Household income data: Focus on the median, not average household income

  

Yes! That’s him! That’s Vernon Martin, the author of "The International Appraiser" blog, the blog that grabbed me and wouldn’t let me go and forced me to read it 790,000 times! He's worse than Epstein!

For retailers or housing developers, which datum should be used:  average household income or median household income?  Average is another name for the mean of the sample.  The median is the number that bisects the sample into halves.  It is at the exact middle of the sample when numerically ordered.

Median income is typically lower, and it is the statistic relied upon by retailers, for good reason. 

Let us look at the example of Irwindale, California, a southern California city of 423 households, a median household income of $113,250 per year and average income of about $121,972 per year.  What would happen to these statistics if Elon Musk moved to Irwindale?  Let us assume that Mr. Mr. Musk is earning $1 billion per year.  

The median household income would change little, perhaps to $113,251, the next wealthier household on the totem pole.

 The average household income would jump enormously, calculated as follows:

 (423 x 113,250 + 1,000,000,000)/424 = $2,471,473 = avg household income

 The average household income in Irwindale would have increased more than 20-fold with the entry of the Musk household.

 Which figure would matter more to the local supermarket?  Will it sell 20 times as many groceries?  Will the carwashes wash 20 times as many cars?  Will 20 times as many homes be sold?  I rest my case with these rhetorical questions.

 With few exceptions, the median household income statistic is the one that retailers and homebuilders rely on.

 Any broker, owner, or consultant who provides unsolicited data on “average household income” in a property’s area is trying to mislead someone.

Further Discussion of the Value Lost in Dividing an Estate into Partial Real Estate Interests for each Heir

German apartment building
 

It is natural for many parents to want to divide an estate into equal interests for all heirs, but this post which follows up Paul Palley's post last week will present a quantitative explanation of the how much value is lost when a whole property is divided into partial interests.  This case was a German estate in which an American daughter was given the same partial interests as her German aunt.

The estate consisted of 3 apartment buildings and one office building in Germany, and each was given a 50% interest by the will.  Unfortunately, appraisers must discount the value of partial interests for the following 9 reasons.

1. Risk of asset (such as increasing vacancies in the market).

2. The steadiness of earnings of the property.

3. Property condition and remaining physical life.

4. Growth potential

5. Diversification (is it just a single asset?)

6. Quality of management (Is it professionally managed or just managed by one of the heirs?)

7. Size of the interest. The smaller the interest, the higher the discount.

8. Lack of control. Having an interest of 50% or less presents control issues.

9. Liquidity. (Is this is a functional apartment buildings or an abandoned K-Mart?)

The following spreadsheet indicates how much value was lost in this distribution of assets:

Notice that the daughter (my client) would have had real estate interests worth 2,787,000 Euros rather than 2,270,000 Euros, a 23% increase.

My 93-year-old mother had the same idea about dividing up her estate -- 50% split down the middle shared between my brother and me. She had two significant assets, a home in Tennessee and a rare Nicolo Amati violin from year 1666. Nicolo Amati trained the world's most renowned violinmakers such as Stradivarius and Guarnerius and his son Giralamo in the town of Cremona, Italy, the world's finest violin-building city.

Then she found that a clerical error had already placed my brother's name on the deed to her home and she realized she could not split up her estate in the way she intended.  I sent the violin to Kenneth Warren and Sons in Chicago for appraisal, and it was estimated to be worth about $200,000, which coincidentally was approximately the worth of her home.

Now my brother and I could inherit whole assets rather than partial interests.  I think it worked out slightly better for him, as I sent the violin for auction in London. The authenticators in London peered with an ultraviolet pen light inside the violin and saw that someone had scratched out the year 1686 and replaced with it 1666. Nicolo Amati died in 1684, before 1686. The authenticators knew, however, that Giralamo Amati kept on using his father's name in the manufacture of his instruments, and it was still an excellent violin, but I had to settle for a slightly lower price of approximately $160,000.

Meanwhile Zillow places a value of $215,600 on the value of the home, which my mother continues to live in.  All is considered fair, though, because of the sweat equity he put into that home.

Estate planners and attorneys should re-read the previous guest post by Paul Palley for the various methods of avoiding partial interest value devaluation of real estate assets.

Guest Post: Estate Attorney Paul Palley explains the problems when estates are divided into "partial real estate interests".

 

Chicago estate attorney Paul W. Palley

Much of my international appraisal work involves estates.  It sometimes dismays me that a decedent leaves his estate in the form of partial real estate interests, particularly when the heirs are in different countries, and the heirs don't know each other well.  Partial interests are usually valued and marketed at discounts.  

In this guest post, Paul W. Palley, Esq.,explains ways of maximizing real estate values for the heirs. 

"Don’t Discount Your Legacy: How to Avoid Devaluation When Leaving Real Estate in a Will

 When a will includes multiple pieces of real estate—especially commercial properties—dividing those assets among several beneficiaries can create unintended financial consequences. One of the most overlooked risks is the devaluation that occurs when beneficiaries inherit partial interests in real estate. This is particularly true for commercial properties, where the sale of a minority or fractional interest often triggers a discounted appraisal.

