly known as a Life Estate. The beneficiary of the Life Estate is referred to as the Tenant. The person or entity that actually has the ownership in the real property is referred to as the Remainderman.

The life estate interest is an estate in real property that ends upon the death of the holder of life estate, (the tenant). The property may then revert back to the original owner of the property or some other designated person (the remainderman).

Uses of a Life Estate

The life estate is typically used as a tool for estate planning. A life estate can avoid probate and insure that the intended heir will receive title to the real property. For example let’s say that an aging parent would like to see to it that their son or daughter receive the full benefit of the value of the parent’s property, without the potential hassle of the property passing through probate or term care or perhaps Medicare costs eroding the value of the estate, a life estate is a likely vehicle for planning.

The Appraiser’s Role

There are multiple scenarios where an appraiser is needed to evaluate a life estate. Sometimes the role of the appraiser is to estimate the value of the interest for the Tenant and sometimes the role is to estimate the value of the Remainderman.

Valuation Scenario – Remainderman’s Interest

The following is an example where the appraiser’s role is to value the interest of the Remainderman. The property is encumbered by a Life Use that has been granted to a 70-year-old person.

There are a series of steps that must be taken in this valuation scenario which are summarized as follows:

q Estimate the fee simple market value of the property assuming it is unencumbered as of the date of conveyance. The scenario presented assumes a fee simple market value of $500,000.

q Estimate the term of the life estate. This element is based upon the age of the beneficiary (The Tenant) of the life estate and their life expectancy. Life expectancy can be estimated from a variety of published tables including that of the tables included in IRS publication 590, which contains a table of life expectancies based upon age. In the case of this valuation scenario, the beneficiary is 70 years old and has a life expectancy of 17 years. The following is an excerpt from the Life-Expectancy table that is included in IRS publication 590:

Table - Expectancy of Life in Years


Life Expectancy


Life Expectancy





































Source: IRS Publication 590, published 2013

q Estimate the expected rate of appreciation over the life expectancy. There are a variety of statistical references that an appraiser can utilize to estimate the expected rate of appreciation. That expected rate of appreciation should be rooted in fact and takes into consideration the kind of property that is being valued. For example if that property is located in an area that historically has seen better than average appreciation, then it is likely warranted that a better than average rate of appreciation be projected. If that property is located in an area or is the type of property where decline in property value is expected for some time then a below average rate of appreciation should be projected.

For this valuation scenario let’s assume that the property will achieve a rate of appreciation that is typical of the general market.

In this case your appraiser might utilize an institutional or nationally recognized benchmark such as the Consumer Price Index (all items). The benchmark chosen in this case was the twenty-year average of the Consumer Price Index (CPI), “All items”. The twenty-year average mirrors the term of the life expectancy of the tenant with CPI being one of most reliable and least subjective measurements of anticipated appreciation. A review of the CPI index, as published by the Bureau of Labor Statistics between 1993 and 2013 revealed an average rate of inflation of 3.1%. Inflation over the past ten years has averaged less than 3.0%. Your appraiser has chosen a rate of 3.0% for the anticipated annual rate of appreciation.

q Discount the forecasted future value of the property over the remaining duration of the Life Estate at an appropriate discount rate. Discount rate is synonymous with what would be an expected rate of return for a like property.

Expected Rate of Return/Discount Rate is essentially synonymous with the rate that an investor would expect over the anticipated holding period. There of course is the option of polling individual investors in real estate in order to establish what the expected rate of return should be. This however, is typically not a feasible method and would likely be flawed, depending upon the size of the sampling. Your appraiser in this case has consulted the Price Waterhouse Coopers Investor Survey that was published for the second quarter of 2013. Discount Rates for residential apartment properties ranged from 5.00% to 14.00% with an average of 8.04%. The subject property being a residential single family home would generally result in a rate at the lower end of the scale simply because it is not exclusively viewed as an investment vehicle. Your appraiser has estimated a rate of 7.00% for the subject property.

Other benchmarks for expected rate of return could be long-term treasuries, bonds, equities or some type of index fund as these investment vehicles could all be alternatives to investing in real estate. The following chart depicts some of the other investment vehicles that an appraiser might reference:

Investment Alternative



20-Year Treasury Bills


Generally liquid asset, easily traded on market, guaranteed yield by Federal Government

20-Year AAA Rated Bond


Generally liquid asset, could be corporate or municipality issued

1-Year Return, S & P 500 Index


Liquid asset, volatile, short-term performance over the past 52 weeks no guaranteed return

Poll Date: February 24, 2014

The above chart illustrates what might be considered extreme ends of the investment spectrum yet also illuminate options that a prospective investor might consider.

