Share and Share Alike

Welcome to the annual shareholders meeting. As board president, you’re proud to announce that, due to the board’s fiscal prudence, the market value of the building has gone up over the past year and now everyone’s shares are worth 10 percent more. Then comes cheerful applause, maybe even a couple of voices piping up, “Well!” and “That’s great!” Everybody’s happy. Okay, then, next agenda item: board elections!

Everyone loves it when share value goes up. It’s like owning a hot stock. Yet how well does share value translate to market value? Is it genuinely useful or more of a feel-good factor? When it comes to determining what a co-op or condo apartment is worth, is share value a good yardstick or something smaller – a “ruler” of thumb?

Sellers, after all, generally use the selling prices of similar apartments in their building as the core for determining an apartment’s value. “People talk of ‘selling my apartment’ rather than ‘selling my shares,’ even in New York City [with its long history of co-ops],” notes Doug Kleine, executive director of the National Association of Housing Cooperatives.

“Share value isn’t really a factor,” says Walter Molony, a spokesperson for the National Association of Realtors, which focuses on single-family homes and condos. “We look at the median sales price for actual transactions.” The formula for the increase in a typical home’s value, he says, is CPI [the U.S. Bureau of Labor Statistics’ Consumer Price Index] plus 1.5 points. And, of course, the Chicago-based Appraisal Institute has specific instructions for certified appraisers to use – and share value doesn’t enter into them.

Should it? “If I want to evaluate what a prospective sale should be,” explains attorney Edward Braverman, senior partner of longtime co-op and condo specialist Braverman & Associates, “I take recent sales in the building, add them up to get the total selling price, add up all the shares represented by that number, divide the number of shares into that gross price, and get a value per share. Then I apply that value to the number of shares in the apartment I’m looking at.” He cautions, however, that such estimates “can’t be totally mechanical. You have to apply some common sense based on the market during the period of time you’re talking about. You have to adjust. Is the market down five percent? [If it is,] you have to adjust your figure down five percent.”

You also may want to adjust your figure up – as boards and shareholders naturally like to do – by factoring in capital improvements. After all, the argument goes, if you’ve just spent $10 million on a spanking-new roof, or a million dollars on landscaping and other aesthetic improvements, doesn’t that make the value of the building go up? And shouldn’t that extra value be divided among the shares?

“Yes and no,” says Dr. David C. Colander, an economics professor at Middlebury College, in Vermont. He agrees that some new way of determining value is needed – the old CPI-plus-1.5 “worked in the past, but probably not in the future,” he notes. Dr. Markus K. Brunnermeier, an assistant professor of economics at Princeton University, concurs. “Using just the CPI would be crude. You can look instead at subcomponents of the CPI. For example, food expenditures might not have as much of an effect as the housing component would.”

Colander, on the other hand, “wouldn’t even use the housing portion of it, because even in one city, you can have one area going up 20 percent, and another going down 20 percent, on the same day.”

So there it is: share value is the aggregate of recent sales and capital improvements divided by the number of shares. Right?

Not quite. Colander says that simply dividing that hypothetical $10 million roof improvement into a per-share figure may not be an accurate reflection of share value. “You would hope it would increase your share value if a new roof was needed and the board made a good decision,” he explains. “But if you didn’t need a new roof and spent the $10 million, then it didn’t increase your value.”

And now here’s where the “yes” of “yes and no” comes in. Whether that metaphoric roof was needed or not, says Colander, “a seller can tell a buyer, ‘Oh, we got a new roof!’ So, share value would be used to try and convince people that the selling price should be higher than what it might be otherwise.”

That works both ways. All things being equal, says Brunnermeier, “you pay $10 million [for a new roof], you improve the value of the apartment house [by] $10 million.” Then comes the rub: “Of course, you also have to depreciate it.” A savvy buyer would factor in that “it’s not worth $10 million two years or five years or ten years later.”

There’s at least one other factor to consider: how much weight to give to the cost of an apartment’s monthly maintenance. Obviously, says Braverman, “if a building has unusually high maintenance, then the share value should go down. Someone who wanted to be really analytical would want to know how much the maintenance is compared to other apartments of the same size and amenities as in other buildings. The cost of an apartment’s maintenance is indicative of a lot of things.” The amount of mortgage-interest and real-estate-tax deductions also ought to be part of the share-value equation. And do you include non-resident shares, such as for commercial space, or break them out separately?

These things can be figured out; economists and statisticians have tools and formulas for these sorts of things, or can develop them. But before you go to the trouble of having someone do that for you, ask yourself: is share value a useful tool?

Surprisingly, given all the caveats, it just might be – even if only a psychological one. “The truth is,” says Braverman, “people aren’t that analytical when they go out and buy.” Colander refers to “the ‘turn-on’ value. People go in, and they’re either turned on by an apartment or turned off.”
And Brunnermeier sees the practical application of share value. “It helps you plan things,” he says. “It’s not just a feel-good.”