 Understanding how and why this happens—and planning accordingly—can help preserve the full value of your estate and prevent conflicts among heirs.

 The Problem with Partial Interests

When a person dies owning a commercial property and leaves it equally to three children, for example, each child inherits a one-third interest. On paper, this might seem fair. But in the real world, that fractional ownership may be worth significantly less than one-third of the property’s total value.

 Why? Because a one-third share in a commercial building isn’t easily sold on the open market. It offers no control over the property’s operations and comes with limited liquidity. As a result, appraisers apply what’s called a valuation discount—often for lack of control and lack of marketability. Depending on the property, these discounts can range from 10% to 40%, substantially reducing the value of what each heir receives.

 Real-World Example: The Family Retail Plaza

 Consider a real-world-style scenario: a man owns a small retail plaza that generates monthly rental income. In his will, he leaves the property equally to his three adult children. The plaza is appraised at $1.5 million. However, each one-third share is valued at only $300,000 instead of $500,000 due to the valuation discount applied for lack of control and marketability.

 Now the estate shows $900,000 in value rather than $1.5 million on paper. This not only reduces the apparent size of the estate for estate tax purposes (which may be a benefit in some cases) but also leaves the heirs with illiquid, discounted assets that are difficult to use, sell, or manage.

 What could have been a straightforward inheritance has now become a source of frustration—and financial loss.

 

Solution 1: Direct the Sale of Real Estate in the Will

 

One of the simplest ways to avoid this problem is to direct your executor to sell the real estate and divide the proceeds among your beneficiaries. By doing this, you ensure that:

• The property is sold at full market value (not discounted).
• Each beneficiary receives their fair share in liquid cash.
• Disputes over management or sale decisions are avoided.

 

This approach works well when none of the beneficiaries wants to keep the property.

 

Solution 2: Use a Trust to Hold and Manage the Property

 

If your goal is to preserve the income from a property or keep it in the family long-term, a trust may be the better option. A revocable living trust or testamentary trust can hold the property after your death and provide instructions for:

• Who manages the property (a trustee or property manager).
• How income is distributed to beneficiaries.
• When and under what conditions the property can be sold.

 

Because the trust holds title to the property as a whole, beneficiaries receive distributions from a unified interest—not discounted fractional shares.

 

Solution 3: Create a Family LLC

 

Another strategy is to transfer real estate into a limited liability company (LLC) either during your lifetime or through your estate plan. In this case, your will or trust would pass LLC membership interests to your heirs instead of the property itself.

 

This setup offers:

• Centralized management through designated managers or majority voting.
• Flexibility for heirs to buy out one another.
• Asset protection and potential tax benefits.

 

Just like with trusts, this helps avoid the sale of unwanted fractional interests and supports long-term planning.

 

Balancing the Estate Fairly

 

What if only one beneficiary wants the property while others would prefer cash?

 

In that case, your estate plan can equalize inheritances by:

• Leaving the property to one heir and giving other heirs equivalent value from other assets.
• Using life insurance to provide liquidity to balance out the distribution.
• Giving the executor the power to sell the property to a third party or to a beneficiary who can buy out the others.

 

Careful appraisals and clear instructions can make this process transparent and fair, reducing the likelihood of disputes.

 

Work with a Professional Team

 

Real estate adds a layer of complexity to estate planning that calls for professional input. In particular:

• A qualified estate planning attorney can help you structure your plan to reflect your goals and protect your beneficiaries.
• A real estate appraiser can provide accurate valuations and explain how discounts may affect the estate.
• A tax advisor can help you evaluate the impact on estate taxes and potential capital gains.

 

Your estate plan should reflect not only what you own but how you want to preserve its value and minimize friction among your heirs.

 

Conclusion: Don’t Let Your Legacy Be Discounted

 Owning multiple properties—especially commercial ones—is a sign of financial success. But that success can be eroded if the assets are divided without considering the impact of partial interests and valuation discounts.

 With thoughtful planning, you can ensure your real estate is passed on at full value, distributed fairly, and handled in a way that honors both your wishes and your family’s needs.

 Whether that means selling a property, creating a trust, or forming an LLC, the right strategy can help you avoid a discounted legacy—and leave behind a gift that truly reflects your life’s work."

"Mr. Palley is an estate planning attorney in private practice in Chicago, Illinois. Educated at the University of Chicago (AB), and DePaul University (JD), Mr. Palley serves clients throughout the greater Chicago area, from young adults just starting out up to high net-worth individuals with complex estates to those needing help with probate after the loss of a loved one. Visit his website at https://palleylawoffice.com/ or contact him directly at ppalley@palleylawoffice.com"

Thank you, Paul, for your words of wisdom.  Paul is a licensed Illinois attorney who I have known for 50 years.

