Run multiple horizons for a real estate FLP

BVWireIssue #151-2
April 8, 2015

When valuing a family limited partnership that holds undeveloped land, a key variable is the time horizon used in the analysis. These partnerships hold on to the land until it appreciates and then sell it—but when?

“A lot of people will tell me that they don’t know for sure when the real estate will be sold,” says Bruce Johnson (Munroe, Park & Johnson Inc.). “Well, neither would an investor, so that makes it necessary to run multiple scenarios on various liquidation timelines based on what was known at the time,” he explained during a recent BVR webinar, Valuations for Complex FLPs.

“I once valued a set of partnerships that owned a sizable amount of real estate, and about two years later I received a call from the IRS and the estate’s attorney,” he recalls. “They asked me if I knew that the estate got an unsolicited offer and sold the properties about 2-3 years after the valuation date. I told them that I did not know that, but, if they looked at my appraisal, they could see that I had forecast three-, five-, and seven-year liquidation time horizons. So I was able to show them I took into account that, due to the age of the owner and that the children lived out of state, the underlying assets would be sold at some point in the future.”

An archived version of Johnson’s webinar, Valuations for Complex FLPs, can be found in BVR’s online library of past webinars if you click here.

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