I may be complicating this more than it needs to be, but in general are there any unique elements one must consider when say valuing a 30% equity position in an existing asset (as a potential acquisition). Can you really know the true value of what you're buying (the 30% stake) if you don't know the exit distribution splits with the partner(s) choosing to remain in the deal? Some additional questions: 1. Do you model this just like a regular core/core+ acquisition and back into your purchase price to hit whatever current and/or total return you are willing to take? 2. Do you model out a 10 year DCF, apply a terminal value to Y11, discount everything back and enter your purchase price to get an NPV? Then take 30% of that if that's the share of equity you are buying?
Thanks for guidance you can provide on this.
At my first we first model the property level CFs and then any relevant waterfalls (i.e. we look at it the same way as we would as if we were buying 100%). If there was a situation where existing partners would be paid out differently than us, we would need to find out what the situation was and then model it accordingly, as that is definitely relevant to us.
1 is correct, the cash flows are based on the 30% stake/partnership interest. Ultimately your backing into a present value of the aforementioned cash flows. 2 is incorrect
So if you're buying a 30% stake that has a back end promote, you might even pay say 5-10% premium for it given the benefit at exit and since it is stabilized (risk off due to development being over with)?
It all depends on the risk of the back end promote/profit split. The promote is the riskiest piece of the tranche so to provide a broad premium of 5-10% would be misleading. When would the buyout occur? Following lease-up of the asset?
Yes assume it's already stabilized
You need to model the cash flow first as mentioned above, then you need to understand what the equity stake is. If leveraged, then obviously you need to model the debt first, then whatever equity is required up front, followed by levered cash flows, followed by levered dispo value net to partnership. Then you just model the different waterfall structures. Theoretically, whoever is proposing the splits to you would have a jv structure in mind. Assuming the value of the total equity stake/the proposed contribution is set in stone, the variables would be 1) what kind of loan terms you can get vs. what is anticipated (assuming no existing debt to assume) 2) what the different contribution/promote tranches are.
EDIT: hit post too quick... obviously #3 variable is what you assume the exit value is.
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