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Judge values minority interest at $12M.

A judge earlier this month ruled that the minority interests of two Koeppel sisters in their family's real estate was valued at $12 million each.

Adam B. Gilbert, the Shea & Gould litigator who tried the case on behalf of the sisters, said, "it was a great decision and an excellent result for the client. It clarifies again that you can't lower the value of the stock to a minority just because they are a minority."

The sisters, Selma K. Friedman and Grace K. Gold, protested certain legal moves in 1986 by two other sisters and two brothers when they tried to change the way the estate of their late father, Max Koeppel, held certain New York City office buildings.

Each of the nine buildings originally in question was held as a single-asset corporation and the other siblings sought to restructure them into partnership entities. They discounted the sisters minority holdings, however, and tried to pay them $5.9 million each for their one-sixth shares, leading to the current lawsuit.

"We got twice as much as they offered us," said Gilbert.

Neither brother, Bevin nor Albert Koeppel, would comment on the decision and their attorney would not comment as he had not spoken yet with his clients.

Judge Stanley Parness, who used his own valuation theory to come up with a $40 million refund in the One New York Plaza certiorari case against New York City -- also litigated by Gilbert, here also disagreed with the expert witness appraisers and came up with his own methodology.

Peter S. Brooks, MAI, CRE, a partner at Austrian Roth & Partners and immediate past president of the Appraisal Institute, said, "He's prolonging his reputation for independently coming to conclusions somewhat different than the two sides."

In an earlier portion of the Koeppel case, the judge valued the leasehold of 26 Broadway at $59.2 million after tossing out appraisal reports by the parties of $88 million and $52.1 million respectively. Other buildings owned in part by the sisters included 301 East 38th Street; 340 East 74th Street; 333 East 75th Street, 130 East 63rd Street, an office building at 87 Nassau, and three properties that were part of a strip center in Great Neck.

Caselaw holds that no discount may be imposed upon the value of minority shares in a close corporation solely by reason of their minority status. But, the judge noted in his Supreme Court decision in Friedman and Gold vs. Beway Realty Corp., these close corporations have a lack of marketability that must be factored into valuation. The shares were also subject to a restrictive shareholder agreement.

Justice Parness agreed for the most part with the latest Beway Realty appraiser, Kenneth McGraw, that Real Estate Investment Trusts (REITs) are most comparable to the subject properties. First McGraw used 13 comparable REITs discounted at 9.8 percent for share price relative to net asset value/share -- the value of the asset and not the underlying company.

The judge later deducted 9.4 percent in what could be a typo -- from a 30.4 percent discount that McGraw proposed for private placement stock.

The court used the remaining 21 percent as a discount for the illiquidity of the shares to come up with the final valuation, rejecting the brothers contention that a 70 percent discount should be used.

"If McGraw demonstrates a 30 percent discount, as I read it," said Brooks, "the judge says that makes sense, but it ineludes both the illiquidity and minority interest -- a lack of control factor -- that we should consider."

Deducting 9.4 percent, based on the REIT analogy, is a way of apportioning out how much of the 30 percent is due to the lack of control, added Brooks. "It's argument by analogy," explained Brooks. "There's a lack of hard evidence."

There are other cases Judge Parness cited where approximately 25 percent was used to determine the share value based on illiquidity but here, he notes, as single asset corporation with nominal debt, the buildings are marketable. Offers had been made on all of them and three, in fact, had sold after the valuation date. These favorable aspects justified the 21 percent discount, he said in the decision.

Brooks said he thought it would be interesting to collect data on actual minority sales. "There is [a lot of] speculation of what [such a] discount should be," he explained.

"My own feeling is thathe is conservative and they might be eligible for a greater discount," Brooks continued. "Should somebody decide to appeal it, there is room for further conjuration."
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Title Annotation:case ruling valuation of minority interest of two heirs in estate containing New York, New York office buildings at $12 million
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Jul 28, 1993
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