Partner and LLC Buyout Appraisals in California: Valuing the Real Estate Behind a Buyout

Families and investors hold a lot of California commercial real estate in partnerships and LLCs: two brothers and a sister who own a strip center and a few apartment buildings, three investors in a small industrial portfolio, a family LLC that inherited a mix of everything. Sooner or later someone wants out. A partner retires, a member dies or divorces, or the owners stop agreeing. However it starts, the buyout turns on what the real estate is worth. This guide covers what attorneys, CPAs and partners should ask for, and where the appraisal fits in a California buyout.

When does a partnership or LLC buyout need a real estate appraisal?

Almost any time the entity’s main assets are real estate. Common situations include:

• A negotiated buyout. One owner wants out and the others want to keep the properties. Both sides need a number they can trust before they negotiate.
• A buy-sell clause is triggered. Many partnership and operating agreements require a buyout on death, disability, retirement, divorce or a transfer, and many say how the price is set, sometimes by appraisal.
• A partner dissociates. Under the California Uniform Partnership Act, when a partner is dissociated and the business continues, the partnership must buy the dissociated partner’s interest (Corporations Code Section 16701).
• A dissolution lawsuit. When an LLC member sues to dissolve the company, the other members can avoid dissolution by buying out the members who brought the case (Section 17707.03). Corporations have a parallel rule in Section 2000.
• An estate holds the interest. When a member dies, the trustee or executor may need date-of-death values for the entity’s properties for tax reporting and for the buyout. See our date-of-death appraisals.
• A loan funds the buyout. The remaining owners often refinance to pay the departing owner, and the lender will want its own appraisal. See hard money and private lender appraisals.

What do the agreement and California law say about price?

The agreement comes first. For partnerships, Corporations Code Section 16103 says relations among the partners are governed by the partnership agreement, and the statute applies to the extent the agreement does not provide otherwise. LLC operating agreements work the same way under Section 17701.10, with some exceptions. Look for the valuation date, the standard of value (fair market value, fair value, book value or a formula), who picks the appraiser and whether the price includes any discount. Those terms decide what the appraisal has to answer.

Partnerships with no buyout terms. Section 16701 sets the default. The buyout price is the amount that would have been distributable to the dissociating partner if, on the date of dissociation, the partnership’s assets were sold “at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner” and the partnership was wound up as of that date. Interest runs from the date of dissociation. If no agreement is reached within 120 days after a written demand, the partnership must pay its own estimate in cash, with a statement of assets and liabilities and an explanation of how the amount was calculated. A court can later fix the price and may assess the fees of appraisers or other experts against a party that acted arbitrarily, vexatiously or not in good faith. For a partnership that mostly owns buildings, the market value of each building is the backbone of that calculation. (Section 16701 does not apply to a dissociation within 90 days before a dissolution, under Section 16701.5.)

LLCs in a dissolution case. Under Section 17707.03(c), the other members may avoid dissolution by purchasing the moving members’ interests for cash “at their fair market value.” If they cannot agree on that value and post the required bond, the court stays the dissolution and “shall appoint three disinterested appraisers to appraise the fair market value of the membership interests.” Section 17701.10 says an operating agreement cannot vary this buyout remedy.

Corporations. Section 2000 uses “fair value,” determined on the basis of 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,” and also provides for three court-appointed appraisers when the parties cannot agree.

The statutes value an ownership interest, not a building. But when the business is owning real estate, every one of these formulas starts from what the properties are worth.

General information, not legal advice. Your attorney decides which rules apply to your entity and your agreement.

Is the buyout price the same as the appraised value of the real estate?

No. Think of it in layers:

1. The real estate. A market value for each property, supported by sales, income and, where it fits, cost analysis. This is our work.
2. The entity. Add cash and other assets, subtract the loans and other liabilities. Your CPA usually handles this layer.
3. The interest. Apply the agreement’s terms. If the agreement or the law calls for it, a business valuation specialist may analyze discounts for a minority or non-marketable interest.

We appraise the real estate. We do not value the membership interest or partnership interest itself, and we do not provide discount opinions. That is a separate business valuation, and your attorney or CPA can bring in that specialist, who will usually rely on a real estate appraisal for layer one. Our guide to fractional interest appraisals explains why a share of a property is not automatically worth its percentage of the whole.

Which valuation date should the appraisal use?

