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Value & Cents
Both individual and business debtors (regardless of organization structure) may own undivided interests (also called fractional interests) in real estate. When a debtor enters into bankruptcy, these real estate undivided interests may have to be valued for a number of collateral, creditor rights, solvency, sale, refinancing, reorganization and other purposes. This article summarizes the characteristics that affect the value of real estate fractional interests, and describes the generally accepted valuation approaches and methods that a valuation analyst will consider when valuing fractional interests for bankruptcy purposes.
Real Estate Fractional Interest
A real estate fractional interest, also called a tenancy in common interest, exists when two or more co-tenants each own a separate fractional share of an undivided real estate parcel. For purposes of this discussion, the terms fractional interest and undivided interest are used synonymously. Unlike a joint tenancy ownership, there is no right of survivorship among tenants in common. A tenancy in common requires only the unity of possession of the subject real estate.
In the absence of a contractual agreement between the co-tenants, each co-tenant may possess and enjoy the entire real estate. For example, each co-tenant has the right to use and enjoy a share of the property's income. Although each co-tenant has an equal right to possess and enjoy the real estate, each fractional owner cannot ( 1 ) exclude the other co-tenants or (2) designate any portion of the real estate as his or her own.
Property-Specific Valuation Considerations
The valuation analyst may consider the following property-specific factors in the fractional interest valuation.
1. State statute co-tenant rights. privileges and obligations.
* Partition: A co-tenant typically may compel a partition of the real estate. When the real estate is partitioned, then each co-tenant takes a distinct part of the real estate - according to his or her respective ownership interest. The purpose of a partition is to allow the tenants in common to sever their ownership. The partition enables each tenant to take possession, enjoy and improve his or her separate real estate parcel at his or her own pleasure. If. because of its physical or functional characteristics, the real estate cannot be equitably divided in kind, then:
(a) the entire property may be ordered...