Summary of Life Estate Valuation ~ Remainderman Interest

Current Value Estimate of Subject Property


Projected Value of Property 17 years hence utilizing a 3% annual rate of appreciation


Present Value of Reversion of Property

(utilizing a discount rate of 7.0%)




The Remainderman’s interest is valued at $262,000, much lower than the fee simple market value of $500,000.

Valuing the Tenant’s Interest

Consider the same information given in the previous example but now the appraisal problem is to estimate the value of the life estate for the tenant. Assume that a survey of comparable rents reveals that the rental market value of the property is $1,000 per month and that the tenant is responsible for maintenance, insurance and taxes. Therefore, as a result of the Life Estate granted, the tenant is enjoying the benefit of $1,000 per month.

Other Assumptions:

v The market value of rents will continue to increase at the rate of 3% annually.

v The expected rate of return over the balance of anticipated life is 7%.

The benefit (or value) to the tenant is best illustrated in the following table:


Monthly Rent Savings

Annual Rent Savings

Present Value Factor @ 7.0%

Present Value of Rental Savings

























$ 9,630





$ 9,269





$ 8,923





$ 8,590





$ 8,268





$ 7,958





$ 7,662





$ 7,375





$ 7,100





$ 6,834





$ 6,578





$ 6,332





$ 6,096



The total present value of this Life Estate in this example (for the tenant) is $142,921 or $143,000 (rounded)

Author Bio

Marc Nadeau is a designated appraiser with 30 years experience based in Guilford, Connecticut. His specialties include: appraising historic properties, appraisals for tax planning and litigation. Marc Nadeau is currently authoring the book for the Appraisal Institute, Identifying and Appraising Historic Properties.

December 8, 2011

Partial Interest Valuation - A Case Study

Filed under: Uncategorized — Tags: — marc @ 6:15 am

Partial Interest Valuation of Real Estate

~ A Case Study by Marc P. Nadeau, SRA

Partial Interest Value ~ The Concept

Partial interest valuation is a technique used by appraisers and other valuation professionals to estimate the value of a fractional interest in real estate. Fractional interests in real estate result from the owner’s ownership of less than 100% of a given property. The technique involves the valuing of a fractional interest in real property with a discount factor being applied to that fractional interest. Reflective of what could be a number of factors including, but not limited to the nature of the property, the percentage or ownership and the management structure in place an appropriate “discount factor” is chosen by a valuation professional. Ownership of a partial interest in real property ownership can manifest itself in a number of forms. Those ownership forms include, but are not limited to: general partnerships, limited partnerships, REITs, joint tenancy, tenants in common, tenancy by entirety, family trusts and ownership of shares in a limited liability corporation.

The transfer or conveyance of a partial interest can arise from any number of events including: divorce, partnership dissolution, estate planning, donation or sale of a partial interest to an unrelated party and so on. In theory, partial interests are almost always worth less than their fractional value. For example, a $1 million dollar property owned by five different owners, each with a 20% interest, would in pure mathematical terms have a value of $200,000 for each interest. That 20% interest, were it to be marketed or sold to another party would be considered a minority interest.

The nature of a minority interest is that it typically has the following characteristics:

  • Lack of Marketability
  • Longer than typical Marketing time
  • Lack of Control
  • Limited or no ability to refinance the property
  • Limited ability to influence decision-making policies

Discounts associated with a partial interest can typically range from 20% to 60% of the proportionate value of the interest as it relates to the entire property. In the case of the $200,000 fractional interest above, a discount factor would be applied to the fractional value.

The IRS perspective

The perspective or position of the IRS has frequently been that the discount applied to the fractional interest be limited to the actual cost of partitioning a property. The courts fortunately, have generally recognized that this is both unreasonable and illogical. The fact is that fractional interests for the most part have a very limited market appeal to the general marketplace with the range of appeal varying by the type of property and the percentage of ownership.

The IRS Training Manual for Appeals Officers in fact recognizes and cites several factors that could influence the size of the discount. The following factors are listed in the manual:

  • The number of owners
  • The size of the fractional interest
  • The size of the tract
  • The use of the land
  • The availability of financing and finally,
  • The cost of partitioning (dividing) the land

Valuation Methodology

The following steps would be involved in valuing a partial interest:

1. Value the property in its entirety;

2. Calculate the value of the proportionate share in the property by taking the 100% value of the property times the percentage of property owned;

3. Determine an appropriate discount for the partial interest;

4. Calculate the value of the fractional interest by multiplying the value of the “proportionate share” times the discount rate.

Discount Rates ~ what are appropriate rates?

Reflective of the fact that partial interests have very limited marketability there is certainly a lack of empirical market data that appraiser’s can draw from. One of the best benchmarks for determining an appropriate discount would be court cases.

