Key Takeaways

  • Real estate funds, mutual funds, and exchange traded funds commonly use a metric called Net Asset Value to quote the per share value of their investment offering.
  • Net Asset Value is calculated as total assets minus total liabilities, divided by the number of shares outstanding.
  • Net Asset Value is used in a variety of circumstances, including personal net worth calculations, benchmarking return performance, establishing purchase and sale prices and calculating capital gains.

When an individual chooses to invest in a private equity real estate transaction, it typically means they are purchasing securities in a company that owns and operates a piece of real estate.  In some cases, the company may own a single property (as is the case in many of our transactions) or, in other cases, the company may own many properties under the company (as is the case with some mutual funds, exchange traded funds or “ETFs” and other closed-end funds).  Because these securities are not publicly traded, valuing them can be difficult because there is no “market price.”  To overcome this challenge, many investment firms who issue private securities (and even some who issue public securities) use a metric called “Net Asset Value” or NAV for short.

What is Net Asset Value? 

The Net Asset Value of a company is fairly simple to calculate, it is Total Assets minus total liabilities.  Theoretically, any company that deals with assets and liabilities could have a Net Asset Value.  But in the context of a real estate fund or other type of mutual fund in which investors hold shares, there is an added twist to the calculation.  The formula to calculate it is Total Assets minus Total Liabilities, divided by the number of shares.  The “fund’s NAV” provides an individual with an estimate of what their investment is worth.  To illustrate this point, it is helpful to consider how a real estate fund works.

In the beginning, the fund manager puts together the legal documentation necessary to form a company.  They then sell shares in that company to individual investors and use the funds raised to purchase real estate assets that will produce a return in the form of income and appreciation.  Each of these investments will be “levered” meaning that the investment manager will pair funds raised from investors (the equity) with a loan (the debt) to increase the number of assets they can acquire.  Once the capital is deployed, the fund’s assets consist of all of the properties that they have purchased and their liabilities consist of the total balances of the loans they have taken out.  The difference between the two values is the total Net Asset Value for the company as a whole.  When this value is divided by the total number of outstanding shares, the share price of each can be determined.  Often, the share price can be used as a proxy for the market value of the investment.  For those that require it, the share price must be registered on the applicable filings with the securities and exchange commission.

Why Does Net Asset Value Matter?

A fund’s Net Asset Value per share is important for several reasons:  valuation for individual financial calculations, it serves as a benchmark for comparing one firm to another, sets a price for purchase and sale transaction, and it can be a way to calculate capital gains.

First, all individuals, especially wealthy ones may be required to submit a statement of their personal financial condition to various parties as they make investments and file taxes.  In order to calculate the value of their fund shares, they need to be able to know the closing price of the Net Asset Value per share on a given day so they can list it on their statement of financial condition.  This value, along with the value of their other assets, is a major factor in a net worth calculation, which is often considered in loan requests and other investment opportunities.

Second, an investment firm that is looking to boast about their fund’s performance relative to peers will often cite the per share change in the Net Asset Value of their fund. Because this is a commonly used metric for investment managers, it can be an easy way to compare performance across different funds.  For example, if investment firm A had a per share NAV of $10 at the beginning of the year and $11 at the end of the year, they could say that they delivered a 10% return.  They could compare this performance with investment manager B who had a per share NAV of $20 at the beginning of the year and $21 at the end of the year.  When comparing the two per share values, investment firm A could say their returns beat investment firm B based on changes in NAV over the course of a single year. 

In an investment fund, the purchase and sale of shares is incredibly common so firms need to find a way to determine the per share value of the fund.  Net Asset Value is the solution and can set the fair value price of shares when they are being sold to new investors or redeemed by existing investors.

Finally, for tax purposes, the per share pricing can be a way to calculate capital gains when a sale has occurred.  For example, if an individual invested with firm A in the example above, they would have booked a $1 per share capital gain when their position is liquidated and this is used to calculate their tax liability.

Interested in Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets – including service-oriented retail shopping centers – well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. 

Whether you’re just getting started or searching for ways to diversify your portfolio, we’re here to help.  We understand the Net Asset Value calculation and use it where appropriate with our offerings. If you’d like to learn more about our investment opportunities, contact us at (800) 605-4966 or send us an email at info@fnrpusa.com for more information.

 

Take the Next Step

eBook

The Ultimate Guide To Investing In Private CRE

The comprehensive A-Z Guide Every Accredited Investor Should Read Before Investing in Private CRE Deals. Instant eBook Download. Updated for Q1 20201.

Download Ebook
DEAL WEBINAR

Whole Foods Neighborhood Center

Join First National Realty Partners' Co-Founders & Managing Principals Anthony Grosso & Chris Palermo as they unveil our most recent acquisition.

REGISTER NOW
Access our Deals

Private Grocery-Anchored Commercial Real Estate Deals

In just a few clicks, create an investor profile on our deal lobby to instantly access our current deals & educational content.

access our deals