Private Placement Real Estate Valuation
Journal of Business Valuation and Economic Loss Analysis (Forthcoming)
17 Pages Posted: 15 Nov 2013
Date Written: November 12, 2013
As a result of the Securities and Exchange Commission's relaxation of its prohibition against the marketing of private placements, investors will soon be exposed to a broad array of syndicated commercial real estate investments. Private placement commercial real estate investments are illiquid and so cannot be easily valued by reference to frequent transactions in the same asset in active markets.
We have reviewed over 200 syndicated commercial real estate private placement memorandums and find that virtually all include projected cash flows. This study explains how investors and their advisors can use these projections to develop estimates of investment value. We determine a lower bound for discount rates applicable to the cash flows derived from commercial real estate and apply the methodology to an actual commercial real estate private placement investment. Our findings suggest significant overvaluation by commercial real estate private placement investment sponsors even when using conservative estimates of discount rates.
Keywords: real estate, private placements, valuation, discounted cash flow, tenants-in-common
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