26 to 32. First, we repeat the regression x-coef¬cients from B21 to B23 in

B27 to B29. The LLC™s data are in C27 to C29. The triple-net-lease dummy

variable equals zero, as the LLC™s properties are not subject to TNLs. We

multiply the x-coef¬cients in B27 to B29 by the LLC™s data in C27 to C29

to come to the regression results for the LLC in D27 to D29, which we

subtotal in D30 as 1.3%. We then repeat the y-intercept of 38.7% from

B20 in D31 and add that to the subtotal, to come to a discount before

adjustments of 37.5% (D32).

PART 3 Adjusting for Control and Marketability

340

T A B L E 9-6A

Correlation Matrix

A B C D E F G H I J K L M N O P Q

4 Avg Disc Debt / MVA98 RYld98 RYld97 RYld96 RYld95 C MF R MH RST Combo Parking Eq Dist TNL Indep

5 Avg disc 1.00

6 Debt / MVA98 0.61 1.00

7 RYld98 0.80 0.61 1.00

8 RYld97 0.64 0.42 0.78 1.00

9 RYld96 0.68 0.48 0.81 0.76 1.00

10 RYld95 0.65 0.47 0.75 0.72 0.88 1.00

11 C 0.07 0.12 0.00 0.11 0.15 0.15 1.00

12 MF 0.00 0.28 0.04 0.14 0.12 0.04 0.19 1.00

13 R 0.01 0.06 0.01 0.02 0.02 0.01 0.08 0.14 1.00

14 MH 0.16 0.13 0.07 0.04 0.01 0.04 0.09 0.16 0.07 1.00

15 RST 0.52 0.35 0.40 0.34 0.43 0.41 0.15 0.28 0.12 0.13 1.00

16 Combo 0.20 0.02 0.21 0.18 0.26 0.15 0.20 0.36 0.15 0.17 0.29 1.00

17 Parking 0.09 0.09 0.01 0.01 0.02 0.02 0.05 0.09 0.04 0.04 0.07 0.09 1.00

18 Eq dist 0.14 0.05 0.09 0.09 0.21 0.11 0.04 0.14 0.08 0.31 0.42 0.29 0.17 1.00

19 TNL 0.51 0.22 0.43 0.36 0.46 0.44 0.09 0.34 0.03 0.16 0.82 0.24 0.09 0.51 1.00

20 Indep 0.20 0.37 0.30 0.16 0.16 0.20 0.27 0.43 0.07 0.07 0.40 0.16 0.14 0.11 0.47 1.00

341

T A B L E 9-6B

Partnership Pro¬les Database: Price-to-Value Discounts”1999

A B

5 Name Avg Disc

6 Aetna Real Estate Associates 23%

7 ChrisKen Partners Cash Income 28%

8 Consolidated Capital Inst. Props. 1 28%

9 Consolidated Capital Inst. Props. 2 35%

10 First Capital Inst. Real Estate 4 21%

11 HCW Pension Real Estate Fund 29%

12 I.R.E. Pension Investors II 40%

13 John Hancock Realty Income Fund II 12%

14 Murray Income Properties I 25%

15 Murray Income Properties II 25%

16 Rancon Income Fund I 39%

17 Realty Parking Properties I 8%

18 Realty Parking Properties II 28%

19 Wells Real Estate Fund II-A 8%

20 Wells Real Estate Fund III-A 31%

21 Wells Real Estate Fund IV-A 38%

22 Wells Real Estate Fund VI-A 26%

23 Wells Real Estate Fund VII-A 25%

24 Wells Real Estate Fund VIII-A 24%

25 Wells Real Estate Fund IX-A 24%

26 Wells Real Estate Fund X-A 20%

27 Windsor Park Properties 6 15%

28 Angeles Income Properties II 30%

29 Angeles Opportunity Properties 37%

30 Angeles Partners XII 34%

31 ChrisKen Growth & Income II 16%

32 Consolidated Capital Inst. Props. 3 25%

33 Consolidated Capital Properties III 28%

34 Davidson Growth Plus 41%

35 Davidson Income Real Estate 38%

36 Multi-Bene¬t Realty Fund ™87-1 (A units) 29%

37 Nooney Income Fund II 42%

38 Shelter Properties VII 35%

39 Uniprop Man. Hous. Com. Inc. Fund I 45%