As most of my clients are in California, I can also recommend attorney Anthony Diosdi in San Francisco.  Our Team - Anthony Diosdi | SF Tax Counsel

The Helms-Burton (“LIBERTAD”) Act of 1996 and resultant property claims from the Cuban Revolution of 1959

 Fidel Castro, Cuban revolutionary leader

The Helms-Burton Act, signed by President Clinton in 1996, allows all U.S. owners of properties seized by the Castro government in Cuba to sue for compensation from the current foreign (non-Cuban) owners of these properties. These properties were generally seized between the years 1959-1961. OFAC prevents litigation against Cuban owners of these properties.

The enforcement of this Act was suspended by subsequent presidents for diplomatic reasons, and President Obama was particularly interested in normalizing relations with Cuba. Also, foreign ownership of Cuban properties was not allowed until Cuba’s Foreign Investment Act of 2014. 

Now there is a new fearless leader, President Donald Trump, who has declared the Act to be enforceable. This will be fun for any appraiser who appraises in Cuba. 

The first defendants in these actions have been Carnival Cruise Lines and French distiller Pernod Ricard. Other foreign rum distillers are also involved. 

This Act benefits U.S. corporations, as well as Cuban exile families who are now U.S. citizens, basically the children and grandchildren of the original Cuban property owners who lost their properties to the Castro Revolution and fled to the United States. (Carnival, however, is an American corporation that did not exist at the time of the Castro revolution.) But litigation is only allowed against non-Cuban owners of these properties.

The Helms-Burton Act, which is rather vague in its language, suggests that the plaintiffs are entitled to 3 x the value of the property at the time of its taking by the Castro regime, to be paid by the current non-Cuban owner of the property, so the litigation only makes sense for large properties not inhabited or owned by Cubans. Valuations at the time of the taking of a property are consistent with eminent domain theory throughout the world. That's the only way it can work.  What if a foreign company erected a one billion dollar structure to the land since the taking? There is no legal precedent that would allow the former landowner to share a part of that, whether in a communist system or a capitalist system.

The lawsuits will be tried in U.S. civil courts and not involve the Cuban government as a co-defendant. Foreign owners face severe penalties in the U.S. if they do not pay the judgment. Likewise, US OFAC has severe penalties for Americans trying to take back properties from Cubans.

There are about 6000 government-certified claims so far for the Helms-Burton Act.

Religion and Real Estate: Obituary for former client Televangelist Reverend Jimmy Swaggart

Rev. Swaggart begging forgiveness for his satanic attraction to prostitutes. But in all fairness, he never touched them; he just left little Jimmy hanging out of his pulpit.

In 2003 I was a review appraiser working for a Florida investment bank that later got absorbed into Blackstone. They sent me in February 2003 to review 11 appraisals in New Orleans and Baton Rouge.

The properties in Baton Rouge were part of the Jimmy Swaggart World Ministries campus in Baton Rouge, Louisiana, located on valuable land situated next to the local regional mall. And Jimmy Swaggart was the sole owner of the 100-acre Ministries Campus.

I spent the day before in the den of iniquity known as the French Quarter in New Orleans, reviewing 8 appraisals. That evening I stayed in my motel room to watch and study the Jimmy Swaggart show. The sermon that night was “Do Not Worship the Counterfeit Jesus”.  I found his sermon to be most confusing, but he did sometimes break to commercial to promote a cassette tape that explained it all. So that’s where the money comes from. Actually, at the time of my visit, his revenues were a 9-figure number. He was an ideal banking client.

“Brother Swaggart” actually made about 20 minutes of time available to personally talk to me, and he stayed in character for a truly memorable performance.  He talked a lot but didn’t listen much.

What Rev. Swaggart was doing was subdividing properties from his campus to serve as collateral for loans. Rev. Swaggart was actually a competent real estate developer who built very functional warehouse properties without making them white elephants like other holy men sometimes do.

I asked him what he needed the loan proceeds for, and he told me that he wanted to buy radio stations, and lenders won’t take radio stations as collateral, so he had to subdivide his ministry property as collateral.  I asked how many radio stations he wanted and he said he wanted radio stations in 48 states. So I asked “You mean radio stations in the 48 continental United States?” and he said “No, every state except Mississippi and Arkansas, because those people don’t have any money, anyhow.” Maybe he was joking.

The Swaggart Ministries Campus has a bible college, TV studio and radio station.  When I was at the TV station I watched the producers editing one of his appeals for money:

“Friends, if you truly love the word of God and want to walk with JESUS, get out your credit cards”.

So I have mixed feelings about Jimmy Swaggart.  On the positive side, he never lied to me, unlike many commercial real estate developers, but he didn’t have to, because he was so good at it, and he had millions of admirers in at least 100 countries, some claiming that he had healed or saved them.  On the other hand, I saw him as the world’s most successful Bible salesman, and perhaps sales were more important to him than saving souls. He died a very wealthy man.