Recognition Of Partnership Values On PFS

[Bryan Hancock]

I was wondering what method folks use to value their in-process partnerships on deals they're working on when they submit their PFS to lenders. Things have become quite complicated to account for lately with all of the projects I have going so I have begun reporting a range of net worth values. My accountant gave me some pointers on this, but these items obviously aren't GAAP perfect or anything. I am reporting:

1. Contributed equity to project as the "conservative value" that falls in line with the rest of my PFS

2. An average of contributed equity and recognition of full pro rata value as an "intermediate valuation"

3. Recognition of full pro rata value as an "aggressive valuation"

Ideally the pro rata value would be cash contributed as a percentage of overall project costs, but our projects have long lead times with city delays so I have tried to recognize things based more on project duration, which seems more accurate and fairer.

Any thoughts or comments? What method do you use? Getting perfect statements for each submission to a lender would be quite expensive so I was wondering if other people have used similar methods or perhaps something that is better.

[Don Konipol]

@Bryan Hancock , boy, this is an interesting post! Just the problem I dealt with for 30 years. A seemingly aggressive valuation and the lender will write off the entire PFS as bogus. Too conservative a valuation and your borrowing capacity will be significantly less than warranted.

So here's the solution that worked for me. I would submit 2 valuations for each asset that was complicated by either long term projects or value added as a general partner above my capital contribution.

My first valuation would reflect my actual capital contribution. The second valuation would reflect both my capital contribution plus carried interest at current quick sale value. I would also note explanation of such as footnote.

Cost and hassle of continually having to prepare new PFS is just the cost of being in real estate partnerships as GP or the like. Looking at just the net worth number for a investor in complicated, ongoing real estate deals is meaningless. To have most success with lenders, a fully detailed summary of each significant investment is necessary. It's just like paying for a securities offering; there is no half way.

BTW Bryan, how has being a full time real estate investor/operator worked out for you? Are you still enthusiastic every day?