40 Uniprop Man. Hous. Com. Inc. Fund II 41%

41 Windsor Park Properties 3 38%

42 Windsor Park Properties 5 27%

43 Windsor Park Properties 7 46%

44 Angeles Income Properties III 42%

45 Angeles Income Properties IV 42%

46 Angeles Income Properties 6 29%

47 Angeles Partners IX 36%

48 Angeles Partners XI 25%

49 Consolidated Capital Properties V 52%

50 Davidson Diversi¬ed Real Estate I 62%

Adjustments to the Discount

For Lack of Public Registration. The Partnership Pro¬les database

consists exclusively of ¬rms that are publicly registered, though privately

traded. The lack of public registration of the member interests renders

them less marketable than the Partnership Pro¬les database. Therefore

we must increase the fractional interest discount for that factor. We as-

sume that a 15% increase is reasonable (D34).

PART 3 Adjusting for Control and Marketability

342

T A B L E 9-6B (continued)

Partnership Pro¬les Database: Price-to-Value Discounts”1999

A B

5 Name Avg Disc

51 Davidson Diversi¬ed Real Estate II 61%

52 Davidson Diversi¬ed Real Estate III 38%

53 First Capital Income Properties XI 41%

54 First Capital Income & Growth Fund XII 44%

55 First Dearborn Income Properties 58%

56 Multi-Bene¬t Realty Fund ™87-1 (B units) 57%

57 InLand Capital Fund 47%

58 Inland Land Appreciation Fund I 45%

59 Inland Land Appreciation Fund II 48%

60 Scottsdale Land Trust 46%

61 CNL Income Fund III 9%

62 CNL Income Fund V 9%

63 CNL Income Fund VI 15%

64 CNL Income Fund VII 11%

65 CNL Income Fund VIII 16%

66 CNL Income Fund IX 11%

67 CNL Income Fund X 12%

68 CNL Income Fund XI 17%

69 CNL Income Fund XII 13%

70 CNL Income Fund XIII 15%

71 CNL Income Fund XIV 8%

72 CNL Income Fund XV 6%

73 CNL Income Fund XVI 14%

74 CNL Income Fund XVIII 7%

75 Carey Institutional Properties 28%

76 Corporate Property Associates 10 16%

77 Corporate Realty Income Fund I 27%

78 DiVall Income Properties 3 12%

79 DiVall Insured Income Properties 2 1%

80 John Hancock Realty Income Fund III 12%

81 Net 1 LP 23%

82 Net 2 LP 28%

83 Capital Mortgage Plus 23%

84 Capital Source LP 15%

85 Capital Source LP II 22%

86 Krupp Government Income Trust 10%

87 Krupp Government Income Trust II 15%

88 Krupp Insured Mortgage LP 9%

89 Krupp Insured Plus LP 15%

90 Krupp Insured Plus II 11%

91 Krupp Insured Plus III 2%

92 Paine Webber Insured Mortgage 1-B 21%

93 Max 61.7%

94 Min 0.8%

95 Mean 26.8%

96 Std deviation 14.4%

For Additional In¬‚uence of Private versus Public Interest. The

member interests should have more in¬‚uence than the small LP interests

from which we calculated the regression coef¬cients, and they actually

do have a vote. We reduce the discount by 5% in D35.

The adjustments for lack of public registration and additional in¬‚u-

ence are both reasonable estimates. In total, our net adjustments are 10%

CHAPTER 9 Sample Appraisal Report 343

(D36). Adding D32 and D36, the total discount for the LLC interest is

47.5% (D37).

