Divorce Appraisals of Commercial Property in California: Valuing Buildings, Land and Portfolios in a Marital Estate

A family home is one appraisal. A marital estate with a strip center, two apartment buildings, a warehouse held in an LLC and a vineyard is a different job. The numbers drive who keeps what, how much one spouse pays the other, and sometimes how much goes back to a spouse for separate property put into a building. This guide is for family law attorneys, CPAs, mediators and spouses who need to know what the appraisal has to do in that situation.

This is general information, not legal or tax advice. Talk to your attorney or CPA about your case.

Who decides what is community property, and what does the appraiser do?

Under Family Code Section 760, property a married person acquires during the marriage while living in California is community property, except as otherwise provided by statute. Under Section 770, separate property includes property owned before the marriage, property acquired by gift, bequest, devise or descent, and the rents, issues and profits of that property. Section 2550 has the court divide the community estate equally unless the spouses agree otherwise in writing or in open court.

Deciding which buildings are community, separate or mixed is the job of the attorneys and, if they disagree, the court. The appraiser’s job is the value of the real estate. A good appraisal makes that split easy by valuing each property separately, stating exactly what was appraised (the fee simple, a leased fee interest, or a share), and giving values as of each date the attorneys ask for.

What valuation date does a California divorce use?

The default rule is in Family Code Section 2552:

• The court values community assets and liabilities as near as practicable to the time of trial.
• On 30 days’ notice by the moving party, and for good cause, the court may value all or any part of the assets at a date after separation and before trial, to divide the community estate equally in an equitable way.

Spouses who settle can agree on a date in their settlement. For commercial property, the date matters because rents, vacancy, cap rates and interest rates can move a lot between the separation and the trial. Tell us every date in play before the work starts so each value is supported by market data from that time.

Why would you need a value as of the date of separation?

Family Code Section 70 defines the date of separation as the date a complete and final break in the marital relationship occurred, shown by a spouse expressing the intent to end the marriage and acting consistently with it. That date can be disputed, and it is the attorneys’ call. Once it is set, a value as of that date can matter in several ways, for example:

• Separate property contributions. Under Family Code Section 2640, a spouse who can trace a down payment, improvement payments or loan principal payments on community property to a separate property source is generally reimbursed, unless that right was waived in writing. The reimbursement is without interest or adjustment for changes in monetary values and can’t exceed the property’s net value at the time of division, so the current value of the building matters too.
• Growth after separation. When one spouse ran or improved a property alone after the split, the attorneys may want values on both dates.
• Apportionment. When a building was separate property but community money or effort went into it during the marriage, the attorneys may need values at more than one point in time.

A retrospective appraisal values the property as of a past date using the sales, leases and market conditions known as of that date. It does not use hindsight about what happened afterward. Which method of apportionment applies is a legal question for your attorney.

How do you value several commercial properties consistently?

When a marital estate holds a portfolio, consistency matters as much as any single number. If one building is valued with today’s cap rates and another with last year’s, the division can be off before anyone argues about it. For a multi-property portfolio appraisal in a divorce, we:

• Use the same effective date, or the same set of dates, for every property.
• Apply the same market assumptions across similar properties, so an apartment building in Long Beach and one in Riverside are measured the same way.
• Value each property separately, so the attorneys can assign each one to a spouse and test different splits.
• Note leases, deferred maintenance, vacancy, environmental questions and other issues that affect each property’s value in plain words.

That works for any mix of property types: office, retail, industrial and warehouse, multifamily, mixed-use, gas stations, hotels, land, farms and vineyards, special-purpose buildings and new construction. Our team covers every county, from San Diego and Orange County to Fresno, Bakersfield and the Bay Area.

What if an LLC or partnership owns the buildings?