The following is a summary of relevant court cases that involve partial interest valuations:

In the case of Lefrak vs. Commissioner the court did not consider fractional discounts as compelling evidence because security owners do not have the right to force partition (the shares were part of a corporate entity). However, the Court did allow a 30% discount for a minority interest and a lack of marketability.

In the case of the Estate of Cervin vs. Commissioner the Court allowed a 20% discount for a 50% undivided interest in a homestead and farm. The legal costs along with the time delays and discounts required by a prospective buyer were reasons for the granted discount.

The case of Williams vs. Commissioner involved the transfer of a 50% interest in 2,360 acres of rural land and its timber in Putnam County, Florida. The court found a discount of 44% to be reasonable. The discount factored in the cost of partitioning, the longer than typical anticipated marketing time and the lack of


The case of the Estate of Baird vs. Commissioner involved minority interests of timberland located in Louisiana. The plaintiffs specifically in this case were that of the Estate of John L. Baird and the Estate of Sarah W. Baird who were married at all pertinent times. John died on December 18, 1994 while Sarah died less than 1 year later on November 2, 1995. At times of death, John held a 14/65 interest while Sarah held a 17/65 interest in a trust that owned 16 noncontiguous tracts of timberland comprising 2,957 acres.

Both estates claimed a 60% discount on the tax returns with the plaintiffs mounting an impressive case that involved the testimony of two real estate appraisers that had extensive experience in valuing timberland as well as a third expert witness that had the experience of actually purchasing partial interests of like timberland. The appraisers, by product of analyzing actual partial interest sales of timberland arrived at discounts of 55% and 36% respectively while the timberland expert claimed that the discount should be 90%, while the written report prepared by the same expert claimed “at least a 55% discount”. The Court found that a 60% discount was reasonable and supported.

Empirical Market Data ~ Partial Interest Sale

Locating actual sales of a partial interest is like finding a needle in a haystack. Given the lack of marketability combined with the difficulty of verifying such a transaction can leave appraisers very little to work with. Presented below is a recent example of a partial interest sale that the readers of this article may find useful in their own analysis of a partial interest:

Case Study ~ Sale of Partial Interest

This study involves the sale of a 1/5 interest in a property identified as Uncas Point Road located in Guilford, Connecticut. The parcel is a vacant, non-buildable waterfront parcel that contains .67 acres and was owned by 5 separate owners, each with an undivided 1/5 interest in the land. The value of the parcel is that is provides access to and has frontage along the harbor.

Established factual information of Case Study

Grantor: Jonathan Wallace

Grantee: Carolyn Matthes

Sale Date: July 1, 2010

Sale Price: $ 3,750 plus $1,000 in assumed property taxes

Volume/Page: 801/340, Warranty Deed

Interest Purchased: 1/5 fee simple interest

Additional Facts for this Case

An independent appraiser appraised the property on September 24th, 2007 for $75,000. With documented time adjustments the value of the property as of July 1, 2010 (the conveyance date) would have been $52,500. $52,500 divided by 5 = $10,500. $10,500 would be the value of a 1/5 interest before factoring in any discount. The discount factor derived from this sale would be 55%.

This appraiser interviewed both parties, both of who indicated that they were each acting in their own best interest. Ms. Matthes is a neighboring property owner who lives across the street from the parcel and is attempting to purchase the entire parcel in pieces in order to have a full, undivided fee simple interest in the parcel.

Bio of the author

Marc Nadeau is a designated appraiser which extensive experience in appraising and consulting on properties with tax implications. Additional information regarding Mr. Nadeau’s services is available at: www.marcnadeau.com

August 9, 2010

State of the Market - Part II

Filed under: the home market — marc @ 2:30 am

In the previous posting on my site I discussed market trends and why, at the time I felt that we would continue to experience market decline through 2010. 

Realtors, homeowners, builders and developers alike are no longer in a state of denial when it comes acknowledging that we have experienced serious market decline. 

Current Market Trends ~ Inventory appears to have leveled off for most market sectors, especially in the lower price points (regardless of what market we are talking about).  The spring months experienced a surge in activity by way of greater sales and more prospective buyers bidding on properties.  As we are now in August and the market has returned to its anemic pace of last year it is clear that the “surge” in activity that we experienced was attributed to the Federal Tax Credits that were being offered to prospective home buyers.   Yes, it certainly looked good for a couple short months but now we are back in the doldrums of a stale real estate market. 

Market Complications ~ Complicating the anemic market further is the fact that credit and mortgages are hard to come by.   More stringent reporting requirements that have been placed on banks by Fannie Mae combined with a revised credit score reporting system (as it relates to mortgage applications) have only exasperated the home market. 

What will it Take? ~ An ease of credit and mortgage requirements along with a real increase in real income are necessary to refuel this stale market.   The last time we experienced such a down market was in 1991/1992.  It took nearly 7 years for the market to recover and that is likely true for this market as well.

