Ownership of a minority interest in private real estate is very common. Structures include real estate funds, partnerships, real estate limited partnerships, joint-ventures and corporations. The fair market value of the minority interest is rarely worth its pro-rata share of en bloc 100% value, regardless of the structure.
Join Stephen Cole, FCPA, FCA, FCBV and Nikola Zivkovic as they discuss how the discount from en bloc value should reflect the following considerations, among others: the mutual expectations of the parties at the outset of the partnership and those that have evolved over time including what is outlined in any relevant agreements; the disadvantages of the minority interest relative to a control position in the subject real estate; the structure of the investment; the liquidity of the interest; the cash flow associated with the interest; the nature of the underlying real estate investment (for example, a development property versus a stable, cash flow generating property); opportunity cost; and the economic and industry conditions as at the valuation date.
There is extensive literature, academic studies and many Court decisions concerning discounts applicable to minority real estate interests. While these points of reference are helpful, their usefulness may be limited where the commentary is very fact specific and / or the data is not current. Many specific minority interests are unique, with their own set of facts, circumstances and value drivers. In these cases, the typical rules of thumb are only a starting point to arriving at a fair market value reflecting the right discount.
One accurate way to determine the value of a minority interest (and by extension its discount from en bloc value) is to determine the value of discounted cash flows anticipated to the minority shareholder. Similar to the Quantitative Marketability Discount Model advanced by Chris Mercer, the prime drivers of the fair market value of a minority interest in private real estate are:
The webinar will discuss the above and hopefully not fall prey to the trap Paul Simon so aptly described in his song entitled ‘So Beautiful or So What’:
“Ain’t it strange the way we’re ignorant
How we seek out bad advice
How we jigger it and figure it
Mistaking value for the price…”