Updated · Part of the CRE investment glossary
How NAV works in a real estate fund
NAV is a balance-sheet figure: what the fund would be worth to its owners if every asset were worth its current mark and every liability were paid. The SEC’s investor glossary defines it for investment companies as total assets minus total liabilities; private real estate funds use the same idea, even though their assets trade far less often than securities.
For a real estate fund, the large assets are the properties, plus cash, reserves and receivables. The large liabilities are mortgage loans, then payables, accrued expenses and any distributions declared but not yet paid. Investors usually see NAV in two places: the fund total in the quarterly report, and their own share of it as the ending balance on a capital account statement.
In open-end funds and non-traded REITs, NAV per unit or share is also the price at which investors subscribe and redeem, so how it is set matters to every transaction. In closed-end syndications and funds, NAV is a reporting figure: it feeds TVPI and RVPI and tells investors what their unrealized position is worth today.
The formula
At any valuation date:
NAV = fair value of assets − liabilities; NAV per unit = NAV ÷ units outstanding
- Fair value of assets: properties at their current marks, plus cash, reserves and receivables.
- Liabilities: mortgage debt, payables, accrued expenses and declared but unpaid distributions.
- A net figure for investors may also deduct promote the sponsor would earn if the assets sold at their marks.
Worked example: a two-property fund
A fund owns two properties. Property A earns $1,200,000 of NOI and is marked with a 6.0% cap rate. Property B was appraised at $15,000,000. The fund has 160,000 units outstanding.
| Line | Calculation | Amount |
|---|---|---|
| Property A | $1,200,000 ÷ 6.0% | $20,000,000 |
| Property B | Appraisal | $15,000,000 |
| Cash and reserves | Bank balances | $1,500,000 |
| Total assets | $36,500,000 | |
| Mortgage loans | $12,000,000 + $8,000,000 | −$20,000,000 |
| Payables and accruals | Open bills, accrued costs | −$500,000 |
| NAV | $36,500,000 − $20,500,000 | $16,000,000 |
| NAV per unit | $16,000,000 ÷ 160,000 | $100.00 |
Why leverage makes NAV move faster than property values
Debt stays at its balance when values change, so every change in property value lands on NAV. In the example, if Property A’s cap rate moves from 6.0% to 6.5% with NOI unchanged, its value falls to $1,200,000 ÷ 6.5% = $18,461,538. That is a 7.7% drop in the property, but NAV falls by the same $1,538,462 to $14,461,538, or $90.38 a unit: a 9.6% drop.
The same effect works upward. It is why two funds holding similar buildings can report very different NAV changes in the same quarter, and why NAV should be read with the fund’s leverage.
How real estate is valued for NAV
Properties have no daily price, so a fund chooses a method and a frequency and states them in its reporting policy:
- Independent appraisals, often annually or on a rotating schedule, with internal updates in between.
- Direct capitalization: current or stabilized NOI divided by a market cap rate.
- Discounted cash flow: projected NOI and a sale value, discounted at a target return.
- Cost: common for land or a property just bought or under construction, until it is stabilized.
- Industry reporting standards such as the NCREIF PREA Reporting Standards set expectations for institutional real estate funds; smaller sponsors often follow a simpler written policy.
What to watch for
A NAV is only as good as its inputs. Before comparing two numbers, check:
- Stale marks: a value set before a change in rates or occupancy can overstate or understate NAV.
- Debt at balance or at fair value: a below-market loan is worth something to the owner and some funds mark it.
- Accrued promote: gross NAV and NAV net of the sponsor’s promote can differ materially late in a deal.
- Transaction costs: NAV marks properties at value, not at what a sale would net after broker and closing costs.
- NAV vs capital account balance: a capital account follows the agreement’s allocation rules and tax basis, which may not match an investor’s share of NAV.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.