Cooperative Ownership and Timeshare Valuation

Chapter: Cooperative Ownership and Timeshare Valuation

Introduction

This chapter delves into the intricacies of cooperative ownership and timeshare valuation, two unique forms of real estate interest. We will explore the legal and financial structures underlying these ownership models and examine the specific valuation challenges they present. The chapter provides a scientific and practical framework for understanding and valuing cooperative and timeshare properties.

Cooperative Ownership

Cooperative ownership, or co-op, represents a form of real property ownership where residents own shares in a corporation that owns the building or property. These shareholders then receive a Proprietary Lease❓❓ that grants them the right to occupy a specific unit.

Structure of Cooperative Ownership

A cooperative corporation owns the real estate.
The corporation issues shares of stock to individual owners at a specified par value. The number of shares required to purchase typically depends on the size or desirability of the apartment unit.
Shareholders receive a proprietary lease granting them the right to occupy a specific apartment.
Shareholders make monthly payments representing their proportionate share of the corporation’s operating expenses and debt service.

Financial Mechanics of Cooperatives

Monthly Maintenance Fees: Shareholders pay a monthly maintenance fee, determined by the corporation’s board of directors. This fee covers:
Management expenses
Operating costs
Maintenance of public areas
Debt service on the underlying mortgage.

Mortgage Financing:
Traditional Model: The cooperative corporation secures a blanket mortgage on the entire property. Shareholders must use personal notes.
Modern Model: A cooperative corporation can arrange a mortgage on the total property, and individual apartment shareholders can mortgage their stock for a portion of its value.

Valuation Considerations for Cooperatives

Risk Assessment: The risk inherent in the underlying mortgage for the entire property needs to be taken into account.
Subletting restrictions❓: Co-op restrictions may not allow subletting.
Board Approval: The board of directors often has more influence on whether a unit can be bought and sold.
Financial Information: Financial health and stability of the co-op corporation must be assessed. This includes analyzing:
Balance sheets
Income statements
Cash flow statements
Reserve funds

Valuation Methodologies for Cooperative Apartments

sales comparison approach❓❓:
Most commonly used approach.
Identify comparable co-op apartment sales.
Adjust comparable sales for differences in:
Location
Size
Condition
Amenities
Views
Floor level
Financing terms
Adjustments can be quantitative or qualitative.

Income Capitalization Approach:
Less commonly used for individual units.
May be applicable if subletting is permitted and reliable rental data is available.
Estimate potential gross income.
Deduct operating expenses to arrive at net operating income (NOI).
Apply a capitalization rate (R) to the NOI to derive the property value (V).
V = NOI / R

Cost Approach:
Rarely used for cooperative apartments.
Difficult to accurately estimate replacement cost and depreciation for the entire building.

Mathematical Considerations:

Calculating Share Allocation:
The number of shares allocated to each unit is often based on the unit’s square footage. A simplified formula is:
Shares_per_unit = (Unit_Square_Footage / Total_Square_Footage) * Total_Shares
Example:
Total Shares Issued = 10,000
total building square footage❓❓❓❓ = 50,000 sq ft
Unit Square Footage = 1,000 sq ft
Shares_per_unit = (1,000 / 50,000) * 10,000 = 200 shares

Timesharing

Timesharing involves the sale of limited ownership interests in, or rights to use and occupy, residential apartments or hotel rooms. These interests can be deeded or non-deeded, and the valuation process must account for the specific type of timeshare interest.

Types of Timeshare Interests

Deeded Interests:

Fee Timesharing: Purchaser obtains a deed conveying title to a unit for a specific part of a year.
Interval Ownership: Ownership period lasts for the duration of the project. At the end of the specified time period, the ownership reverts to the interval owners as tenants in common.

Non-Deeded Interests:

Right-to-Use: Purchaser receives the right to use a timeshare unit for a specific period.
Points-Only: Interests can be used at various resorts in a proprietary network or in a vacation club system.

Valuation of Timeshare Interests

Market Segmentation:
Two-tiered market:
Original (primary) marketplace: sales by resort developers.
Resale (secondary) marketplace: resales by individuals.
Prices and market participants differ significantly. Appraisers must use comparable sales from the appropriate market.

Valuation Challenges:
Limited Data: Reliable sales data can be scarce, especially in the secondary market.
Complex Rights: The bundle of rights associated with a timeshare interest can be complex and difficult to quantify.
Resort-Specific Factors: The reputation, amenities, and management of the resort significantly impact value.
Economic conditions.
Seasonality.

Valuation Methodologies for Timeshares

Sales Comparison Approach:
Primary approach.
Identify comparable timeshare sales.
Adjust for differences in:
Location
Season/time of year (prime weeks vs. off-season)
Unit size and type
Amenities
Resort quality
Deeded vs. non-deeded interest
Points value
Remaining years of use.
Adjustments require careful analysis and market knowledge.

Income Capitalization Approach:
Rarely applicable.
Timeshares are typically not purchased for income-generating purposes.

Cost Approach:
Not typically used.
Difficult to allocate costs and depreciation to a limited-use timeshare interest.

Mathematical Considerations:

Present Value of Future Use (for non-deeded interests):
For right-to-use interests, the present value of the right to use the timeshare unit over the remaining term can be calculated.
PV = Σ [Benefit_per_period / (1 + r)^t]
Where:
PV = Present Value
Benefit_per_period = Monetary value of using the timeshare for each period (e.g., weekly rental rate minus maintenance fees)
r = Discount rate reflecting the risk and opportunity cost
t = Time period (years)

Practical Applications and Related Experiments

Cooperative Case Study:

Property: A 50-unit cooperative building in Manhattan.
Valuation Task: Determine the market value of a two-bedroom apartment.
Data Collection: Gather recent sales data for comparable apartments in the building and nearby cooperatives.
Analysis: Analyze the financial statements of the cooperative corporation, including reserve funds and operating expenses.
Adjustments: Adjust comparable sales for differences in size, condition, floor level, views, and financing terms.
Conclusion: Develop an opinion of market value based on the adjusted sales data and analysis of the cooperative’s financial health.

Timeshare Experiment:

Objective: Determine the impact of seasonality on timeshare value.
Methodology:
Collect sales data for the same timeshare unit during different weeks of the year.
Analyze the data to determine the premium for prime weeks (e.g., summer or holiday seasons).
Calculate the percentage difference in value between prime and off-season weeks.
Results: Quantify the impact of seasonality on timeshare value.

Conclusion

Cooperative ownership and timesharing present unique valuation challenges. Appraisers must understand the legal and financial structures underlying these ownership models and apply appropriate valuation methodologies. The sales comparison approach is the primary method for both property types, but the analysis requires careful consideration of market segmentation, adjustments for specific property characteristics, and the cooperative or timeshare corporation.