Valuation Discounts Applicable to Real Estate Holding Companies (PART 2) ANGELA SADANG, MBA, CFA, ASA
A fter discussing the application of a minority discount or discount for lack of control (DLOC) in the last issue of Real Estate Perspectives , I will now turn to discussing the next incremen- tal adjustment in the valuation of partial, non-controlling interests in entities holding real estate as their primary and most valu- able asset. In this article, we will address the use of the discount for lack of marketability (DLOM) applicable to interests in real estate holding companies.
The diagram below graphically illustrates the basic levels of value as we apply discounts: the starting point is the control level which, as discussed in my last article, emanates from the 100% net asset value of the real estate holding entity. The marketable minority (or “as-if freely traded”) level results from the application of a minority discount (which was the subject of my first article) and conversely, the application of a control premium from the freely traded value brings you back to the control level. The lowest level is called the nonmarketable minority level which results from the application of a DLOM and represents the concep- tual value of nonmarketable (i.e., illiquid) minority interests of privately held real estate holding entities that lack active markets for their shares.
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Real Estate Perspectives
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