Appraisals of Fair Market Value under the Partition of Real Property Act – Code of Civil Procedure 874.316(d)

While the public may believe there is only one way to appraise a property, many co-owners end up in a debate with the court over the parameters of a proper valuation under the Partition of Real Property Act.

“Fair Market Value of the Property” is to be Determined under the Partition of Real Property Act

Notably, the Partition of Real Property Act, which became effective January 1, 2023, allows certain parties, usually the defendant, to buy the property if a plaintiff requests a partition by sale.^[1]Code of Civil Procedure § 874.317(a) This generally means that the court would hold a hearing wherein “the court shall determine the fair market value of the property .”^[2]Code of Civil Procedure § 874.316(g)

This same definition of what is being valued is repeated as to the duties of an appraiser as follows: “If the court orders an appraisal, the court shall appoint a disinterested real estate appraiser licensed in the State of California to determine the fair market value of the property assuming sole ownership of the fee simple estate. On completion of the appraisal, the appraiser shall file a sworn or verified appraisal with the court.”^[3]Code of Civil Procedure 874.316(d)

Definition of Fair Market Value

“[A] commonly accepted definition of fair market value is set forth in IRS Revenue Ruling No. 59-60 as ‘the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.’ (Internal Revenue Service, Revenue Ruling No. 59-60, 1959-1 C.B. 237.) That same definition has been applied by courts in California.” Cheng v. Coastal L.B. Associates, LLC (2021) 69 Cal.App.5th 112, 122.^[4]The court cited numerous examples as follows: “See, e.g., Rappaport v. Gelfand (2011) 197 Cal.App.4th 1213, 1228, 129 Cal.Rptr.3d 670 [buyout of limited partnership interest]; see also … Continue reading

Within eminent domain, California has a statutory definition as follows: “The fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.”^[5]Code Civ. Proc. § 1263.320(a)

The California Evidence Code addresses the method for valuing property as follows: “Except where another rule is provided by statute, this article provides special rules of evidence applicable to any action in which the value of property is to be ascertained.”^[6]Evid. Code, § 810

The Evidence Code further provides: “The value of property may be shown only by the opinions of any of the following: (1) Witnesses qualified to express such opinions. (2) The owner or the spouse of the owner of the property or property interest being valued. (3) An officer, regular employee, or partner designated by a corporation, partnership, or unincorporated association that is the owner of the property or property interest being valued, if the designee is knowledgeable as to the value of the property or property interest.”^[7]Evid. Code § 813(a)

Evidence Code, section 815, in turn, provides: “When relevant to the determination of the value of property, a witness may take into account as a basis for an opinion the price and other terms and circumstances of any sale or contract to sell and purchase which included the property or property interest being valued or any part thereof if the sale or contract was freely made in good faith within a reasonable time before or after the date of valuation….”^[8]Cal. Evid. Code § 815

“When relevant to the determination of the value of property, a witness may take into account as a basis for his opinion the price and other terms and circumstances of any sale or contract to sell and purchase comparable property if the sale or contract was freely made in good faith within a reasonable time before or after the date of valuation. In order to be considered comparable, the sale or contract must have been made sufficiently near in time to the date of valuation, and the property sold must be located sufficiently near the property being valued, and must be sufficiently alike in respect to character, size, situation, usability, and improvements, to make it clear that the property sold and the property being valued are comparable in value and that the price realized for the property sold may fairly be considered as shedding light on the value of the property being valued.”^[9]Evid. Code, § 816

Appraisals May Not Reflect “Fair Market Value”

Miller & Starr, California’s leading treatise on real estate law, notes that: “This definition differs from the typical appraisal definition of market value established by the Appraisal Institute, and required to be used by federally regulated financial institutions and others, which is the most probable price that a property would sell for on the open market.” ^[10]Fair market value defined, 7 Cal. Real Est. § 24:22 (4th ed.) (citing “Appraisal Institute, The Appraisal of Real Estate, 12th Ed. (2001), Chapter 2,” and “Regulations of the … Continue reading

Common Issues with Appraisals Contrasting with Fair Market Value

While appraisals serve an important purpose, appraisers must follow rules that may not match the price derived under the definition of fair market value as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Common issues can include:

• Minimal evidence of market value, perhaps involving new homes or those with unique characteristics
• Condition of the property, such as a hoarder house that would sell for considerably more after the personal effects (trash) are removed
• Fixtures and improvements, including utilities
• Potentially unpermitted improvements that may have a market value, even if the appraiser deems the improvements not part of their valuation

No Lack of Control Discount is Applied for Fractional Interests

The Partition of Real Property Act makes clear that: “If the court orders an appraisal, the court shall appoint a disinterested real estate appraiser licensed in the State of California to determine the fair market value of the property assuming sole ownership of the fee simple estate.”^[11]Code of Civil Procedure 874.316(d) This means that there is no discount applied based on the co-ownership that existed prior to the buyout or any co-ownership that may exist after the buyout.

A similar argument was rejected when it was raised by a member of an LLC as follows:

Appellant contends the valuation standards prescribed for shareholder buyouts under section 2000 should apply to LLC membership purchases under section 17707.03. Section 2000, which governs shareholder purchases initiated to avoid dissolution of a closely held corporation, “does not permit a lack of control discount when determining the fair value of a minority shareholder interest.” [citations] Appellant claims such discounts should similarly be disallowed here.

Appellant’s position contravenes ordinary principles of statutory construction. When construing a statute, a court need only consider other statutes or case law applying other statutes if the plain language of the statute at issue is unclear. [citation] That is not the case here. Section 17707.03 plainly states that members may avoid dissolution of a limited liability company by purchasing at “fair market value” the membership interests of those seeking dissolution. The commonly accepted definition of “fair market value” under California law is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts.[citations] Fair market value includes discounts reflected in the market. [citations]

Section 2000, in contrast, specifies that shareholders seeking to avoid dissolution of a closely held corporation must purchase at “fair value” the shares of those seeking dissolution. “Fair value” is defined in section 2000 as “the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation.” (§ 2000, subd. (a); accord, Mart v. Severson, supra, 95 Cal.App.4th at p. 526, 115 Cal.Rptr.2d 717.) Fair value “does not consider market-related factors that could affect value in the particular hands of a specific owner. Instead, ‘fair value’ considers only ‘the proportionate interest in a going concern.’ ” [citations]

Cheng v. Coastal L.B. Associates, LLC (2021) 69 Cal.App.5th 112, 123–124\

Contact a Partition Attorney with Experience in Appraised Value Disputes

Navigating an appraised value dispute in a partition action can be challenging. A partition attorney can offer specialized guidance to navigate the uncertainties of the Partition of Real Property Act. If you are seeking tailored advice and representation, contact Talkov Law, California’s premier partition action law firm. For a free consultation, call (844) 4-TALKOV (825568) or reach out online today.