In determining the fair market value of a noncontrolling, fractional ownership interest in a closely held real estate holding entity, the strongest market pricing data can found in the syndicated real estate limited partnership market, commonly referred to as the “secondary market.”  Limited partnership interests traded in the secondary market are registered for public sale, although they are not actively traded on any exchange.  The market for such partnership interests is comprised of a group of 10 to 12 independent broker intermediaries or facilitators who attempt to arrange trades matching buyers and sellers of these publicly-registered, but non-listed interests on request.  This market reflects the trading of limited partnership interests that have historically combined elements of both lack of control and lack of marketability; however, with the network of buyers, sellers and broker intermediaries now providing a reasonably efficient mechanism to facilitate trades, pricing in the secondary market in recent years is primarily a reflection of the value of fairly liquid, though passive noncontrolling ownership interests.  Despite increased liquidity in the secondary market in recent years, the vast majority of secondary market limited partnership interests still trade at prices well below the partnerships’ underlying net asset values.  

For over 10 years, members of Cogent Valuation have prepared bi-monthly studies analyzing the trading prices of limited partnership interests in the secondary market relative to the underlying net asset value of the partnerships.  The net asset value for each partnership observed in our studies was calculated by adjusting the partners' equity by substituting the estimated market value of real property (as determined by either an independent real estate appraisal or the general partner's estimate) for the book value of real property.  Our substantial database of historical pricing in the secondary market has provided us with unique insights as to the key factors that influence pricing adjustments relative to the underlying fee simple value of real property holdings. 

Because the value of any investment is ultimately tied to the ability of an investment to provide a return, Cogent Valuation also produces indications of value based on a comparison of market pricing in the secondary market relative to various measures of investor return.  Absent the ability to compel liquidation, cash distributions represent the primary source of liquidity for noncontrolling ownership interests in real estate holding entities.   Market multiples or capitalization rates derived from the secondary market are useful metrics for developing indications of value for fractional ownership interests in such entities.