In THE REAL ESTATE CLIENT: VALUATION SERVES IMPORTANT MASTERS IN LITIGATION CASES, forensic accounting expert witness Richard M. Squar writes on minority interest:
A minority interest discount is applied to reflect the degree of absence of control or power over various business decisions of the partnership. It is common in partnership agreements of real estate limited partnerships to “limit” the ability of the limited partner to influence operations in the partnership, including management decisions, the ability to transfer limited partnership interests or substitute limited partners, the right to compel distributions, or the power to initiate liquidation of the partnership.
The discount for lack of marketability is concerned with the liquidity of the interest being valued. Liquidity is a measure of how quickly and easily the limited partnership interest can be converted into cash if the owner of the limited partnership interest wants to sell his/her investment.
In recent years, various court decisions indicate that the business appraiser needs to be more specific and detailed in supporting opinions regarding both the applicable minority interest and lack of marketability discounts. Too often business appraisers would analyze in depth the aggregate net asset value of a limited partnership, only to then take discounts totaling perhaps 35% to 45% of such value based on general studies of marketplace data.