Needed my money in year three of a five year deal, so now I know what illiquid means

$52,000 on $80,000 is a 35% haircut and honestly that's about what I'd expect. There's no market for these interests. Your buyer knew you were the only seller and he was the only bidder, and he priced accordingly. Nobody was going to pay you par for something they can't sell either.

@cairn that's fair and I've come around to it. At the time it felt like being robbed. Looking back, he took on the same lockup I was trying to escape plus the risk that the sponsor's valuation letter was optimistic, and he wanted paying for both. The thing that stings isn't his price. It's that I created the sale.

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 the post I needed six months ago. I was about to put a chunk into an LP deal that was more than half my liquid cash because the projected return looked better than anything else I could find. Reading this, 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?

@juniper a redemption right would mean the partnership itself has to buy your stake back at some price if you ask. Most private syndications don't offer one at all, so the answer to your 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. @anchor did anyone suggest a loan against the interest instead of selling it?

Small thing, but in my market the roof and sewer would have been about $19k total. Yours must have been a bigger house than mine. Doesn't change the lesson, just noting the size of the cash hole varies a lot by where you live.

I'd push on one assumption in your post. You keep saying the deal was doing okay because the sponsor's letter valued it near par. Sponsor valuations on unsold value-add deals are estimates the sponsor produces, and in my underwriting I treat them 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. Your buyer may have paid a fair price for the actual asset and the 35% discount is partly a valuation correction rather than pure illiquidity cost.

@sextant that's plausible but you're guessing too. Flat distributions in year three of a heavy renovation can also mean the sponsor is holding cash for capex on purpose, which is what I'd want them doing. I'd want to see the rent roll before I called the value fiction.

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.

@anchor did you consider just letting it ride and taking on debt personally instead? A HELOC or a personal loan at whatever rate against keeping an interest you'd already paid for. I ask because the 35% discount you ate 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?

@rigging because the property takes that long to fix. You can't renovate 180 units, push rents, season the new income and refinance or sell in eighteen months. The lockup matches the work. @kestrel's question is the good 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 the beginners. Check whether the operating agreement lets the sponsor issue a capital call and what happens if you can't fund it. @anchor's problem was needing cash out. The mirror version is the sponsor needing cash in, and if you're already short, a call you can't meet can dilute you at terms set in a document you signed years earlier. Read the transfer clause and the capital call clause in the same sitting.

@kestrel 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 @anchor it apparently didn't. Sometimes you just have to take the bad price and the lesson is upstream, in how much you committed.