Minority Shares: It’s Complicated

by George Grace on July 8, 2016

Minority Shares: It’s Complicated

Minority Shares: It’s Complicated by George Grace

There is seemingly an infinite number of ways real estate is owned and sold.

In most cases, the owner of real estate has a deed for a property, and when the property sells, the deed is transferred to the new owner in exchange for value. In other cases, the property may be owned as shares in a corporation.

I recently closed a deal for a shareholder of a minority interest in a building in Tribeca, New York City. I went into the situation knowing that it is a challenge to sell a minority interest, because the potential buyer does not obtain control of the asset. In this case, my client wished to sell its shares but needed to obtain a bona fide offer for its interest in the building to present to the other shareholders—shareholders who, as part of their shareholders’ agreement, enjoyed the right of first refusal.

Our goal was to find a buyer that would tender a reasonable offer while knowing that the time and effort the buyer would expend might be in vain. I was able to find a potential buyer who was specifically interested in the type of property being sold, and was, therefore, willing to take the time and bear the risk. The buyer made a fair offer, and the seller accepted it.

Ultimately, the other owners (i.e. other shareholders) exercised their right of first refusal and bought my client’s share for the amount of the bona fide offer.

It was a positive outcome (except for the potential buyer) to a complex situation in which the seller was not selling real estate but an interest in the corporation that owned a real estate asset.

Understanding the different ways that building ownership is held is tricky. That is why it is best to turn to someone who has devoted 30 years to the real estate business. To find out how I can help you, contact me here.

George Grace

George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016
646-312-6800

{ 3 comments… read them below or add one }

Jacob Babarinde July 11, 2016 at 8:53 pm

Hi George,

Many thanks for sharing your illuminating and interesting experience.

I have a short question, though. What method of valuation/appraisal did you use to value your client’s partial interest in the subject property?

Reply

Stacey Tomaschik July 12, 2016 at 4:04 pm

We evaluated in a number of ways. First, we valued it based on cash flow of the asset and taking a market cap-rate for this type of asset. We then looked at it in terms of comparable sales of fee simple ownership. Because this is not an ownership position, there is a discounting for a minority interest. The real issue is what is that discount. For this, we met with other owners/buyers who have bought minority interests and asked how they valued it. Some would not buy another minority interest. Others discounted it based on the potential time frame that the asset is sold or on obtaining a majority interest. An amount for all potential buyers was included for attorney fees. I hope this gives you an idea of some of the issues that need to be considered.

Reply

Jacob Babarinde July 13, 2016 at 7:17 am

Your explanation is deeply appreciated!

Reply

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