Cooperative & Timeshare Interests: Ownership and Valuation

Cooperative & Timeshare Interests: Ownership and Valuation

This chapter delves into the complexities of cooperative and timeshare ownership, providing a scientific understanding of their structures, valuation methodologies, and unique characteristics. We will explore the underlying principles that govern these interests, examine practical applications, and discuss relevant valuation techniques.

Cooperative Ownership

Cooperative ownership, often shortened to co-op, represents a unique form of real estate❓ ownership where individuals own shares in a corporation that owns the entire property. These shares grant the owner a proprietary lease to a specific unit within the building.

1. Structure and Operation:

   • The cooperative corporation holds title to the real estate.
   • The corporation issues a specific number of shares at a defined par value.
   • Individual owners purchase shares; the number of shares required is linked to the unit’s size and desirability.
   • Shareholders receive a proprietary lease granting them the right to occupy a specific unit.
   • Shareholders pay a monthly maintenance fee, covering operating expenses and debt service on the corporation’s underlying mortgage.

2. Financial Mechanisms:

   • Traditional Financing: Historically, cooperative corporations obtained mortgages on the entire property. Individual shareholders funded their purchases with 100% equity or short-term personal loans.
   • Modern Financing: Currently, individual shareholders can mortgage their shares, using the stock as collateral for a portion of its value while the cooperative corporation arrange mortgage on the total property.

3. Mathematical Representation of Maintenance Fees:

   The monthly maintenance fee (MF) can be represented as:

   MF = (OE + DS) * (SU / TS)

   Where:

   OE = Total Operating Expenses of the cooperative.

   DS = Debt Service on the underlying mortgage of the cooperative.

   SU = Shares allocated to a specific unit.

   TS = Total number of shares in the cooperative.

   This formula illustrates that maintenance fees are proportional to the shareholder’s ownership stake (shares) and the overall expenses of the cooperative.

4. Advantages and Disadvantages:

   • Shareholder Control: Shareholders elect the board of directors, influencing property management and policies.
   • Financing Challenges: Historically, the financing structure was complex, involving individual loans and a share of the blanket mortgage.
   • Restrictions: Co-op boards often impose restrictions on subletting and have significant control over sales, impacting property value.
   • Social Exclusivity: Co-op boards exert substantial influence over who can buy and sell units, creating potential advantages or disadvantages based on buyer preferences.

Timeshare Interests

Timesharing involves the sale of limited ownership interests or rights to use residential apartments or hotel rooms. Understanding the different categories of timeshare interests is crucial for accurate valuation.

1. Categories of Timeshare Interests:

   • Deeded Interests:
     • Fixed Week: Ownership for a specific period each year at a designated resort.
     • Floating Week: Ownership for a specific period each year but with flexibility in choosing the exact week within a defined season.
   • Non-Deeded Interests:
     • Right-to-Use: The right to use a timeshare unit for a specified period at a specific resort or network of resorts without owning the real estate.
     • Points-Based: Purchase of points that can be redeemed for stays at various resorts within a proprietary network or vacation club system.

2. Deeded Timeshare Interests Classification:

   • Timeshare Ownership: Purchaser receives a deed as a tenant in common with other timeshare owners, using the unit only during their stipulated period.
   • Interval Ownership: Ownership lasts for the duration of the project. Upon project termination, ownership reverts to interval owners as tenants in common, who can sell the property or renew the interval estate.

3. Non-Deeded Timeshare Interests Subcategories:

   • Leasehold Interest: A prepaid lease arrangement granting the right to use the property for a specific term.
   • Vacation License: A license transferred from the developer to the purchaser, providing the right to use a unit for specified periods over the contract’s duration.
   • Club Membership: Purchase of membership in a club owning or operating the timeshare property, granting the right to use a unit for a specific period each year of membership.

4. Timeshare Market Tiers:

   • Primary Market: Sales by resort developers and owners to individual buyers.
   • Secondary Market: Resales by individuals who purchased from developers or in the secondary market.

   Appraisers must use sale prices from the relevant market (primary or secondary) to accurately value timeshare interests.

5. Mathematical Representation of Timeshare Value:

   A simplified model for valuing a timeshare interval can be represented as:

   V = (PVB - PVC) * (1 - r)^n

   Where:

   V = Estimated Value of the timeshare interval.

