A to Z - A Glossary of Partnership Valuation Terms:

Allocations	Allocations of income, loss, gain, and distributions (both operational and capital) are determined according to provisions established in each partnership's agreement of limited partnership. Allocations are a critical valuation factor, especially when such allocations relate to distributions between the general partner and limited partners, or between classes of limited partners.
Assignee Interest	When a transferee receives an assignee interest in a limited partnership, the transferee receives an assignment of economic benefits without the benefit of voting rights granted to a fully substituted limited partner. An assignee interest is a weaker form of ownership than a substitute interest. Many partnership agreements allow the general partner to determine, at its sole election, whether a transferee will receive full substitution or assignee status.
Break-Up Value	See, "Net Asset Value"
Capital Account	A capital account is created for each partner at the time capital is contributed. Initially, each partner's capital account is equal to her capital contribution. The capital account is increased to reflect each partner's allocable share of net income and is reduced to reflect each partner's allocable share of distributions and net losses. A partner's capital account is not a substitute for fair market value and should never be used for valuation purposes in any context.
Capitalization Rate	The capitalization rate, or alternately "cap rate", expresses the value of an asset as function of its expected net operating income (revenue less operating expenses). A capitalization rate represents an investor's return requirement based on cost of capital, inflation expectations, expected income and appreciation, and investment risk. Properties which trade at relatively low capitalization rates are generally deemed to offer superior growth potential, lower risk, or both. Alternately, properties which change hands at relatively high capitalization rates are generally deemed to offer lower growth potential and/or higher risk. To determine the value of an asset based upon the income capitalization approach, the asset's expected stabilized net operating income (either one year trailing or first year future net operating income) is divided by the capitalization rate. The income capitalization approach is the preferred methodology employed by many secondary market investors to determine the value of a partnership's real estate assets.
Regulation "D"	Under Regulation "D", the Securities and Exchange Commission permits certain businesses (including limited partnerships) to sell securities without SEC registration. Limited partnerships which sell or have sold securities subject to this exemption are alternately referred to as non-public partnerships, private partnerships, or Reg "D" partnerships.
Discount Rate	The discount rate is an annual rate of return which, when applied to a stream of projected future cash flows, describes an investment's present value. Investor's determine the discount rate applicable to an investment based upon cost of capital, inflation expectations, income and appreciation potential, and risk.
ERISA	ERISA, or the Employee Retirement Income Security Act of 1974, is a federal law that sets standards for pension plans in private industry. Qualified Plans and Individual Retirement Accounts must be governed according to guidelines promulgated under ERISA. For example, retirement plans which are "qualified" under ERISA must report the value of non-marketable securities on Form 5500 for each plan year see, Valuations for ERISA Purposes.
Fair Market Value	Revenue Ruling 59-60, the longstanding IRS ruling related to the valuation of closely-held business interests, references fair market value "as the price at which … property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts." The willing buyer/willing seller standard is appropriate for determining the valuation of non-traded minority interests in limited partnerships and other non-marketable securities.
Family Limited Partnership	A family limited partnership (FLP) is a form of business entity in which family members contribute their assets in exchange for general and limited partnership interests. Typically, assets are contributed by the parents or grandparents in exchange for a one percent general partner interest and a 99% limited partner interest. The parents (or grandparents) then gift the limited partnership interests to their children and grandchildren without ceding control of the FLP's assets. Gifts of minority interests can often be made at substantial discounts to underlying asset values, providing individuals with the opportunity to transfer substantial assets during their lives and, consequently, reducing the size of their taxable estates.
Right of First Refusal	Many limited partnership agreements provide that a limited partner can only sell and transfer an interest subject to first offering to sell that interest to the partnership or its partners. These provisions are onerous as they impair an interest's marketability by discouraging third party offers.
General Partner	The partnership general partner is responsible for partnership management and has unlimited liability related to partnership obligations.
Holding Period	A partnership's expected remaining holding period is a significant valuation factor. Interests in limited partnerships expected or perceived to have relatively short holding periods will, all things equal, trade at lower discounts to their net asset values than partnerships expected to have comparatively lengthy holding periods.
Individual Retirement Accounts	Many investors hold interests in limited partnerships in their Individual Retirement Accounts, or IRAs. The fair market value of limited partnerships and other non-marketable assets must be reported to the IRS by IRA custodians on Form 5498 each year.
Internal Rate of Return	The internal rate of return, or hurdle rate, is the discount rate which, when applied to a series of future cash flows, produces a net present value of zero. The internal rate of return expresses an investor's holding period return requirements inclusive of ongoing cash flow and residual value.
