Real estate vs cash flow: when an Indian LLP is actually just a property holder

There is a category of Indian businesses that the founders run as operating companies but the market values mostly as real estate. The factory with the manufacturing operations on land that has appreciated 8x in 20 years. The office tower with the IT services company occupying its own floors. The hotel with the hospitality business sitting on a 4-acre site in Bandra or Indiranagar.

When these businesses come up for sale, the valuation question is structural before it is numerical. Are you valuing an operating business that happens to own real estate, or a real-estate holding that happens to have a small operating business attached? The two framings produce numbers that differ by Rs. 30-150 crore on a single transaction.

The two valuation approaches

Approach one: sum-of-the-parts

Value the operating business on its own cash flows, using the income approach (DCF on operating cash flow, ignoring rent paid to the property arm). Separately value the real estate at market value. Add the two.

The operating business component. A DCF based on a hypothetical scenario where the business pays market rent for the property it occupies. The rent assumption matters: a Rs. 200/sq ft/month rent in Bandra is materially different from a Rs. 80/sq ft/month rent in a non-prime location.

The real estate component. Market valuation by a registered valuer (typically a separate real estate appraiser, not the company's auditor or merchant banker) using comparable transactions and rental yield approaches.

The output. The sum of operating-business value and real-estate value, with no double-counting. The operating business's value reflects its actual operating performance net of market rent; the real estate's value reflects its standalone market value.

Approach two: total enterprise DCF

Value the entire business — operations plus real estate — as a single going concern. The DCF uses actual cash flows, which include no rent paid (because the business owns the property), but also includes the maintenance and depreciation of the property as part of operating costs.

The output. A single enterprise value that bundles operating cash generation and property ownership. The real estate's standalone market value does not surface separately.

Where the gap comes from

When the real estate has appreciated significantly more than the operating business has grown, the two approaches diverge.

Consider a factory in Bawal, Haryana, on 5 acres purchased in 2003 for Rs. 8 crore. The manufacturing business is doing Rs. 60 crore revenue with Rs. 6 crore EBITDA, growing 8 percent annually. The land is now worth Rs. 80 crore.

Sum-of-the-parts:

Operating business: DCF on Rs. 6 crore EBITDA growing 8 percent, less notional market rent of Rs. 2 crore (5 acres at industrial rental yields), at 15 percent WACC, terminal growth 4 percent. Enterprise value of the operations: roughly Rs. 35 crore.

Real estate: Rs. 80 crore at market value.

Total: Rs. 115 crore.

Total enterprise DCF:

DCF on actual Rs. 6 crore EBITDA (no rent), growing 8 percent, at 15 percent WACC, terminal growth 4 percent. Enterprise value: roughly Rs. 65 crore.

The gap is Rs. 50 crore. The total enterprise DCF undervalues the asset by Rs. 50 crore because it does not capture the embedded land appreciation that has nothing to do with operating performance.

The buyer who pays Rs. 65 crore gets the operating business and a Rs. 80 crore real estate asset. The buyer who pays Rs. 115 crore gets the same thing. The buyer's economic position is identical; the seller's outcome differs by Rs. 50 crore.

Why each side argues for one framing

Sellers argue for sum-of-the-parts. The real estate has appreciated. The operating business is fine but not exceptional. The land carries most of the value. They want to be paid for the land.

Buyers argue for total enterprise DCF. Real estate is not their core business. They are buying a manufacturing operation. The land is incidental — it happens to be there, but they are not paying a premium to a real estate developer for industrial land in Bawal that they did not seek out.

The buyer's argument has a kernel of truth: a financial buyer who buys this business may not have any plan to monetize the real estate. Operating businesses cannot easily extract land value without disrupting operations. Moving a factory costs money and takes years. The 'real estate value' that the sum-of-the-parts approach captures may not be realizable for the operating buyer.

The seller's argument also has a kernel of truth: the seller could simply sell the land separately, lease back the operating space, and capture both values. Paying the seller only the total-enterprise DCF rewards the buyer for value that the seller could have unlocked themselves.

The three fact patterns

Pattern one: factory plus manufacturing

Industrial land in a growing region (Bawal, Manesar, Sri City, Sanand) where land prices have appreciated 5-10x in 15 years. Manufacturing margins are moderate (8-12 percent EBITDA). The real estate is a meaningful percentage of total value.

Sum-of-the-parts is the right approach if the buyer can credibly relocate or restructure operations. If not, the parties compromise — typically the seller accepts 70-80 percent of the standalone real estate value, the buyer recognizes that the land has option value even if not immediately monetizable.

Pattern two: office tower plus IT/services

An IT services company that owns its office building (or buildings). Common in Bangalore, Pune, Gurugram. The real estate may be Rs. 100-400 crore. The operating business may have a similar or larger value standalone.

Here the sum-of-the-parts is more defensible because the operating business is portable. The IT services company can relocate to leased space, sell the building, and continue operating. The buyer is paying for the operating business; the building is a separable asset.

Pattern three: hotel plus hospitality

A boutique hotel owning a 1-acre site in a prime urban location. The land is worth Rs. 150 crore. The hotel business does Rs. 30 crore EBITDA. The land value exceeds the operating business value by a significant margin.

This is where the framing fight gets most intense. A pure hospitality buyer will value the asset on hotel operating fundamentals. A real estate buyer will value the land and treat the hotel as a tenant. The right buyer depends on who is at the table.

Sellers in this pattern often structure dual-track processes: market the asset to both hospitality buyers and real-estate buyers, and let the highest bidder reveal the right framing.

What the valuation report should actually contain

For an LLP or company with significant embedded real estate, the valuation report should always present both numbers.

Approach one valuation. Sum-of-the-parts with explicit components: operating business DCF (with market rent assumption), real estate market value by a registered valuer, total.

Approach two valuation. Total enterprise DCF on actual cash flows.

A reconciliation paragraph. Explaining why the two numbers differ, what the difference represents (embedded land appreciation, in most cases), and which framing is appropriate for the specific transaction being contemplated.

A buyer-specific overlay. For a financial buyer with no real-estate strategy, the total enterprise DCF is closer to the relevant value. For a strategic buyer who could monetize the real estate (sale-leaseback, relocation of operations, redevelopment), the sum-of-the-parts is closer.

The report does not pick one number and hide the other. It presents both and helps the parties understand which is appropriate.

Negotiating the framing

The valuation framing is part of the negotiation, not separate from it. Both sides know the math. The question is which framing the deal anchors to.

A useful negotiating tactic for sellers: get an independent real estate valuation from a registered valuer (separate from the company valuer) early in the process. The market value of the real estate becomes a third-party-supported reference point that anchors the sum-of-the-parts argument.

A useful negotiating tactic for buyers: structure the consideration so that the real estate is acquired separately at its market value, and the operating business is acquired at its standalone DCF value. The buyer pays the same total but the allocation is cleaner, and the post-closing accounting and tax treatment is more efficient.

Both tactics work because both parties recognize that the asset is two assets, not one, and that the valuation has to acknowledge that structure.