Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Fractional Interests

A fractional interest is the term for owning a portion of a real-estate asset. The concept behind creating a fractional interest is that, if a commercial property is worth $1,000,000 while owned by an individual as a leased fee estate, then if that individual conveys to his son or daughter a 20 percent interest, the retained 80 percent interest would be worth less than $800,000, its pro rata percentage of the assumed value. The reasoning for the reduction in value is that now each party owns a part of the whole, a fractional interest. The problem in owning a part interest in a property is that you must coordinate and interface with another party or parties as to various issues relating to the property. You must agree on matters from the day-to-day management of the property, which includes a myriad of decisions that must be made on a daily basis, to extraordinary events, such as the sale or refinance of the asset.

The basic idea is to lower the value of the estate and, hence, the estate tax. By transferring out 20 percent of the ownership in the estate property, the size of the estate has been reduced, and the value is further reduced since now the title is held by multiple parties (with the associated consequential issues). When the transfer is accomplished, there may be a gift-tax assessment depending on the amount of the gift and whether or not it falls within the gift-tax exemption. A key issue when executing the transfer is how the transfer will be accomplished. ...