Jefferies, Spencer	Founder and publisher of Partnership Profiles (Dallas, TX), the leading providing of analysis and commentary in the limited partnership industry. The company publishes an industry newsletter six times a year as well as an annual limited partnership discount study. To learn more about Partnership Profiles, visit www.partnershipprofiles.com.
K-1 (Form 1065)	The K-1 is a tax form which is part of a partnership's annual Form 1065 Federal Income Tax Return. The K-1 reports to the Internal Revenue Service, for a given year, each partner's capital account, capital contributions, distributions, share of non-recourse debt, and allocations of income or loss. Partnerships usually issue K-1's to limited partners in late winter or early spring each year.
Limited Partner	A limited partner is a passive investor with no management responsibility and liability that is limited to his or her capital contribution.
Limited Partnership	A form of business entity which is comprised of one or more general partners and one or more limited partners. The general partner is responsible for managing a partnership's affairs and has unlimited liability. The limited partners are passive investors, do not participate in ongoing management, and have liability that is limited to their capital contributions. Limited partnerships are finite-life "pass-through" entities and are not subject to federal income taxation.
Liquidation Value	See, "Net Asset Value"
Liquidity Fund	Liquidity Fund was one of the first companies to make a secondary market in limited partnership interests. The company, which is no longer active in the partnership secondary market, was formed in 1980 to invest in limited partnerships through its private investment funds.
Marketability Discount	The marketability discount reflects the diminution in value which results from owning an interest in an asset which is not "readily marketable". The marketability discount is most often expressed as a percentage deduction applied against an interest's minority value.
Minority Interest Discount	The minority interest discount, which is opposite of a "control premium", reflects the diminution of value which results from owning a non-controlling (rather than controlling) interest in an asset. The minority interest discount is expressed as a percentage deduction to an interest's ratable share of a partnership's net assets.
NASD Notice to Members 01-08	Issued on April 16, 2001, this notice provides guidance to NASD member firms as to customer statement reporting requirements. Download the NASD Notice in pdf format: NASD Notice to Members 01-08.
Net Asset Value	Net asset value (or, alternately, "Break-up Value" or "Liquidation Value") represents the value of the limited partners' share of partnership equity based upon a hypothetical sale of a partnership's underlying assets and liquidation as of a particular date. Net asset value is usually stated on a "per unit" basis and does not reflect discounts for lack of marketability or lack of control associated with ownership of fractional partnership interests.
OCC	The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises national banks. The OCC oversight includes monitoring federally chartered banks to ensure compliance with rules concerning the valuation of assets (including hard to value partnership interests) held in trust with the banks it regulates and supervises.
Partnership Profiles	Partnership Profiles is a Dallas, TX based publisher of information and analytics pertaining to limited partnerships and the partnership secondary market. The company publishes an industry newsletter six times a year as well as an annual limited partnership discount study. To learn more about Partnership Profiles, visit www.partnershipprofiles.com.
Passive Income or Loss	Passive income and passive losses generated by a limited partnership reflect a partnership's net income or loss from operating activities net of deductions for interest expense, depreciation, amortization and extraordinary items. Passive income and passive losses are passed through to a partnership's partners based upon allocation provisions established in the agreement of limited partnership. As a result of the Tax Reform Act of 1986, the applicability of passive losses to ordinary income was eliminated for most taxpayers (see, "Tax Reform Act of 1986").
Phantom Income or Gain	Phantom income or gain is created when a limited or general partner receives an allocation of taxable income or gain which is not offset by cash distributions. Phantom income is often generated by older partnerships which have fully depreciated assets and late term, fully amortizing debt. Phantom gain is often generated when an asset is sold by partnerships with large negative bases and little distributable equity. Limited partners receiving allocations of phantom income or gain can often carry forward suspended losses from prior years to offset tax liabilities created when allocated phantom income or gain.
QMDM	An acronym for "Quantitative Marketability Discount Model" developed by Z. Christopher Mercer of Mercer Capital in Memphis, TN. The model can be used by business appraisers to quantify marketability discounts for a minority interest in light of future dividends, holding period, expected residual value, and return requirements. To visit Mercer Capital's web site at www.bizval.com.
Qualified Plans	Valuations of limited partnership interests and other non-marketable securities held in ERISA qualified plans must be reported annually on IRS Form 5500. Valuations are also required when a qualified plan is terminated.
