How do you count syndication investment as part of net worth?

Question

Hi,

i was trying to find an answer to this question, but nothing came up in BP or google. Here is the situation. I have invested in a couple of syndications and then I started wondering how is my net worth calculated. Is it simply the value of my investment or is it the value of the underlying asset? If the asset how do you go by at calculating that, do you ask the sponsor?

Thanks!

Omar Khan · Answer

@Prolet Miteva It depends what you need it for. If this is for your internal consumption, then go with what most folks are saying.

But if this is for getting financing, then it's no use being shy.

Forget about your initial investment. You can value your "stake" in a syndication either through the income approach (cap-rate analysis) or comps approach. Similar to how a sponsor would decide if a deal is attractive or not. Taking your basis at historical cost is going to be shortchanging yourself and NOT presenting a true picture of your net worth to the lender.

Theo Hicks · Answer

Assume your net worth is equal to your initial equity investment. Then, once the deal is sold, your new net worth is your equity investment + profits from sale.

As @Juan Vargas mentioned, you can determine the increase in value of the apartment to calculate your true net worth, but you would need an official appraisal or BOV.

Michael Bishop · Answer

@Prolet Miteva I agree with the general consensus of the thread - count your net worth as your initial investment. Of course you can ask your Sponsor for a break down on the current valuation of your investment, but just as in underwriting, it's better to be conservative and leave room for upside on the other end!

Lane Kawaoka · Answer

@Prolet Miteva

Its a little complicated. Make a spreadsheet of the value of the deals you are in. And also try to determine the percent of ownership (you might also factor what the GP/LP splits are too).

You might own 1% of a 10M deal and 2% of a 5M deal.

Also don't forget to subtract the debt on the deal.

Let me know if you would like a tracker sheet.

Gwyeth Smith · Answer

I came across this situation recently when applying for a Fannie Mae Loan.  I listed myself as a percentage owner of the asset I was a LP on based on what my contribution was against the purchase price.  I listed the value of the asset as the purchase price.  It was early enough into the deal that I figured I wasn't short-changing myself on any forced equity or value-add component.  I felt that was the most honest was to classify it for the purposes of net worth.  Had it been further along into the deal I probably would have conservatively estimated the value based off the most recent financials from my LP deal vs how they were performing against their initial projections.

Carolyn L. · Answer

The sponsor may be able to issue a simple statement of your unit valuation, provided by their accounting firm/CPA.  This is what our sponsors supply to all members in our syndication on an annual basis.

Charles LeMaire · Answer

If there are IRA investors in the deal, the sponsor must provide them a Property Evaluation form each year so that they can calculate their RMD, even if they are not yet at the point they must take the RMDs.  Ask the sponsor for a copy of that form.  It isn't perfect, but at least all the investors are working from the same number.

Chris Grenzig · Answer

@Prolet Miteva I would just use what you invested, especially if you are not controlling the investment as it may be tough to gauge the value today. Personally, I'd always prefer to be lower than real and be happy when that investment sells, than overestimate and end up being lower than I thought.

Also, if the net worth number is for a bank or something they're going to ask you to prove it and is a bank really going to believe you when you say you're $100k is worth $200k but we haven't sold it yet? If it's just to calculate your own net worth just to have a number attached to it, then it's whatever makes you happy.

Jeff Greenberg · Answer

The interesting issue in this conversation is that I have never been asked to prove, either my valuation of the deal or my ownership percentage that I stated in my PFS. I have been asked for proof of liquidity.  That included cash, retirement, and stock accounts.  I was never asked about any of the private placements either in a GP or LP position.

Scott Morongell · Answer

@Prolet Miteva I would side to the conservative side and assume your net worth on what your initial investment was. Once sold like others have mention your able to use those sale proceeds as contribution to your new net worth.

How do you count syndication investment as part of net worth?

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