Benchmarks for Net Effect of the Adjustments. The x-coef¬cients

for the dummy variables can give us a feel for how the discount might

vary if Partnership Pro¬les had data available on trades of LLCs with

assets more similar to our subject. The coef¬cient for the triple-net lease

dummy variable is 7.2%. In earlier years, typical coef¬cients for other

dummy variables have ranged from 5“12%. Therefore, the net adjust-

ment for no public registration and increased in¬‚uence of 10% appears

reasonable.

There is another way to benchmark the net adjustments. According

to Jay Abrams™ conversations with brokers who sell LP interests, shifting

from selling a publicly registered LP interest to a private LP interest adds

approximately 7“10 months in the selling time, which is 58“83% of one

year. If we multiply that by the ˜˜Average Years to Sell™™ x-coef¬cient of

0.1368 in Abrams™ book20, we get an increase in discount of 8“11%. In the

book, there was another regression21, and the ˜˜Average Years to Sell™™ x-

coef¬cient for that one was 0.1722. Using that instead of the 0.1368 leads

to estimates of the net adjustment of 10“14%. Furthermore, it is reason-

able to assume that the decrease in discount from the ˜˜increased in¬‚u-

ence™™ factor in the private LP is offset by the increase in the discount for

the additional monopsony power to the buyer of the private LP interest.

Thus, 8% to 14% is a reasonable range for net adjustments.

Commentary to Table 9-7: Private Fractional Interest Sales

Robert Jones, a real estate appraiser with the ¬rm Jones, Roach & Car-

ingella in San Diego, provided us with actual transaction data for illiquid

fractional interests in real estate. Table 9-7 shows the detail and our anal-

ysis of the interests and their related discounts.

Comparability to the Subject Interest

The member interests are very comparable to the fractional interests in

Table 9-7. The main difference is that the subject member interest repre-

sents ownership in several properties, not just one.

Statistical Methodology

We performed simple and multiple regression analysis of the database.

As independent variables, we tested the transaction amount (Price), the

percentage interest (Size), the FMV of the entire property, and dummy

variables for the time period of the transaction (pre-1990) and whether

the interest was a GP interest in a general partnership. We did not have

yield data.

20. Table 7-5, p. 240, cell B54. In other words, the regression in the book shows that for each year

of inability to sell, restricted stocks experience a discount of 13.68%.

21. Applicable when the subject company has been publicly traded for at least six months, and

thus historical stock prices are available to calculate the ˜˜Price Stability™™ variable. See Table

7-5, p. 239, cell B26.

PART 3 Adjusting for Control and Marketability

344

Regression Results of Partnership Pro¬les Database

The bottom of Table 9-7 shows the overall regression results. R2 and ad-

justed R 2 are 49.0% (C37) and 41.7% (C38), respectively.22 This means that

the regression model explains 41.7% of the variation in the discounts.

The standard error of the y-estimate is 10.07% (B10). We can form an

approximate 95% con¬dence interval around the regression estimate by

adding and subtracting two standard errors, or approximately 20.1%.

The dummy variable for whether the transaction was pre-1990 or not

is the only variable in the ¬nal regression:

The regression equation is:

Average Discount 0.4679 0.1846 pre-1990

The y-intercept and the x-coef¬cient appear in cells B43 to B44. The

y-intercept of 0.4679 means that when all the independent variables have

a zero value, or in this case when the transaction occurs after the end of

the 1980s, then the average discount from net asset value is 46.79%, or

46.8% rounded.

One should not place great weight on the regression equation above.

It was derived from a small data set, and the explanatory variable for

yield is missing. It is nevertheless relevant evidence of the fractional in-

terest discount in real-world transactions.

