Valuation supports resolution
Our client in this case was a well-known foundation, and at issue were several very large real estate partnerships, with combined assets worth about $400 million. Their principal holdings were large apartment projects in the U.S.
We were asked to help resolve a dispute between the foundation, who is a majority limited partner, and the general partner. Their relationship had degenerated with the souring real estate market, and with the general partner getting fairly exorbitant fees under an old management contract, while there was little cash flow for the limiteds. There were few options left, and their choices all involved the risk of litigation.
LET’S MAKE A DEAL
The client wanted to make some sort of deal, perhaps buying out the general partner, or selling to it, or changing the agreement in some way. But each scenario involved various transfers of rights, and those sets of rights had varying degrees of control, liquidity and claims on cash flow. The client needed to have a pretty good idea of value under a fair market value premise, a fair value premise, and an indication of values the other side could claim in an adversary proceeding. The options were much more complex than initially believed.
INTEGRATING THE REAL ESTATE
Our valuation comprised both the real estate assets and the partnership interests. This was critical because the property facts and value trends were integral to understanding the rights and options of the various partnership positions. Additionally, a large stack of real estate appraisals is unwieldy and expensive; our fee ended up at about half of what it would have been with traditional, individual property appraisals.
The appraised value of the assets at one point in time was only a small part of the problem. What was the value effect of the management contract? (Answer: Huge.) What about the incentive of the GP to maintain its management fees? How might this affect other decisions that would be desirable for the limiteds? How does this affect the discounts? Property characteristics and market trends influence valuation discounts, the relationship of the partners over time and the partnership decision-making process in ways that consideration of the fee interest in the real estate alone would not reveal or anticipate.
CHANGES AND PREMISES
Each of the positions had to be valued under differing premises: The LP position as noncontrolling nonmarketable and noncontrolling marketable (modified because it did have certain negative control abilities, such as approving asset sales), and GP position as controlling, both marketable and nonmarketable, but also considering its liability to the 30 or so other limited partners. Fair market value includes discounts which may or may not show up under the fair value premise.
A second set of issues resulted from changing market conditions. Some of the apartment projects had condo maps, but the market for conversions had never developed in this area. It was all new. This was important for the client, because its position had approval rights for any major asset sale, and conditional offers submitted to management were all over the map. What was the sellout potential based on condo mapping? What sorts of offers could the client reasonably approve?
The conclusions were complex, but organized in a way that supported the client’s decision-making process. In the end, litigation was avoided, and neither side bought out the other. The client’s board of directors was able to approve some asset sales. A long-festering problem was steered to a more amiable conclusion through understanding of how the various positions and scenarios were valued.
Litigation sometimes resolves disputes using Solomon’s method, with appraisers supporting each side’s position and the Court cutting the baby in half. Our approach is to increase our client’s understanding of valuation issues and other likely positions, so that the most constructive choices can be made. And, when it comes to it, providing opinions of value that prevail.