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The second method Hulberg used was the “Fractional Discount
Method”. The method was set out in an April 1992 journal
article, Davidson, “Fractional Interests in Real Estate Limited
Partnerships”, The Appraisal Journal, 184-194 (Apr. 1992), in
which 10 factors were used to analyze the amount of a fractional
interest and a partnership discount. The factors included:
Relative risk of assets held, historical consistency of
distributions, conditions of assets, market’s growth potential,
portfolio diversification, strength of management, magnitude of
the fractional interest, liquidity of the interest, ability to
influence management, and ease of asset analysis. Using those
factors, Hulberg arrived at a 35-percent discount for Kmart
property, a 33-percent discount for the Walgreen property, and a
34-percent discount for the Wells Fargo property. However, the
factors are applicable to going real estate limited partnership
interests and are not fully applicable to the present situation
due to the family ownership, the lack of diversity of assets, and
the lack of a professional management company. The applicable
factors would appear to be risk of assets held, historical
consistency of distributions (i.e., rental income history),
conditions of assets, the magnitude and liquidity of the
interest, and management influence. The total discount
attributable to these factors ranges from 25 percent to 27
percent.
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