Commentary to Table 9-8: Final Calculation of Fractional

Interest Discounts

2.80% Member Interest

To calculate the ¬nal discount, we weight the ¬rst two valuation ap-

proaches equally at 45% each, as both approaches appear equally impor-

tant, valid, and reliable. The third approach we weight only 10% because

of the small and incomplete data set from which its regression model was

derived. The 49.2% (C8) discount calculated using the economic compo-

nents approach comes from Table 9-5, B12, the 47.5% (C9) discount using

the Partnership Pro¬les Regression comes from Table 9-6, D37, and the

46.8% (C10) discount comes from Table 9-6, C43.23 The weighted average

of the three discounts is 48.2% (E11), which we round to 48% in E12.

Final Calculation of FMV of Fractional Interests

Gifts Transferred on December 25, 1999. To calculate the FMV of

the 2.80% fractional interests gifted on December 25, 1999, we calculate

the dollar value of a 100% fractional interest discount, $1,389,185 48%

$666,809 (B18 B19 B20). Note that B18 is the FMV of the equity

before discounts, which comes from Table 9-2, C22.

Next we subtract this discount from the FMV of equity to determine

the FMV of a 100% Fractional Interest, $1,389,185 $666,809 $722,376

22. The adjusted R2 is a downward adjustment to remove the effects of irrelevant variables

randomly increasing R2.

23. As this is not a pre-1990 valuation, the regression estimate for the discount is equal to the

intercept coef¬cient.

CHAPTER 9 Sample Appraisal Report 345

346

T A B L E 9-7

Private Fractional Interest Sales [1]

A B C D E F G H I J K

4 Pro-Rata

5 Date Size FMV-100% Value Price Discount Pre 1990 GP

6 1 Linda Vista Rd., S Diego [2] [3] GP 1/1/1984 6.7% NA NA NA 20.0% 1 1

7 2 Eighth Ave., S. Diego TIC 9/1/1985 66.7% 60,000 40,000 27,000 32.5% 1 0

8 3 Fifth Ave., S. Diego [2] [4] GP 4/1/1988 33.3% 3,000,000 1,000,000 675,000 32.5% 1 1

9 4 West 61st St., Los Angeles TIC 10/1/1996 33.3% 90,000 30,000 10,000 66.7% 0 0

10 5 Garden Grove Ave., Reseda TIC 10/1/1996 25.0% 145,000 36,250 22,000 39.3% 0 0

11 6 K St., S. Diego TIC 2/1/1998 20.0% 325,000 65,000 36,000 44.6% 0 0

12 7 So. Calif. [5] LP 7/1/1998 2.5% 5,460,000 136,500 75,000 45.1% 0 0

13 8 So. Calif. [5] LP 7/1/1998 0.5% 14,800,000 74,000 37,000 50.0% 0 0

14 9 Brant St., S. Diego TIC 6/1/1999 50.0% 1,680,000 840,000 545,000 35.1% 0 0

[1] Source of data: Jones, Roach & Caringella, Real Estate Appraisers, S. Diego.

[2] These are interests in General Partnerships, not GP interests in Limited Partnerships.

[3] The seller reportedly would not hypothecate her interest for a required construction loan and offered to sell her interest to another partner who would. This indicates that the seller may have had unusual leverage, which may have

reduced the discount.

[4] We have reduced the nominal selling price of $750,000 by 10% to account for the ˜˜very bene¬cial ¬nancing™™ provided to the buyer by the seller. Exact details of the ¬nancing agreement are unknown.

[5] The seller had tried to sell his interest on the open market and had offers at a 75% discount from pro rata value. He then sold his interest to the GP, who had tried to discourage the sale. It is quite possible that the GP did not extract

the full market discount and that the full discount was actually 75%. This is because the GP is in the business of forming partnerships, not taking advantage of limited partners.

REGRESSION RESULTS [6]

35 Regression Statistics

36 Multiple R 0.7000

37 R square 0.4900

38 Adjusted R square 0.4171

39 Standard error 0.1007

40 Observations 9

42 Coeff Std Error t Stat P-value Lower 95% Upper

95%

43 Intercept 0.4679 0.0411 11.3857 0.0000 0.3708 0.5651

44 Pre 1990 0.1846 0.0712 2.5933 0.0358 0.3529 0.0163

[6] We found that with the constraints of the available data, the best explanatory variable for discounts was the time of the transaction, where the time is categorized pre-1990 or post-1990.

