Time is of the Essence: A Proposed Model for Computing the Discount for Lack of Marketability

Abstract

Abstract This article proposes that the essential factor giving rise to a discount for lack of marketability (DLOM) is the inability to immediately sell the property being appraised and the uncertainty as to the future time of sale. It is also proposed that dividends, whether paid or not, do not affect the DLOM but that a failure to pay dividends consistent with the pre-DLOM value is properly considered in a discount for lack of control. The model proposed here for the DLOM is a function of three factors: (1) the future value as a function of time, (2) the probability of sale as a function of time, and (3) the present value as a function of time. A closed-form expression of the model is provided for the unique situation involving a prediscount valuation using a capitalization method with a constant growth rate and a uniform distribution of the probability of sale over time.