Real Estate Limited Partnership Investments by retirement plans

[ldr]

Does anyone have advice about how to determine the market value of limited partnership investments?

Case:  A profit sharing plan with pooled assets (no individual direction) of a law firm with 3 partners and 10 rank and file employees has investments in real estate limited partnerships among other assets.  Taking one of the limited partnerships as an example:

The plan paid $250,000 four years ago for an 11% interest in a group of limited partners who bought a shopping center.  The center has tenants who pay rent, the partners incur expenses, etc. etc. and a K-1 is issued each year.  My research has indicated that K-1s are great as a snapshot of cash flow but do not have any information regarding market value at the end of the year of the limited partnership.  

The underlying asset has been appraised at $36,000,000.  But the market value of the limited partnership itself is nowhere near 11% of $36,000,000.  In fact, one of the other partners who also paid $250,000 for their share recently wanted to sell out.  They offered their share to the other partners.  Nobody wanted it except one, who offered 10% less than the original purchase price, and the seller declined and kept it.  However, the seller would have let it go for the full $250,000 he paid for it originally.

We have to have something provided to us that we can "hang our hat on" when we produce an annual report with account values as of December 31st.  The client has tried to push the broker who sold them the limited partnership into providing a market value, but all he can come up with is the appraisal of the real estate parcel as a whole.

All this is to say that my client is completely baffled at how to come up with a reasonable value for this type of asset.  I wondered if anyone else has had this problem and how you resolved it?

Thank you.

 

 

[My 2 cents]

The world is full of readily marketable investments, with determinable values.  Why does anyone want to get involved with this sort of thing?

[Mike Preston]

Happens all the time.  Sad but true.  Somebody has to get up the stones to confront those who made the decision to invest with the cold, hard facts of life when it comes to investing qualified plan monies.  If they can't find somebody local to do right by the plan then a quick google search will come up with a bunch of names.  While not an endorsement because I have not had a client use them for years, the client might consider contacting Equity Valuation Associates.  They need to pay somebody for advice, the sooner the better.  Such advice might entail re-allocations of past year's results.  It can become quite the quagmire.

[QDROphile]

Yes, the plan needs to hire a valuation expert who is competent with respect to the asset.  The comments of My 2 Cents suggest that some competent adviser or independent fiduciary consider whether or not the investment and the maintenance of the investment (such as the valuations used for past years that have affected distributions) involve a breach of fiduciary duty.  I am not suggesting it is; that would be determined by the circumstances.  The plan seems to be a bit small to carry significant illiquid real estate investments.

[MoJo]

An appraisal/valuation by an expert is really the only way to go.  In a former life, working for another bundled shop with lots of "brokerage" window accounts, they would accept the general partner's "statement" of the value of a limited partnership interest.  Surprisingly, annual plan auditors routinely accepted that, but regulatory auditors did not.

In my current position, we "allow" them, but always ask at the time of purchase which "paid for" valuation firm will be doing the ANNUAL valuation for reporting purposes, and whether that expense will be borne by the accounts of the holders, or the employer....   Self limiting tactic to say the least.

[ldr]

Thank you all for your input and feedback especially Mike Preston for the suggestion of a firm the client could use.

I think you might find that many small plans in the deep south, especially those held by professional firms such as attorneys, doctors, and dentists, have significant holdings in limited partnerships.  It was even more prevalent 20-30 years ago but there are plenty of them still around.  In my research, I learned that many, many TPAs and CPAs believe that values can be taken from the K-1 but I found hard evidence saying that this approach is flatly wrong.  I know for a fact that my predecessor here was using K-1 values, or cost, each year, as directed by the Trustees, or in the absence of any other information being provided.

I will let the client know that he needs an appraisal service familiar with such matters.

 

 

[RatherBeGolfing]

1 hour ago, ldr said:

Thank you all for your input and feedback especially Mike Preston for the suggestion of a firm the client could use.

I think you might find that many small plans in the deep south, especially those held by professional firms such as attorneys, doctors, and dentists, have significant holdings in limited partnerships.  It was even more prevalent 20-30 years ago but there are plenty of them still around.  In my research, I learned that many, many TPAs and CPAs believe that values can be taken from the K-1 but I found hard evidence saying that this approach is flatly wrong.  I know for a fact that my predecessor here was using K-1 values, or cost, each year, as directed by the Trustees, or in the absence of any other information being provided.

I will let the client know that he needs an appraisal service familiar with such matters.

This is by no means limited to a geographical area.  It happens wherever a client has an adviser with a "great opportunity for investment" .

 

[My 2 cents]

17 minutes ago, RatherBeGolfing said:

This is by no means limited to a geographical area.  It happens wherever a client has an adviser with a "great opportunity for investment" .

 

With most of the "great opportunity" being for the benefit of the adviser?

[RatherBeGolfing]

16 minutes ago, My 2 cents said:

With most of the "great opportunity" being for the benefit of the adviser?

Are there other "great opportunities"?  

Kidding aside, I have seen some crazy investments with amazing returns, but like I tell my clients, that doesn't mean that they are appropriate investments for a plan...

 

[A Shot in the Dark]

In addition to the valuation issues addressed in this topic, do not forget about the additional fidelity bonding requirements for holding non publicly traded assets, versus the required independent audit if the bonding is not completed. 

 

[My 2 cents]

I think we can all agree that, with respect to such investments, the plan officials merely shrugging their shoulders and using something expedient (such as "cost") to assign a value to them is not acceptable.  The actual value of the assets must be regularly assessed by experts.

Judging from the facts indicated in the original post, there is and has always been a very tenuous relationship between the value of the investments and the amount spent to buy them.