Many couples hold commercial property through an LLC, a partnership, or with partners outside the marriage. In that case, two separate questions come up:

1. What is the real estate worth? That is what we appraise: the market value of each property the entity owns.
2. What is the spouse’s interest in the entity worth? That depends on the entity’s loans, cash and other assets, the operating agreement, and sometimes discounts for a minority or non-marketable interest. That part of the analysis belongs to a business valuation specialist or the CPA, who use our real estate values as an input.

When spouses own a property together with other people, see fractional interest appraisals. When a divorce forces a buyout of a business partner, see partner and LLC buyout appraisals.

What do the disclosure rules mean for the appraisal?

Under Family Code Section 2104, each spouse serves a preliminary declaration of disclosure that identifies all assets in which the spouse has or may have an interest, regardless of whether they are community or separate, along with the percentage owned when the property is not solely owned by the spouses. The petitioner serves it with the petition or within 60 days of filing.

That list is a natural starting point for the appraisal scope. If an asset is left out of the judgment, Section 2556 gives the court continuing jurisdiction to divide community assets that were not adjudicated, generally equally. A building discovered after judgment may still need an appraisal later, and possibly as of more than one date.

How do property tax and income tax rules treat the transfer?

Two rules come up often when a building moves from one spouse to the other:

• Property tax. Revenue and Taxation Code Section 63 says interspousal transfers are not a change in ownership, including transfers to a spouse or former spouse in connection with a property settlement agreement or decree of dissolution, and distributions of a legal entity’s property to a spouse or former spouse in exchange for that spouse’s interest in the entity. So a transfer under the divorce generally does not reset the assessed value.
• Income tax. Under Internal Revenue Code Section 1041, no gain or loss is recognized on a transfer to a spouse, or to a former spouse when the transfer is incident to the divorce. The property is treated as a gift and the spouse who receives it takes the transferring spouse’s adjusted basis. Two buildings with the same market value can carry very different built-in gains, which is why CPAs often ask for both value and basis information.

Talk to your attorney or CPA about how these rules apply to your property and whether any filing is needed. Our part is a supported market value they can rely on.

Should spouses hire one appraiser or two?

Both approaches are common. A jointly retained appraiser can save money and time when the spouses agree on the scope and the dates. Separate appraisers are common when the case is contested or the values are large. Either way, the appraisal should be independent. Our opinion of value is the same whoever orders the report, we never pick a number to help one side, and our fee is never tied to the value. When the other side already has an appraisal, an appraisal review can test whether its data and reasoning hold up. See litigation appraisals.

What should you send to get started?

The faster we have the documents, the faster the work goes. For each property, send what you have of:

• The address or parcel number, and who holds title (the spouses, one spouse, a trust or an entity).
• The dates the attorneys need: current, date of separation, or another date.
• Rent rolls, leases and operating statements, ideally for the year before each valuation date.
• Recent capital improvements, deferred maintenance, environmental reports and any pending sale, listing or offer.
• For land and farms, water information, crop and planting details and any Williamson Act contract.
• The contact for access, often a property manager.

Then call or text (805) 990-9700. You talk directly to the appraiser on your assignment, not a coordinator or an appraisal management company. As Paul puts it, we pick up the phone, and we are your ears and eyes on the property.

Do you also appraise the family home?

Yes. Commercial and investment property is our core work, and we appraise the family home, vacation home or rental houses alongside it for the same clients, so every property in the estate is valued on the same dates. See divorce appraisals for the service overview.

Divorce work is one example of what we do. PM Appraisal prepares every kind of commercial appraisal report, including lending, date-of-death and estate, trust, partition, litigation and retrospective appraisals, for every commercial property type across California. Rush commercial appraisals in 5 to 7 business days.

Keep reading

• Divorce appraisals in California
• Multi-property portfolio appraisals
• Retroactive and retrospective appraisals
• Partner and LLC buyout appraisals
• Fractional interest appraisals in California
• Litigation and partnership dispute appraisals

This article is general information, not legal or tax advice. Talk to your attorney or CPA about your situation.