Needing liquidity in year three of a five year LP deal is a lesson in what illiquid actually means

A 35 percent haircut on a forced sale is about what should be expected here. There's no market for these interests. A buyer in that spot knows the seller is the only seller and he's the only bidder, and he prices accordingly. Nobody pays par for something they can't sell either.

@renee_dubois that is a fair point, and it holds up under scrutiny. In a position like that it is easy to feel robbed in the moment. Looking back, the buyer takes on the same lockup the seller was trying to escape, plus the risk that the sponsor's valuation letter is optimistic, and wants paying for both. What stings in cases like this usually is not the price. It is that the seller created the sale by needing out early.

I've bought two LP interests in secondary transfers and both times I paid between 25% and 40% off the sponsor's reported value. Same reasoning as your buyer. One thing worth knowing for anyone reading: the manager's consent is a real gate, not a formality. In one of mine the sponsor took nine weeks to consent and asked the buyer to sign the full subscription package again, including accredited investor verification. If you're planning an emergency exit around that, plan for months, not weeks.

The lockup is the product. You're being paid, in part, for agreeing not to need the money. If you need the money, you were the wrong investor for that deal, and that isn't a character flaw, it's just a mismatch.

This is a pattern worth flagging early. An investor eyeing an LP deal that would tie up more than half their liquid cash, drawn in because the projected return looks better than anything else available, is exactly the setup this thread describes. The projected return doesn't matter at all if the timing doesn't fit.

Two things I don't understand yet. What's a redemption right, and does every syndication have this problem or was this deal unusual?

@kevin_lombard a redemption right would mean the partnership itself has to buy a stake back at some price on request. Most private syndications don't offer one at all, so the answer to that second question is that this is normal rather than unusual. Interval funds and non-traded REITs sometimes have limited redemption windows, and those come with their own caps and gates. @ehernandez74 did anyone suggest a loan against the interest instead of selling it?

Worth noting that in many markets, a roof and sewer line replacement in the same quarter runs closer to 19k total. The size of that cash hole varies a lot by where the property sits, but the lesson stays the same either way.

One assumption worth pushing on here. A deal being described as doing okay because the sponsor's letter valued it near par deserves scrutiny. Sponsor valuations on unsold value-add deals are estimates the sponsor produces, and in careful underwriting they get treated as marketing until an appraisal or a sale says otherwise. A 1980s 180 unit renovation with distributions still at 7% in year three, when the model probably had them stepping up by then, reads like a plan running behind. A buyer in that position may have paid a fair price for the actual asset, meaning a 35% discount is partly a valuation correction rather than pure illiquidity cost.

@dpatel_re that's plausible but it is still a guess. Flat distributions in year three of a heavy renovation can also mean the sponsor is holding cash for capex on purpose, which is what a limited partner should want them doing. The rent roll settles it either way, and that is the document worth requesting before drawing a conclusion about the deal.

The $2,400 in legal and transfer costs is the part I'd never have budgeted. So the actual all-in cost of getting out early was the discount plus fees plus whatever taxable mess the transfer created in that year, which I assume was its own headache.

Eighteen months of expenses in reserve before any of this. That's the line I'm writing down.

Six months into researching and I've been treating LP deals as the easy option because there's no tenant calling me. This thread has reordered that. There's no tenant calling, and there's also no lever to pull when something changes on your end.

@ehernandez74 was there a version where you let it ride and took the debt on personally instead? A HELOC or a personal loan at whatever rate, set against keeping an interest you had already paid for. Worth asking because the 35% discount you took is a lot of interest expense on $30,000.

I'm new to all of this, so here's a basic question. If there's no way out, why does anyone sign up for five years?

@megan_doyle15 because the property takes that long to fix. Nobody renovates 180 units, pushes rents, seasons the new income and refinances or sells inside eighteen months. The lockup matches the work. @aaron_fitz10's question is the sharper one though. Borrowing against the house to avoid selling the interest at 65 cents is at least worth pricing out.

One more mechanical point for anyone early in this. Check whether the operating agreement lets the sponsor issue a capital call and what happens to an investor who cannot fund it. @ehernandez74's problem was needing cash out. The mirror version is the sponsor needing cash in, and an investor who is already short can be diluted by a call they cannot meet, at terms set in a document signed years earlier. Read the transfer clause and the capital call clause in the same sitting.

@aaron_fitz10 I've done roughly that. Borrowed short against other collateral rather than sell an illiquid position into a market of one buyer, and it worked out cheaper. It only works if the income comes back, which for @ehernandez74 it apparently didn't. Sometimes you just have to take the bad price and the lesson is upstream, in how much you committed.