The market continues its correction reflective of the fact that home prices just got to be too expensive relative to what people can actually afford.  According to the Connecticut Economic Resource Commission, in 2008 the average annual household income for the Town of Guilford was $97,577.   Comparing this figure to the State average of $67,236 the Guilford figure stacks up quite favorably.  The Guilford figure of $97,577 compared to the median house price of $425,000 looks less favorable and, when compared to the average new construction price of $750,000 at that time, the affordability becomes even less feasible. 

What’s Ahead? ~ A continued downward trend in prices and values are expected, especially in areas where abundant inventory exists.  This appraiser is convinced that the market will continue its 6% decline for the general market through the end of the year and likely well into 2011.




January 13, 2010

Historic Homes ~ An Evolving Market Perspective

By: Marc P. Nadeau, SRA

Being from New England, when one thinks of a historic home the image often conjured up is that of a 1700s center chimney cape, a Federal style from the early 1800s, a Second Empire Victorian or even a brownstone.  All have become part of the architectural landscape that helps define New England.   The bulk of the architectural styles that everyone from appraiser to homeowner to builder has come to know were for the most part born during a 200-hundred-year period.  That period extends roughly from the year 1700 to 1900.

Fast forward to 1950, enter the modernists.  The A-list of architects that settled in New England and graced us with some of the most innovative and imaginative house designs include the likes of Philip Johnson, Marcel Breuer, John M. Johansen, Walter Gropius and Paul Rudolph.   For those not akin to architectural history and it’s drivers (so to speak), Mr. Johnson was perhaps the most celebrated American architect of the last half-century while Mr. Gropius and Mr. Rudolph served as deans of the Harvard and Yale Architecture Schools respectively.

The modernist style, embraced by some and distained by others has without question earned its place in the American catalog of historic homes.  Perhaps most famous of the Modernist movement is the “Glass House” located in New Canaan, CT.   The property is now owned and run by the National Trust for Historic Preservation with tours being available.

Philip Johnson's Glass House, New Canaan
Philip Johnson’s Glass House, New Canaan, CT

Value of Historic Homes

Historic homes of all periods continue to hold their own against their more modern contemporaries, often being sold at premiums over and above the general marketplace.   Homes designed by notable architects also seem to have their own unique value points and typically result in an even greater premium of value.   This appraiser, in the not too distant past had the assignment of appraising a Philip Johnson home in New Canaan, CT.  The historical array of comparable sales included homes by Johanson, Marcel Breuer and even a Frank Lloyd Wright design.  The collective array of sales from these well known architects demonstrated a distinctly higher value point over and above their lesser-known contemporary architects.

Endangered Species

Despite the market’s willingness to pay a premium for historic and antique homes these properties continue to be threatened with demolition from all walks of the development world.  Be it the homeowner looking to expand upon an existing structure, a developer seeking to maximize profit or the architect/designer wanting to make more productive use of existing spaces, these properties often become dated, outmoded or just cease to function for the modern-day dweller.

In recent years, there have been a number of publicized properties that faced demolition including the Meeker House, a 150-year-old house on Cross Highway in Westport, a 1950’s Paul Rudolph house on Minuteman Hill Road in Westport and the Alice Ball House, a Philip Johnson design in New Canaan.  The Meeker House was disassembled and moved to a different location, the Rudolph house was demolished amidst much opposition and the Ball House awaits an unknown fate.   Part of the issue with the Ball House, a 1,773 square foot modernist dwelling, was that the home ceased to meet the criteria for today’s homeowner.  The owner, (who happens to be an architect) proposed several scenarios to the town including saving the modernist house, perhaps using it for a guest house or a pool house while building a second more functional home on the same site.  The town environmental commission denied the application only making the preservation of the modernist structure less feasible.   The application, after revision was approved by the town but unfortunately, opposed by a neighbor who enjoined in a lawsuit against the property owner.

Potential Solutions

There is no question that the remedy for preservation needs to come from the local level.  Towns that serve to be home to the varied historic structures should perhaps consider special zoning/development provisions that would serve to preserve the historic architectural fabric.  One suggestion would be to allow for increased density coverage on these sites wherein perhaps the footprint of the historic structure would not count toward the overall allowable site density. Preservation today is often about co-existence.  An avenue such as this would pave the way for the construction of an additional structure leaving the often smaller, dysfunctional historic dwelling suitable for a guest quarters, pool house or complimentary use.

Bio of the author
Marc Nadeau is a designated appraiser which extensive experience in appraising, redeveloping and restoring historic properties.  Clients in this genre include individuals, The National Trust for Historic Preservation, the Connecticut Trust for Historic Preservation and the Philadelphia Preservation Trust.  Additional information regarding Mr. Nadeau’s services is available at: www.marcnadeau.com