August 11, 2026
A family owns a shopping center through an LLC. One member holds 32%. For estate planning, gift reporting, or a buyout, someone needs to know what that 32% is worth.
The intuitive answer — take the property value and multiply by 0.32 — is almost always the wrong one.
What the holder of a fractional interest actually owns
A fractional or undivided interest is a partial ownership stake in an entire asset, not exclusive rights to a physical portion of it. A 25% owner of a building owns a quarter of the whole thing, not a specific quarter of the floor plan.
That ownership comes with two structural limitations, and both affect what a buyer would pay:
Lack of control. A minority holder cannot unilaterally decide to sell the property, refinance it, lease space, distribute cash, or change management. Those decisions belong to the majority or to whatever the operating agreement specifies. A buyer of that interest inherits the same powerlessness.
Lack of marketability. There is no ready market for a minority stake in a privately held real estate entity. It cannot be listed like a property, is difficult to finance, and the pool of interested buyers is small. Selling it takes time, costs money, and may not be possible at all on reasonable terms.
Appraisers address these with two adjustments, commonly abbreviated DLOC (discount for lack of control) and DLOM (discount for lack of marketability).
The discounts are sequential, not additive
This is the mechanical point most often gotten wrong, and it changes the answer materially.
The two discounts apply one after the other, with the second applied to the already-reduced figure — not summed and applied once. The IRS Form 706 instructions illustrate the method with a clean example: begin with a pro rata value of $100, apply a 10% discount for lack of control to reach $90, then apply a 15% marketability discount to that $90, arriving at $76.50. The effective combined discount is 23.5%, not 25%.
The gap looks small at $100. On a meaningful interest in a real asset it is not small, and the arithmetic is one of the first things a reviewer checks.
What kinds of interests this applies to
Fractional interest analysis is relevant across a range of ownership structures:
- Tenancy in common (TIC) — direct undivided interests in real property
- Limited and general partnerships — including family limited partnerships
- Limited liability companies — the most common structure in current practice
- Holding companies
- S-corporations and C-corporations holding real estate
The structure matters. An undivided TIC interest in a single property carries different rights — including, typically, the ability to seek partition — than a limited partner interest in an entity whose agreement restricts transfer. Those differences drive the analysis rather than sitting alongside it.
Two different professionals, one assignment
This is worth stating plainly, because clients frequently encounter it mid-engagement and are surprised.
Valuing a fractional interest in an entity generally involves two distinct pieces of work:
- The real property appraisal — a market value opinion on the underlying real estate, developed by a qualified real property appraiser
- The interest-level analysis — determining the pro rata value, then developing and supporting the applicable discounts
The first is squarely real property appraisal. The second draws on methodology shared with business valuation, particularly where the interest sits inside an operating entity rather than being a direct undivided interest in land or a building. Depending on the entity structure and the assignment, this may call for a business valuation professional working alongside the real property appraiser.
Ask any firm you engage which parts they perform and which they coordinate. A clear answer is a good sign.
Why the discounts are hard to support
Fractional interests are rarely sold in observable, arm’s-length transactions the way properties are. That scarcity of market data is the central analytical problem in this work.
An appraiser cannot simply assert a percentage. Supporting a discount requires reasoning from the specific facts:
- The size of the interest, and whether it confers any control
- The number of co-owners and how dispersed ownership is
- Restrictions in the operating or partnership agreement — transfer limits, rights of first refusal, buy-sell provisions
- Whether partition is available as a practical remedy, and what it would cost and take in time
- Distribution history and whether the interest actually produces cash
- The nature and quality of the underlying property
- Whatever transactional or empirical evidence exists
Unsupported discounts are among the most common reasons this work fails under scrutiny. A number that looks reasonable but rests on nothing is not defensible, and this is an area that draws attention.
Why the tax context raises the stakes
Fractional interest valuations most often arise in gift and estate reporting, where the discount directly reduces reported taxable value — which is exactly why they receive scrutiny.
Requirements exist under federal tax rules governing what constitutes a qualified appraisal and a qualified appraiser for these purposes, and the specific applicable rules, thresholds, and reporting obligations are matters for your tax counsel or CPA. What matters from the valuation side is straightforward: the report needs to be developed and documented well enough to survive review by someone motivated to challenge it, potentially years after it was written.
When you need this work
- Gift and estate tax reporting where interests are transferred or included in an estate
- Estate planning, modeling the effect of transfer structures before executing them
- Buyouts and partner exits, where the interest must be priced
- Partnership and shareholder disputes, where the value of a minority position is contested
- Divorce, where marital assets include entity-held real estate
- Charitable contributions of fractional interests
Teel Valuation Group provides real estate valuation supporting fractional and minority interest analysis for estates, trusts, family limited partnerships, LLCs, and closely held entities, working with estate planners, attorneys, CPAs, and family offices nationwide.
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