Business Valuations: An Overview of Discounts in Real Estate Holding Companies

In determining the value of a real estate holding company, the valuator must look at the element of control. Control is the ability to influence or direct the finances of a business, the large decisions of a business, and the day-to-day operations of a business.  Generally, the more control over the real estate holding company, the greater the fair market value of the interest in the real estate holding company. If there is a lack of control over the company, then a discount for the lack of control could be figured into the actual purchase price of the interest in the real estate holding company. Usually when trying to determine what the discount should be, valuators consider these three different factors: distributions, debt, and property type.

Partnership Profiles Inc. (PPI) publishes an annual survey titled Survey of Re-Sale Discounts to help determine the different values of real estate holding companies. The survey focuses on two entities: non-publicly traded real estate limited partnerships and real estate investment trusts. Focusing on those two entities, the survey reports the purchase price on a secondary market for the net asset value (NAV) of the noncontrolling interests.  To determine the discount on noncontrolling interests in real estate holding companies, PPI compares an entity’s NAV, divided in proportion to the amount of interest, and the actual trading price of the noncontrolling interest. This article is based off PPI’s observations.

If the non-publicly held real estate holding company has not disclosed a liquidation plan, then then the first element to consider is the company’s history in paying operating cash distributions and its current resources to pay operating cash distributions. The second element to consider is the company’s amount of debt financing.

In the past, PPI has reported that real estate holding companies with moderate to high amounts of debt usually had higher discounts than real estate holding companies with low to moderate amounts of debt. However, in PPI’s 2021 summary, PPI reported that there was not much of a difference between companies with high amounts of debt and low amounts of debt when it comes to a discount. PPI surmised that COVID has changed the amount of discount and that, currently, the best way to determine a company’s discount is to look at their dividends and the property type.

In addition to looking at a real estate holding company’s dividends, the investment structures and asset types can affect its discount amount. For example, if the company is holding undeveloped land, then it has a higher risk and does not give cash dividends to its investors. This would cause the company holding this land to have a higher discount. On the other hand, if the company is holding office space under a triple net lease, then the risk is not quite as high, and the property can return investments quickly. This would cause the company holding this property to have a lower discount.

Determining the discount for a real estate holding company can be tricky sometimes. There is no one formula that will work for every real estate holding company—every company must be evaluated under its specific facts and circumstances. Having to determine the discount amid a divorce can make the process seem even more daunting. Obtaining the right team is critical to determining the fair market value and discount of your real estate holding company as stress-free as possible during a divorce.

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