One LP wants out at year three, and the operating agreement says I decide

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. I run a small team and the thing that has cost me most is doing a one-off process by email and then having no record of why. Whatever you decide, run it 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 five who watch it happen learn that you handle awkward things in an orderly way. That's worth more to your next raise than the 50k spread you're arguing about.

Your equity bridge is doing a lot of work at that 6.25. What did you buy at? 2.4M on trailing 214k is a 6.4 going in at what sounds like closer to today's NOI, so either you bought stabilized at market and there's no lift, or the 214k is post-improvement and the entry cap was worse. Which is it, because the whole 253k number rests on that cap being defensible to somebody who isn't you.

Also the 3% prepay isn't relevant unless you're refinancing to fund the buyout, and you said you aren't. But it is relevant to the exiting LP, because a buyer of his interest inherits a deal that can't be recapped cheaply until 2029. That's a real discount, not a courtesy one. If I were the member buying his slot I'd want it at capital account plus accrued preferred, not at a broker's opinion of gross value.

One more thing. You said his capital account is 178k after distributions. Distributions that reduce capital account are return of capital, and how those got characterized affects what he's actually owed on exit. Have your accountant restate his 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?

@juniper 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.

@cairn, 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?

@rigging 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.

@orchard I think you've got the precedent thing backwards. I'm assembling a list of people I'd want to raise from eventually and the sponsors who scare me 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 you kill yourself is by having no process and improvising under pressure, which is roughly where @cairn is standing right now.

Buying LP interests secondhand at discounts comes up a lot in what I read, and this is the first live example I've seen described in enough detail to follow. If the price is set at capital account plus accrued pref like @ledger 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, right? I don't understand yet who is supposed to be protecting the exiting guy from selling at 178k when the number might be 253k. Is that just on him to argue?