   PVB = Present Value of Benefits, including potential rental income and personal use value.

   PVC = Present Value of Costs, including maintenance fees and special assessments.

   r = Discount rate reflecting the risk and illiquidity of the timeshare interest.

   n = Number of years remaining in the timeshare agreement.

   This model considers the present value of the benefits and costs associated with the timeshare, discounted to reflect its inherent risks and the time value of money.

Scope of Work in Valuation

Valuation standards mandate the appraiser’s responsibility for defining the appropriate scope of work. The scope must yield credible results, align with regular users’ expectations, and be consistent with peers’ actions in similar assignments.

1. Problem Solving Process:

   • Identifying the Problem: Define the client, intended user, intended use, type of opinion, effective date, property characteristics, and assignment conditions.
   • Determining the Solution: Select appropriate valuation techniques and data.
   • Applying the Solution: Execute the valuation process and generate an opinion of value.

2. Scope of Work Elements:

   • Relevant Property Characteristics: Assessing physical, legal (e.g., zoning), and economic (e.g., actual gross income) factors.
   • Application of Valuation Approaches: Determining the intensity and rigor of applying the cost, sales comparison, and income capitalization approaches.
   • Highest and Best Use Analysis: Assessing the property’s most profitable use, considering physical, legal, financial, and market factors.
   • The scope of work for an assignment is acceptable if it leads to credible assignment results, is consistent with the expectations of parties who are regularly intended users for similar assignments, and is consistent with what the actions of an appraiser’s peers would be in the same or a similar assignment.
   • Developing a scope of work is a bottom-up process: an appraiser starts with the valuation practices that are essential in all assignments and then considers the applicability of the professional standards and practices to the problem at hand. The ideal solution is arrived at not by reducing a standardized procedure to meet specific required components, but rather by building a logical framework for the assignment from the ground up.

3. Activities in Valuation Assignments:

   • Identifying Relevant Real Property Characteristics (Tables 8.1)
     Process Physical Legal (e.g., zoning) Economic (e.g., actual gross income)
     less intensive❓ No site visit No research Obtain from owner*

     Drive-by visit Examine zoning maps Read leases

     Drive-by, exterior-only* | Talk to planning/zoning Read leases

     More Intensive
     site visit with exterior measurements
     department*
     Verify with management company
     Site visit including examination of interior with interior measuretments
     Talk to planning/zoning department
     Obtain and read zoning ordinance
     Read leases
     Verify with management company and tenants
     * Special/extraordinary assumptions will need to be stated about information taken to be true when it is uncertain.

   • Application of the Three Approaches to Value (Tables 8.2)
     Process
     Less Intensive More Intensive

     Cost Approach
     Sales Comparison Approach
     Income Capitalization Approach
     Not necessary, omitted
     Land valuation via extraction
     Comparable cost data from readily available sources
     Comparable data from files | -
     No adjustments to comparables in analysis
     Comparable rental, expense, and vacancy data from files
     Capitalization rates from readily available sources
     Verified comparable cost data from cost manual
     Comparable data from readily available sources, confirmed with one or more parties to the transaction
     Comparable data, including capitalization rates from readily available sources, confirmed with one or more parties to the transaction
     Land valuation via sales comparison approach with complete verification of sales data
     Comparable cost data obtained from local contractors
     Thorough search of all available data sources Confirmation with one or more parties to the transaction
     Adjustments via paired sales analysis
     Thorough search of all available data sources
     Confirmation with one or
     more parties to the
     transaction
     Local vacancy survey

   • Development of a Highest and Best Use Opinion (Market Value Appraisal) (Tables 8.3)
     Process
     Less Intensive More Intensive

     Inferred; based on readily observed evidence, such as surrounding land uses, age and condition of existing improvements, and known market demand for property type
     Application of four tests (physically possible, legally permissible, financially feasible, maximally productive) but based on readily observed evidence
     Application of four tests (physically possible, legally permissible, financially feasible, maximally productive) with research into each factor, testing for feasibility
     Application of four tests (physically possible, legally permissible, financially feasible, maximally productive) with complete market analysis and feasibility study
     * Special/extraordinary assumptions may need to be stated about information taken to be true when it is uncertain.
     Source: Stephanie Coleman, Scope of Work, 2nd ed. (Chicago: Appraisal Institute, 2016), 56-57.