Multidisciplinary valuation engagements are complex. There are blind spots that, if not addressed, will undermine the valuation. This series is written to identify those blind spots and solve the problem for everybody the easy way. The author’s intent is to support the valuator’s authority and credibility in the courtroom and in all valuation applications.
Mixed-discipline assignments can seem much more straightforward than they actually are. For example, valuing an interest in a partnership that holds real estate requires underlying property value and the rest of the balance sheet plus ownership rights, property type, and leverage so you can connect with market data, right? Is that enough for a persuasive story? The answer is almost always no, since such a short and generalized list is guaranteed to miss key blind spots. That means portions of the analysis that are needed to make the valuer’s story truly persuasive, and the opinion of value credible, remain unseen. But once you know what to look for, the story turns around and becomes highly persuasive.
The same can be said for other multidisciplinary arrangements. My purpose with this article and other writings is to solve the problem for everybody the easy way. I will first demonstrate blind spots that appear when valuing fractional interests in real estate and show you what to do about them. (Starting with real estate interests because their valuation is by far the most common multidisciplinary application and is also the most consequential for the public.) My intention is to support your authority and credibility in the courtroom and in all valuation applications.
QuickRead Series
The first installment in this series was “Multidisciplinary Valuation Opportunities and Challenges: Risks and Benefits” QuickRead, July 16, 2026. That earlier article took a broad and fundamental look at some serious multidisciplinary valuation characteristics; most importantly, its propensity for generating blind spots. Raising the question was the first step in this series. These next articles will reveal blind spots that are very often missing from partnership valuations. We will also point to resources for finding all of them. Commonly encountered blind spots include:
- Specific company risk—gone missing
- Capital structures—that are not really comparable
- Intangible owner benefits—can be a very big deal
- Working capital—a forgotten necessity
- Subject degrees of control—needs your systematic evaluation
- The crucial holding period—emphasizing reasonable and useful
- Scope of work—must acknowledge methods used by your peers
Today’s Blind Spot: Specific Company Risk
This article examines one very prominent blind spot—specific company risk—that shows how an otherwise well-understood element of any business valuation disappears when a second discipline comes onto the scene.
Whatever happened to specific company risk? You know, the adjustment made in the income approach for risk attributable to subject company management or circumstances that is not represented in the market data. Shows up in pretty much every business valuation, right? But it virtually never shows up in real estate partnership valuations. What happened? It was swallowed up by a blind spot, generated by the chasm between the two professions. And this is not an incidental blind spot. Not at all. If missed, it can kill the valuation consultant’s credibility, causing substantial errors in the concluded value.
Comparative circumstances will serve to illustrate. Let’s take two otherwise identical partnerships that hold different assets. Partnership A holds a ground lease for a site occupied by a K-Mart store. The lease has been in place for about five years and is currently a bit undermarket. Terms of the lease almost guarantee that the spread between payments and market will increase over time. There are 10 years remaining on the initial lease term, and there are five five-year renewals. So essentially 35 years remaining. The tenant pays all expenses. Thus, the primary management activity is receiving rent checks and distributing net proceeds to the other partners. The manager/general partner could not affect anything else if they wanted to for the next 35 years; more than a generation.
Partnership B holds an older mixed-use building in a redeveloping commercial district. New construction is everywhere. The subject building has managed to hang onto its retail tenants for now, but its offices are half-vacant. Tenant relationship skills have just become a big deal; rents or lease terms might have to be adjusted and/or additional tenant improvements considered. The building could sit half-empty for the next two years, while excess space nearby is absorbed. Some real estate managers can handle this and get decent results. What if Partnership B is being managed by the son of the original developer who has almost no real estate experience?
If an interest in each were on offer, which would you consider investing in? Which would you run from? If otherwise identical, would you apply the same discount to each? I suggest that doing so could hit your credibility hard.
Where Did This Come From? (Inside vs. Outside)
When valuing an entity, many business valuers simply enter the real estate appraiser’s conclusion on the partnership’s normalized balance sheet and then forge ahead with the valuation. But there is a shopping list of valuation elements that can look entirely different depending on whether they are being viewed by the business valuer or the real estate appraiser.
Viewpoints can diverge because real property markets exist “outside” the partnership, while its business operations are found “inside” the partnership. The two realities might be very similar but can also be wildly different. A real estate appraisal lives in the outside, market-based world for real estate assets. A business valuation lives largely in the inside, personal world of partnership operations, as well as the market world for the partnership interest being valued.
The real estate appraiser can certainly understand both realities; however, scant, if any, attention is spent to think about possible inside manager issues since a normal market value report automatically assumes “typical and competent” management. The partnership’s management is irrelevant under this approach. If this is a blind spot (which it almost always is), the assumption is not challenged and this hurts the credibility of the entire valuation project.
