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Understanding Blockage

Posted Aug 15, 2014
Written by Fran Zeman
Category General

The concept of blockage refers to a discount that would apply to the valuation of a large group/groups of “similar” properties that would hypothetically enter the marketplace on/about the same date. Originally based on the effects this would have in the securities market (stocks), blockage has been expanded and used for personal property valuations, particularly in the instance of artists’ estates, and even large collection holdings. Legal precedents regarding the concept of blockage have been established by several high profile Tax Court cases involving properties created by David Smith, Georgia O’Keeffe, Andy Warhol, and Alexander Calder (to name a few). Blockage is related to market absorption rate, or the ability of the market to absorb these properties in a reasonable amount of time; the concept of blockage is also related to what are termed “mass appraisals”. The definition for mass appraisal can be found in USPAP.    

While the concept of blockage is a consideration in estate appraisals involving significant numbers of holdings, it may not be applicable, depending on the properties and/or the particular assignment. An experienced and accredited appraiser knows that every appraisal assignment is different and, particularly with matters relating to estate and gift tax, that there will be one or more (or even a team of) professionals with whom to consult. It is incumbent upon the appraiser to know what questions to ask of others and to provide a professional opinion based on applicable background research. There is no such thing as “an across-the-board-discount”, nor is there an arbitrary assignment of a discount percentage. It takes extensive experience to recognize that value conclusions are based on factors reported by the “marketplace”. Only by studying and tracking market history and trends related to the properties being appraised is one able to quantify and establish probable results. When the assignment does call for applying a blockage discount, others (a business valuations appraiser and/or economist) should most definitely be involved.