This might best be explained by investors™ increased perception of risk due to the real estate crash in 1990. Had it been available, we would expect that using yield as a second independent

variable would have signi¬cantly increased the explanatory power of the regression.

T A B L E 9-8

Final Calculation of Fractional Interest Discount

A B C D E

4 2.80% Member Interest

6 Indication Wtd Avg

7 Table of Discount Weight Discount

8 Economic components approach 9-5, B12 49.2% 45.0% 22.1%

9 Regression of partnership pro¬les database 9-6, D37 47.5% 45.0% 21.4%

10 Regression of private fractional interest data [1] V-3, C43 46.8% 10.0% 4.7%

11 Total 100.0% 48.2%

12 Round to 48%

14 Final Calculation of FMV of Fractional Interests

16 Date of gift 12/25/99 1/3/00

17 Fractional interest 2.80% 2.25%

18 FMV of equity (Table 9-2, C22) $1,389,185 $1,389,185

19 Fractional interest discount-% (E11) 48% 48%

20 Fractional interest account-$ $ 666,809 $ 666,809

21 100% fractional interest FMV of equity $ 722,376 $ 722,376

22 FMV of 2.80% and 2.25% member interests $ 20,227 $ 16,253

23 Rounded FMV of 2.80% and 2.25% member interests $ 20,000 $ 16,250

Note: Mrs. Smith intends to make four gifts of $16,250 on approximately 1/3/2000. We have ignored second-order effects of gifting a smaller interest (2.25% vs. 2.80%) in Table 9-5A,

B15, as it has no impact on the ¬nal calculation. Thus, in our opinion, a 2.25% interest gifted on 1/3/2000 has a FMV of $16,250.

[1] As this is not a pre-1990 valuation, the regression estimate for the discount is equal to the intercept coef¬cient. We do not weight this valuation method heavily, due to the relatively

little data that were available for the regression.

(B18 B20 B21). Finally, we multiply the FMV of a 100% fractional

interest by the 2.80% interest to calculate the FMV of the 2.80% member

interest, $722,376 2.80% $20,227 (B21 B17 B22), which we round

to $20,000 in B23.

Gifts Transferred on January 3, 2000. Mrs. Smith also made four

gifts of 2.25% LP interests on January 3, 2000, which we value in column

C. We multiply the $722,376 (C21 B21) 100% fractional interest fair

market value of the equity by a 2.25% member interest in C17 to arrive

at a fair market value of $16,253 (C22), which we round to $16,250 (C23).

The calculations in Table 9-5A depend on the size of the interests in

cell B15. However, the change from a 2.80% member interest to a 2.25%

member interest is so small that it actually has no impact. Thus, we use

the same fractional interest discount of 48% for the January 3, 2000 gifts.

Conclusion

In our opinion, subject to this report and the Statement of Limiting Con-

ditions, the appropriate fractional interest discount for a 2.80% and 2.25%

member interests in the LLC as of December 25, 1999 through January 3,

2000 is 48%, which amounts to fair market values of $20,000 and $16,250,

respectively.

CHAPTER 9 Sample Appraisal Report 347

STATEMENT OF LIMITING CONDITIONS

In accordance with recognized professional ethics, the fee for this service

is not contingent upon our conclusion of fractional interest discount, and

neither Abrams Valuation Group nor any of its employees has a present

or intended interest in the subject interest.

We have relied upon ¬nancial information provided by Bradley Jones

and David Sofer, CPA, and have accepted it as correct without further

veri¬cation. We assume there are no material transactions between De-

cember 14, 1999, the date of the LLC™s ¬nancial statements, and December

25, 1999, and January 3, 2000, the dates of the gifts. For use of this report

in the year 2000, we assume there are no material changes in property

values and that there are no material changes in the equity of the LLC or

its member interests.

All other information used in this report is from sources we deem