About PVX

The PVX story

PrimusPVX^® is the culmination of a multi-decade effort to fill the gap between business valuation and real property appraisal. Real estate appraisal has quite a long history, and business valuation as a distinct discipline is relatively newer. Each has its own highly developed body of knowledge, which is applied widely in business valuation to operating businesses and their assets except for highly specialized assets such as machinery and equipment, real estate, personal property and a few others. Real estate appraisal is concerned with all aspects of real property. However, it turns out that the business of holding real estate—partnerships, LLCs, tenancy-in-common—is unusual in that it requires very specific competencies in each discipline to assemble the necessary facts and valuation technology to be able to persuasively reflect the actions of buyers and sellers of the undivided fractional interests in these entities. The asset is real property, the holding entity is a business and the two must come together, in collaboration.

Market demand

Such division of real estate has been a popular ownership form for a very long time, but has expanded with family asset planning and structuring over the past few decades. There are now huge numbers of fractional interest structures in existence, and they are not going away. Regardless of how estates are taxed in the future, the fact is that family members and investors are now holders of fractional interests. They will need valuations for estate planning for sure, but also for equitable asset allocation, buyouts and settling disputes for generations to come. The public needs valuations, but the market is very fragmented. Real estate appraisal capacity is widespread, as is business valuation capacity. But few business appraisers are really qualified to perform interdisciplinary valuations, as are even fewer real estate appraisers. Acquiring the capacity requires heavy investment in talent and technology that is hard to amortize over a handful of assignments each year.

Solving the problem

Fractional interest valuation is multidisciplinary, and any solution to the valuation dilemma requires multidisciplinary understanding. Dennis Webb is in a relatively rare position to do just that. He is an MAI real estate appraiser and an ASA business appraiser, and has practiced in both fields for more than 20 years. The disconnect between the disciplines had been apparent from 1994, but Mr. Webb was able to identify the problem and began to fill in the disciplinary gap. Articles in The Appraisal Journal and many other professional journals, presentations to valuation groups (including a two-day seminar offering), and the seminal textbook, Valuing Undivided Interests in Real Estate: Partnerships and Cotenancies (published by the Appraisal Institute in 2004). The public demand was far beyond the capacity of the principal associations, though, and the problem was not solved.

The IRS and taxpayers in crisis – the problem gets serious

Much of the fractional interest valuation work is for estate & gift applications, since asset fractions can be used to minimize tax burdens. It is not hard to imagine the extent to which marginal tax practitioners and poorly qualified (but otherwise willing) appraisers could partner up to create a tax compliance nightmare. And that’s exactly what happened.

The IRS’ experience of taxpayer noncompliance resulted in a set of ever-tightening requirements that culminated in the Pension Protection Act of 2006, which allowed the IRS to sanction appraisers with other tax practitioners if the valuation was substantially off from what the IRS concluded was the correct value. A fairly draconian level of power to be sure, but it was required because the valuation professions had not developed a successful valuation environment, had not adequately educated the public, and allowed a “cottage industry” of valuation in support of tax avoidance to flourish. Bad actors, marginally competent appraisers and others were selling the public a bill of goods, and audits were continuing at a rapid pace.

The IRS began a public outreach effort in 2005, and the American Society of Appraisers co-sponsored a series of Symposia with the IRS in 2005–2011. The weakness of professional practice and the concern of the chief reviewing authority began to clarify what was really needed. The facts, typically showing up in every lawyer’s argument and supposedly underlying every valuation, were not showing up. The IRS was pleading with valuers: What are the facts? What does your conclusion have to do with the facts? It is not difficult to find US Tax Court opinions repeating this now-common plea.

Now we’re getting somewhere

Mr. Webb’s work from 1994 had placed great weight on finding the facts, because that is simply what is required for every appraisal. Fair market value (the taxation standard) uses the notion of a hypothetical buyer and seller to premise the analysis of value: What would they consider in arriving at a price for the interest being valued? Finding the facts is simply following their due diligence; what would they need to know to arrive at a price? The professional difficulty was that (in addition to bad actors) the facts were divided between two valuation disciplines, and very few appraisers are qualified in both. The facts fell into a gap and were not often found.

The facts are not only divided between disciplines; they are also scattered among the actual players in any fractional interest scenario. Effective valuation requires a lot of collaboration: between the asset (real estate) appraiser, the property manager, partnership management and other influential parties, and usually the fractional interest holder’s attorney and accountant. The legal structure, operating history, property history and future expectations all need to be addressed to understand the facts and their relevance. Such collaboration doesn’t happen a lot.

The genesis of PrimusPVX

By now, Mr. Webb’s valuation work (under Primus Valuations) had developed many models and applications in a very wide variety of fractional interest situations. Fact patterns were well-understood, and similarities and differences between entity structures and their bearing on value were well-known. The effort to build the technological infrastructure was motivated by an engineering fascination with process and curiosity about how the disparate disciplines and their bodies of knowledge could be integrated. The goal was always a persuasive story founded on the facts. The critical element was the connection between the facts and established valuation process; it was the most difficult and time consuming to develop because it is not readily modeled in a clear and concise way. Valuation professionals needed help with valuation technology, in addition to guidance for finding the facts.

