NY court affirms DLOM for statutory fair value of real estate holding company

Lawyers (and their financial experts) may recall Giaimo v. Vitale, a dissenting shareholder case that affirmed the application of a discount for lack of marketability (DLOM) to the statutory fair value of a company that owned 19 apartment buildings. Importantly, the lower court did not distinguish between the discount that might apply to a partnership versus a corporation that holds real estate, denying a DLOM based on a “control level of value” for the company shares. It also adopted a present-value discount for taxes on built-in gains (BIG), and the parties appealed.

In the most recent decision, the New York appellate court agreed that DLOM applies to the statutory value of a close corporation, but found that the marketability of a corporation’s real property assets was not the same as the marketability of its shares. Although the common factors might affect both the liquidity of corporate stock and real estate, the effects “are not the same,” the court held:

There are increased costs and risks associated with corporate ownership of the real estate in this case that would not be present if the real estate was owned outright. These costs and risks have a negative impact on how quickly and with what degree of certainty the corporations can be liquidated, which should be accounted for by way of a discount.

After reviewing the entire record—including evidence from the company’s expert estimating a DLOM from 8% to 30%, based on the build-up method as well as restricted stock and other studies, and applying a 20% DLOM—the court agreed the build-up method “best captured” the DLOM in this case, which should be 16%, it held (without much discussion). As for the BIG discount, the court rejected the parties’ respective arguments—that it should be dollar-for-dollar (the company) or zero (the dissenting shareholder)—and, like the prior court, affirmed the present value approach. Read the complete digest of Giaimo v. Vitale, 2012 N.Y. App. Div. LEXIS 8706 (Dec. 20, 2012), in the February 2013 Business Valuation Update; the court’s decision will be posted soon atBVLaw.