The one the agreement or the law points to. That might be the date of death, the date of dissociation, the date a dissolution case was filed, the end of the fiscal year or a date the parties agree on. Under Sections 17707.03 and 2000, the court can set a different date for good cause.

Buyouts often run months behind the date that matters, so the appraisal is frequently a retrospective appraisal as of a past date. That is routine work for us. We use the sales, leases and market conditions that were known or knowable as of that date. If the parties also want a current value, for a refinance or a settlement, both can be in the scope.

Why should every property be appraised the same way?

Because in a buyout, consistency is fairness. If one building is valued by an appraiser who leans conservative and another by one who leans aggressive, someone on the other side of the table will notice. The same valuation date, the same standard of value and the same approach to things like deferred maintenance, below-market leases and vacant space keep the numbers comparable and defensible.

This matters even more when the entity owns property in several counties. PM Appraisal appraises every commercial property type in every California county, so a family LLC with apartments in Los Angeles, a warehouse in the Inland Empire and land in San Diego County can be handled by one firm with one point of contact. See multi-property portfolio appraisals. If the owners plan to divide the properties instead of paying cash, a value for each property is what makes a fair split possible.

Can a buyout trigger a property tax reassessment?

Yes, and it catches people off guard. Under Revenue and Taxation Code Section 64(c), when a person or entity obtains control of more than 50 percent of a corporation’s voting stock, or a majority ownership interest in a partnership, LLC or other entity, the purchase is treated as a change in ownership of the real property the entity owns. A buyout that takes one remaining owner from 50 percent to 100 percent can do exactly that. Section 64(d) adds a separate rule for some entities that received property in a transfer excluded from reassessment: when the “original coowners” cumulatively transfer more than 50 percent of the interests, the property is reappraised.

The paperwork has a short clock. The new controlling owner must file a change in ownership statement with the State Board of Equalization within 90 days (Section 480.1), and under Section 480.2 the entity must file when the original coowners’ transfers cross the 50 percent line. Missing the deadline carries a penalty of 10 percent of the taxes on the new base year value. If the assessor’s new value looks too high, a supported appraisal is the evidence for an appeal; see property tax appeal appraisals.

General information, not tax or legal advice. Talk to your CPA or attorney about how these rules apply before the buyout closes.

Can both sides use the same appraiser?

Often, yes. In a negotiated buyout, the owners frequently agree on one appraiser and share the report, which saves time and money and keeps the discussion on the numbers. Some agreements instead have each side choose an appraiser. Either way, tell us at engagement who the client is and who will rely on the report, because USPAP requires the appraiser to identify the client and intended users at the start. Our opinions are independent. We never take an assignment that requires a predetermined value, and our fees are never tied to the result.

If the buyout is already in litigation, talk to your attorney about how the appraisal will be used. We provide appraisals for litigation and partnership disputes, partition actions between co-owners and divorce matters where a spouse’s interest in an entity is part of the marital estate.

What should you send the appraiser?

• The valuation clause from the partnership or operating agreement, and the valuation date
• A list of every property with address, APN and property type
• Rent rolls and copies of leases for income property
• Two to three years of operating statements and the current budget
• Recent capital work, known deferred maintenance and any pending repairs
• Any prior appraisals, purchase contracts or offers
• Who the client is, who else will rely on the report, and one contact for property access

Your appraiser will confirm the exact list on the first call.

How do attorneys, CPAs and partners work with PM Appraisal?

You call (805) 990-9700 and talk to the appraiser who will inspect the properties and write the reports. No coordinator and no AMC portal. We pick up the phone, and we are your ears and eyes on the property. Rush commercial appraisals take 5 to 7 business days. Standard timing depends on the property and scope, so call for a timeline on your assignment.

Buyouts are one example of what we do. PM Appraisal is a family-owned California appraisal firm with about 40 years of work across the state. We appraise every commercial property type, from office, retail, industrial and multifamily to gas stations, hotels, land, vineyards, medical, care facilities and special-use property, and every kind of commercial appraisal: estate and trust, date of death, divorce, retroactive, partition, eminent domain, tax appeal, casualty loss, lending and consulting. See all services.

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

Keep reading

• Litigation and partnership dispute appraisals
• Multi-property portfolio appraisals
• Partition action appraisals in California
• Fractional interest appraisals in California
• Retroactive and retrospective appraisals
• Commercial appraisal in Los Angeles

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