Consolidating a Divided Interest

The client had originally inherited a one-third interest in each of two parcels of farmland, one a smaller parcel adjoining a city and the other larger and more rural.  Other heirs of his grandparent, each also owning a third of each property, included a local educational foundation and an out-of-state charity.  The charity had decided to sell, and the client had arranged for a friend to buy its interests.  In the process, the client traded part of his third interest in the larger property to his friend in exchange for the charityís former one-third interest in the smaller parcel.

He had decided to develop the smaller parcel next to the city.  But he had a problem.  The educational foundation owned a third of it, and he would need to acquire that interest to be positioned to develop it.  But he had limited financial resources.  The foundation had what appeared to be an inflated opinion of its value.  The client asked Rutledge Company to search for a solution.

We explored alternatives with both the clientís friend and the foundation.  We learned that the foundation wanted only to sell its interests in both parcels and had high expectations of the value of each.  His friend, with the greatest minority interest in the larger parcel, was happy with the status quo but expressed flexibility.

Using the foundationís high estimates of value of the two parcels and the respective percentage interests of each of the parties in the two parcels (three parties in the large parcel and two parties in the small parcel), we calculated the total value of the interests of each party.  Then, using the foundationís estimate of value per acre of the larger parcel, we were able to identify a single tract easily separated from the rest that represented within about three percent an equivalent to their total value in the two parcels.  This tract was separated from the rest of the larger parcel by only a local road.

Following extensive negotiations, the foundation agreed to accept a one hundred percent interest in that separable tract in exchange for their one-third interests in both parcels.  At this point, they were free to sell or retain that tract and could operate independently of their two former co-owners.

The friend had owned a large minority interest in the larger parcel, which was now smaller by the amount peeled off for the foundation.  So the percentage interests in the remaining acreage were adjusted so that the friendís now-larger percentage in a now-smaller parcel represented the same acreage as before. 

The final result was ownership by the client of one hundred percent of the small parcel to be developed and a continued interest in the remaining portion of the larger parcel.  The friend had a larger interest in the now-smaller large parcel.  And the foundation had a tract they could completely control.

We concluded that the foundationís inflated value of both parcels essentially offset each other.  Those values affected both the interest in the parcel they conveyed to the client and the tract they received.  They did, however, object initially to the three percent discount represented in the value of their new tract.  However, we were able to show them that they eliminated a minority interest in two parcels in exchange for one tract completely under their control.  A minority interest discount would be significantly more than three percent, as would the cost of a partition suit.  Finally, they would be able to sell the tract and reinvest the proceeds at a significantly greater return, quickly recovering any small discount.

This assignment succeeded because all three parties gained.  The client got complete ownership of the tract he wanted to develop, the foundation got one tract in exchange for minority interests in two parcels, and the friend retained his same acreage interest but with a now-majority interest in a smaller parcel.

 

Rutledge Company LLC

License No. 481.000176

John K Rutledge, Managing Broker

License No. 471.004599

 

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