The interesting thing about fractional interests in real estate is that most fit fairly predictable fact patterns. These patterns are concerned mostly with ownership and legal structures, which are limited in their scope. Any type of real estate can be involved, and there are a great many influences on real estate value. Any fractional interest valuation requires a specific and competent real estate appraisal. Period. But the property’s attributes again fit in predictable classifications, and the influence of these attributes on the fractional interest discount shows distinct patterns.

It was now clear that the elements were in place to structure a model that would guide the user/appraiser as well as handle the computational and logic requirements of the valuation process. That portion that was so difficult and time-consuming to construct could be made available to practitioners, saving them the time and effort.

Moving from 1.0 to 2.0

PVX makes use of a major advance in fractional interest valuation technology, introduced in Webb’s Valuing Fractional Interests in Real Estate 2.0 (Milonguero Press, Los Angeles 2021), a digital copy of which is made available to PVX subscribers.

The valuation professions have been working with fractional interest valuation 1.0, a body of knowledge that was developed for operating companies over many decades. But the 1.0 methods were never designed for real estate ownership; application to real estate holding entities and tenancy-in-common was just an afterthought. Webb’s new book describes an engineered approach to valuing fractional interests—one that ends the 1.0 era and introduces version 2.0. This is a practice upgrade building on decades of work involving marketability discounting, public partnership trading, and option pricing, adapting each specifically for real estate entities. Reliance is placed primarily on income methods, using public limited partnership and REIT market returns. The result is a coherent and explainable process that supports the many factual and circumstantial variations that can be faced by real estate holding entities.

Version 2.0 is complete and transformative, created to ensure the success of the next generation. PVX is built on version 2.0.

PVX produces results

PVX guides a thorough investigation with a comprehensive checklist of documents, numerous questions designed to uncover the relevant facts, and a complex algorithm that combines valuation models and logic. As the facts are revealed, the effect of each set of facts on the discount is displayed in real time. The level of understanding conveyed to the user, even if not a professional valuer, is unprecedented.

What about atypical conditions? Most automated valuation systems are tied to a normative situation—think about Zillow’s® value indication for your house. Within the scope of what it can do, it’s pretty good. But you can come up with many exceptions that simply cannot be handled by Zillow. Understanding circumstantial variations and caveats comes only with experience, and this is built right into PVX. You get special circumstance flags and references so that you know when and how to depart from the norm. Many of these are blind spots for professional valuers, and these can easily lead to valuation disaster. PVX reveals a great many of the blind spots and special conditions and guides the user to find solutions.

Acknowledgements

PrimusPVX is the result of many years of work, research, and investigation; collaboration with numerous discussion groups; and analysis of the valuation practices endorsed by the American Society of Appraisers, the Appraisal Institute, the Royal Institution of Chartered Surveyors, and the American Business Appraisers National Network. The past couple of decades have included a lot of engagement with the appraisers and institutions that are committed to the betterment of the professions. Professional real estate appraisers and business valuers are eager to see the professions progress and are quite generous with their time and energy. The Internal Revenue Service has also played a major role in clarifying the scale and importance of fractional interest valuation work, with IRS lawyers, engineers and valuers have contributing to dialogue in conferences and to the advancement of our profession in general.

Dennis A. Webb, ASA, MAI, FRICS

Mr. Webb is a business valuer, real property appraiser, former syndicator and engineer. He is an award-winning writer and the principal authority on valuing fractional interests in real estate. Mr. Webb has been speaking and writing for decades about essential, but still-mysterious, valuation topics that mix real estate and business. His mission has resulted in more than 70 articles and presentations for valuation professionals, lawyers and property owners and his most recent case study textbook: Valuing Fractional Interests in Real Estate 2.0 (Milonguero Press, Los Angeles 2021).

Dennis’ passion is bringing understanding, clarity, collaboration and technology to bear on the valuation of hard-to-value asset interests, a niche specialty that has long proved vexing for appraisers, advisors, the courts, and property owners alike. His professional dual-field designation is quite rare. His emphasis has always been on “engineering” valuation methodology and bringing analysis/data crunching together with persuasive storytelling.

Dennis is the founder of Primus Valuations®, a multidisciplinary valuation firm with a practice emphasis on real property-related business interests and the enterprise value associated with special-use properties. He has been active in real property appraisal since 1988 and in business valuation since 1994. He is a member of the Appraisal Institute (MAI), an Accredited Senior Appraiser (ASA) in both real property appraisal and business valuation with the American Society of Appraisers, a Fellow of the Royal Institution of Chartered Surveyors (FRICS), and a lifetime member of the Institute of Electrical and Electronics Engineers.

Before specializing in valuation, Dennis was co-owner of an NASD broker/dealer firm that provided real estate investment syndication, analysis, and consulting services. During that time, he held licenses as a registered representative and general securities principal and was responsible for due diligence investigations. He received a Bachelor of Science degree in engineering from the University of California at Los Angeles with a minor in economics and worked for 15 years as a systems and design engineer. A native of Los Angeles, Dennis now lives in Denver, Colorado, and enjoys writing, hiking, traveling and dancing Argentine Tango (not necessarily in that order).