An LP wants out at year three of a seven year hold, and the operating agreement leaves the valuation call to the manager

The thing I'd worry about is the precedent, since the other five now know there's a door. I've held land partnerships where one exit request turned into three inside a year because people learned it was possible. If you do this, put in writing that it's a one-time accommodation on the exiting member's request and that the manager isn't obligated to repeat it. That doesn't legally bind anything you haven't already got in the agreement, and your counsel should be the one drafting the language, but it changes what the other five expect.

On valuation, I wouldn't use your own cap rate. Get a broker opinion of value from someone with no role in the deal, and let the exiting LP pay for it or split it. Then you're transmitting a number rather than setting one.

Different angle. Running a one-off process by email with no record of the reasoning tends to be the most expensive habit in a small operation. Whatever gets decided here, it's worth running as a documented procedure: written request, valuation source named, ROFR notice to the company, then to the members with a deadline, then closing docs. Even if only one person ever uses it, the rest of the group watching it happen learns that awkward situations get handled in an orderly way. That's worth more to the next raise than the spread being argued over now.

An equity bridge doing that much work at a 6.25 exit cap deserves scrutiny. The entry basis matters here: a purchase at 2.4M against a trailing 214k is a 6.4 going in if that NOI is close to today's, which means either the property was bought stabilized at market with no lift built in, or the 214k is post-improvement and the entry cap was worse. Whichever it is, the exit number rests on that cap being defensible to someone other than the operator. Also, a prepay penalty isn't relevant unless a refinance is funding a buyout. But it is relevant to the exiting partner, because a buyer of that interest inherits a deal that can't be recapped cheaply until the penalty period ends. That's a real discount, not a courtesy one. A member buying into that slot should generally price it at capital account plus accrued preferred, not at a broker's opinion of gross value. One more thing worth checking. Distributions that reduce a capital account are return of capital, and how those got characterized affects what an exiting partner is actually owed. It's worth having the accountant restate the capital account before anyone quotes a price.

I've gone through this a couple of times and one thing still isn't clicking. What is a capital account and why is it 178k when he put in 200k? Is he down 22k?

@kevin_lombard no, he's not down. The capital account is a running tally: money in, plus profit allocated to him, minus distributions and losses. Cash distributions pull it down even when the deal is doing fine. His economic position is the 253k-ish share of value, the 178k is a book figure.

@renee_dubois, as an LP in seven of these, the version I've seen handled well went like this. Manager circulated a one page notice saying a member had requested an exit, gave the valuation source, gave the other members ten business days, and made clear the manager would not be buying it himself. The last part matters more than people admit. The second the sponsor is the counterparty on a discounted purchase of his own investor's interest, every remaining LP does the arithmetic on whose side you were on. If you want to buy it, and 253k against 200k basis says you might, get the exiting LP an independent number and disclose that you're a bidder before he decides. Otherwise take yourself out of the pool entirely.

Dumb question probably. Can he just sell it to whoever he wants, like a share? Or is the whole point that he can't?

@megan_doyle15 he can't, which is why the ROFR exists. LP interests in a private deal aren't liquid and the agreement usually says any transferee has to be approved by the manager and meet the same investor qualification standards the original raise required. @karen_whitfield the precedent point runs the other way. Investors weighing which sponsors to raise from eventually often find the sponsors who scare them are the ones with no path out at all. A stated, painful, discounted redemption process is a feature. Nobody uses it, but knowing it exists is what gets a 200k check from someone who is 61 and doesn't know what year seven looks like for him. The way a sponsor gets into real trouble is by having no process and improvising under pressure, which is roughly where @renee_dubois is standing right now.

Buying LP interests secondhand at discounts comes up a lot in general discussion, and this is a useful example to follow through in detail. If the price is set at capital account plus accrued pref like @hannah_west29 says, and the real equity share is 253k, whoever buys that slot books a spread on day one for taking on an illiquid position with no recap until 2029. That's the trade. What's unclear is who is supposed to be protecting the exiting partner from selling at 178k when the number might be 253k. Is that just left for the exiting side to argue?