Resolving the latest controversy over limited partnership valuation methods
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There has been some conversation of late in the Business Valuation space about the appropriateness of using the net asset value (NAV) method to value interests in real estate holding entities like limited partnerships. The most recent to weigh in were Jim Hitchner in his April 2025 Hardball with Hitchner newsletter, and Carla Glass in her presentation titled Counterpoint to DCF as Best Method to Value Asset Holding Companies at last year’s ASA conference in Portland.
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There are a surprising number of ways to slice and dice valuation approaches and methods for limited partnerships, since different methods can be applied at a) different levels of value, and b) different points in time. Both Jim and Carla take up many of those differences, and their views are indeed helpful. This article is my take on how the various named methods can actually work together. Its purpose is to address misconceptions that have been called out but that still can get in the way of a solid understanding of overall partnership valuation methodology.
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The question is about timing
The obvious reference point for any asset holding company is…its assets. Using the NAV method to adjust each asset to its fair market value gives a fair market value balance sheet, and the equity or net asset value of the company. In the case of real estate partnerships, the real estate asset and debt liability almost always dominate. Straightforward, right? Maybe not.
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The apparent limitation of this method is that a partner who does not control the assets cannot access their value, making the NAV method not directly applicable for noncontrolling interests at the date of value. However, since partners have the expectation of receiving their pro rata share of NAV at some future point, the method definitely does apply in the future. Date of value NAV also gives the valuer a useful reference point for use in the direct market data method.
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Calculated datasets control methodology
One popular dataset has been the annual Public Limited Partnership Discount Study, based on Partnership Profiles Minority Interest Discount Database. This study concludes discounts from NAV that reflect a lack of control adjustment to a minority partner’s pro rata NAV. The discounts are calculated as 1 – price/NAV. These data have been the dominant source of minority interest analysis for more than 30 years.
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Using these discount data is part of the market approach, where market indications are applied using the direct market data method in the same manner as, say, DealStats multiples. Those market multiples are based on sales, EBITDA and other backward-looking metrics. Applying a concluded discount to the subject’s NAV is not a specialized “discount study.” It is essentially a direct market data method, well in the mainstream of valuation practice.
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The subject partnership’s NAV (obtained using the asset accumulation approach’s NAV method) is adjusted for the control discount (extracted using the direct market data from the market approach). This has been the conventional process for valuing interests in real estate partnerships. At least, so far…
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So the market is about the past?
Not quite. Market expectations are always embedded in market approach metrics, since market participants have future expectations, not past expectations. Yes, we have information about the past, but the future is only “knowable” (in the market approach) by selecting comparable companies that face the same general future. This is the same situation as highest & best use in the real property appraiser’s sales comparison approach. Similar transactions in a comparable market would have broadly similar futures. Can be iffy, but this is the only way to make reasonable use of market approach metrics.
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Building in the future part 1
The income approach is explicit about the future, but needs market yield rates. It is a need that Partnership Profiles has addressed by developing yield rates from the same Discount Study database; results are published in their annual Rate of Return Study. This is a good effort to bring out assumptions that are embedded in the Discount Study, but which otherwise could not be used to analyze the subject because they are not known.
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These published yield rates are determined by first forecasting future distributions, debt amortization, capital appreciation and an estimated liquidation horizon for each partnership. The publication then shows calculated rates of return (yields) as averages and medians in each year. The year-to-year variations are fairly small, which is consistent with the relatively uniform future expectations. The yield rate is a calculation, just as the discount is a calculation; both are attempts to create useful metrics by synthetic means. We have no idea whether secondary market participants actually used the multiples or yields, but they do enable the valuer to use traditional methods; in this case, the discounted future returns (DCF) method.
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Even though intended for income methods, Partnership Profiles assumptions about growth rates and liquidation horizons necessarily project a future NAV as the reversionary value. So does using these data mean the valuer is using the DCF method, or the NAV method? Yes! Both are involved in development of value.
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Building in the future part 2
An independent income method requires a different yield rate source. While any yield rate can be built up beginning with the risk-free rate, that doesn’t work so well with real estate assets since we have mountains of direct yield observations. A more recent dataset taking advantage of this circumstance, involving real estate investment trusts (REITs) and investor surveys, appeared in 2018 and is now known as the PrimusREIT Database™. This Database is available as part of a valuation tool (PrimusPVX) that applies a yield premium to an internally-calculated asset level return for the subject partnership quickly and simply. The internal DCF model makes use of a built-up minority-level yield and the partnership’s own future expectations to conclude a minority-level value. The valuer can then use the calculated discount for lack of control (1 – minority-level value/current NAV) in their own NAV-based models, or the concluded minority-level yield rate in their own DCF models.
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The bottom line is that an asset approach, a market approach and an income approach can happily coexist as long as the data sources are understood. It isn’t necessarily either/or. If a mix makes the best use of the available data and results in a compelling story of value, so be it.
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Conclusions
The market for any asset always operates based on future expectations, whether given up (seller) or acquired (buyer). Using available market observations to demonstrate what price the market would pay for the subject interest is the valuation process. Making reference to current NAV while using either historic data from transactions in the direct market data method, or yields from market data in the discounted cash flow method, is consistent with long-established business valuation practice. Quoting from Mr. Hitchner:
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The NAV method is not a short cut, and it is NOT a discount study. It is an appraisal method. If you believe that the P/NAV method includes consideration of risk and return, then the net asset method also includes consideration of risk and return. Starting with an NAV, discounts are commonly accepted and applied in appraisals to arrive at the proper level of value.
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And from Ms. Glass:
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[There] are good reasons to use [an] income approach to value interests in asset holding companies. There also are risks. Overall, whether [you] call use of the discount data an asset-based approach or a market approach is just terminology. But there might be valid reasons to call it a market approach. There’s simply no need to say that the asset-based approach is inappropriate.
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Valuing interests in limited partnerships does not necessitate creating an entirely new way of arranging traditional approaches to value. It simply comes down to using data that is available, both from the subject partnership and the market, and (hopefully) connecting the two in ways that are persuasive and result in conclusions that are credible. There are many tools available to valuers, and there is no reason they cannot be combined in ways that the available information requires. Understanding methods, their application, limitations, and presenting a sensible “story of value” is what we do.
I have been valuing fractional interests in real estate for more than 30 years. You can find these issues and everything else pertaining to these types of valuations in Valuing Fractional Interests in Real Estate 2.0, the only truly multidisciplinary work in this field. Please stay tuned, since there is much more to come.
Dennis A. Webb
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Copyright © Dennis A. Webb, 2025, All rights reserved.