Recapture	Recapture refers to the taxable gain produced when an asset is sold for an amount which exceeds its depreciated basis. The prospect of triggering recapture is often a deterrent to selling partnership assets due to the negative tax consequences which result.
RELP	RELP is an acronym for "Real Estate Limited Partnership".
Roll-Up	A transaction involving the consolidation of two or more entities into a single entity. In the context of limited partnerships, roll-up transactions have historically involved the consolidation of several finite-life, non-traded limited partnerships into a single, infinite life, exchange traded entity. Many of these transactions were considered abusive to investors and, in 1993, the United States Congress passed the Limited Partnership Roll-up Reform Act to limit roll-up abuses.
Swing Vote	A limited partner holds a swing vote interest when the interest held, if combined with the interest of another limited partner, creates a voting block sufficient to assert control over a partnership's affairs. A swing vote interest can warrant a higher valuation than an equivalent minority interest which is not sufficient in size to represent a "swing" vote.
Revenue Ruling 59-60	Revenue Ruling 59-60 (RR 59-60) is the longstanding Internal Revenue Service ruling which describes the factors which must be considered by appraisers in the valuation of closely-held business enterprises (including non-traded limited partnership interests). For a detailed description of RR 59-60, visit www.valuationsgroup.com/rr5960.asp.
Secondary Market	The partnership secondary market was created in the early 1980's when a handful of firms were formed to actively acquire interests in limited partnerships on a secondary basis. Partnerships trading on the secondary market trade infrequently and often at large discounts to net asset value.
Substitute Limited Partner	When a transferee receives full substitution of a limited partner interest, the transferee receives an assignment of economic benefits as well as all other non-economic benefits (i.e., voting rights) held by the transferor. A substitute limited partnership interest is a stronger form of ownership than an assignee interest. Many partnership agreements allow the general partner to determine, at its sole election, whether a transferee will receive full substitution or assignee status.
Tax Reform Act of 1986	The Tax Reform Act of 1986 (TRA86) is most noted for its imposition of passive loss limitations on limited partners. Prior to 1986, the tax laws permitted losses generated from passive investment activities to be applied to offset ordinary income. TRA86 changed the rules, limiting the application of passive losses to the offset of passive activity income (for most taxpayers) and, as a result, severely limiting the tax shelter advantages available prior to passage of TRA86.
Tax Credit Partnership	The tax credit partnership has been one of the most popular public partnership syndication vehicles in the post TRA86 period. Limited partners in tax credit partnerships receive, in addition to an equity interest, tax credits to offset their federal income tax liabilities on a dollar-for-dollar basis. Partnerships which pass-through tax credits to partners own tax credits earned through rehabilitation of historic properties, renting to low income tenants, or both. Boston Capital is the largest syndicator of tax credit limited partnerships. Visit Boston Capital at www.bostoncapital.com.
Unrelated Business Taxable Income	Unrelated Business Taxable Income (UBTI) is the only income which, if earned by a tax-exempt entity, is subject to income taxation. Many limited partnerships generate UBTI when they engage in activities requiring active management. The UBTI rules were generally designed to discourage pension plans from acquiring active businesses and unfairly competing with taxable investors.
Valuations Group, The	The Valuations Group is a Memphis based firm which has been a leader in providing valuations of limited partnerships and other non-marketable securities to investors and their fiduciaries since 1992. To learn more about us, please visit www.valuationsgroup.com.
Wollack, Richard G.	Richard G. Wollack, a co-founder of Liquidity Fund and the First Capital Companies, was a champion of limited partnership roll-up reform in the early 1990's. Mr. Wollack's efforts culminated in passage of the "Limited Partnership Roll-Up Reform Act", a critical investor protection bill signed into law by President Clinton in 1993.
X	"X" designates the Roman numeral for "10" in the Arabic numbering system. Many sponsors of multiple public limited partnerships have designated the 10th partnership in series with the Roman numeral "X".
Year-end Valuations	Year-end valuations of partnership interests are required by many large institutions (banks, trust companies, and brokerage firms) to comply with pension reporting requirements, properly account for trust assets, and to report periodic valuations on customer statements. To learn more about how The Valuations Group can provide your institution with year-end valuations, please visit our products page.
Zell, Samuel	Sam Zell is a noted real estate "vulture" investor and founder of Equity Residential Properties and Equity Office Properties based in Chicago, Illinois. In the late 1980's, Sam Zell acquired First Capital Companies, a major syndicator of real estate limited partnerships.