Valuation technology for real estate partnerships has been developed almost exclusively from the business valuation side. Thus, blind spots for this specific type of multidisciplinary valuation are real estate related. Missing one side of a two-sided situation automatically generates many blind spots. Persuasive and successful work requires avoiding blind spots and addressing management issues.
What Needs to be Done
The valuer must determine whether a partner would have any reason to be concerned with current management’s abilities in relation to the specific property’s demands, which can vary greatly, as the opening example demonstrates. The partner would also be concerned with the ability to cope with any future decisions, especially if succession is in the offing. The prospect of having a chance to be in a real estate deal with a very talented general partner who has a proven track record would be an attractive one. Such general partners definitely exist. On the other hand, risking being stuck with an incompetent manager who could jeopardize the entire asset base is a scary prospect. Such general partners also exist. From the point of view of the partnership interest buyer and seller, such matters can easily be deal-breakers on the entry side, and strong motivators to exit on the seller side.[1]
In the interest of involving the case facts in our analysis, it is especially helpful when management characteristics can be compared with market data. In this case, such data comes from real estate investment trusts (REITs) and public real estate limited partnerships (RELPs). But property and asset management has so far been relegated to a kind of soft comparison, which goes something like: “REIT managers are professional/institutional and are therefore better than those that run private partnerships,” and “RELP managers are generally similar(ish) to those that run private partnerships.” Technically not completely blind, but not a lot to go on. An A for effort, but much more should be done (and is).
A Simple Solution, Please
To begin with, acknowledge that there is a difference between the two case situations outlined above. Ask yourself whether the current and short-term future manager is up to the task based on history and interviews with the client’s lawyer and/or CPA. Discuss the difference with the real estate appraiser since it is very unlikely to be in their report; that automatically assumes competent management. You are already way ahead.
Your chosen valuation methods will need to incorporate different fact sets that demonstrate different results. Some methods can do this in a rigorous and persuasive manner. Some methods are less rigorous, but at least these leave room for your own logic and estimated effect on the discount. Most do not do anything at all.
The most rigorous and persuasive method is the management risk classification system.[2] It divides management risk into five categories based on three criteria: 1) Competence based on the property’s management demands, 2) Confidence in the partnership’s management both at the date of value and in the future, and 3) Persistence based on provisions for succession. It is based on the income approach but can be used in conjunction with several NAV methods as well. It resolves the blind spot.
Conclusions
It is the nature of multidisciplinary valuations to generate blind spots simply because the tools to understand the facts are distributed between professional specialties. What is a profession to do? Fortunately, we now have truly multidisciplinary resources that you can readily draw on to find and eliminate blind spots from your work. Your understanding supports a winning story of value that makes sense to your report’s reader and the trier of fact. It also shows that you understand (for example) the subject partnership and the risks it faces. Finding and addressing the blind spots that most other practitioners miss sets you apart and enhances your credibility. Stay tuned for other blind spots and their solutions.
[1] I will go further: Based on my experience owning and operating a securities broker-dealer, the investor’s primary concern with a private offering is not the deal, but the principal. Who are they dealing with? If the manager or general partner does not pass, then that is the end. No deal, no matter how good it looks. Ignoring the principal who comes with the deal is fatal in the marketplace and can destroy the valuer’s credibility all by itself.
[2] Dennis A. Webb, Valuing Fractional Interests in Real Estate 2.0, (Milonguero Press, Los Angeles 2021): 131-134. You will find this book in the NACVA library.
Dennis A. Webb, ASA, MAI, FRICS, is a designated business valuer and real estate appraiser, former syndicator and engineer. He is the principal of Primus Valuations, a multidisciplinary valuation firm with a practice emphasis on real property-related business interests, the enterprise value associated with special-use properties, personal property blockage discounts, and other mixed-discipline applications. Mr. Webb has been speaking and writing for 30 years, an effort which has resulted in a large body of articles, presentations, and ongoing seminars for valuation professionals, lawyers, and property owners. His most recent major work is the definitive “Valuing Fractional Interests in Real Estate 2.0,” a complete upgrade of the valuation process for LLC, partnership, and common tenancy interests. NACVA describes it as “…the only book that combines real property appraisal and business valuation discipline technologies into one cohesive methodology.” You will find the book in the NACVA library. His emphasis has always been on “engineering” valuation methodology and bringing analysis/data crunching together with persuasive storytelling. A native of Los Angeles, he now lives in Denver, Colorado, and enjoys writing, hiking, traveling, and dancing Argentine Tango (not necessarily in that order).
Mr. Webb can be contacted at (303) 910-9755 or by e-mail to dwebb@primusvaluations.net.
