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NAV in the Nontraded REIT World

March 24, 2017

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NAV in the Nontraded REIT World

March 24, 2017 | by Beth Glavosek | Blue Vault

Close up of businessman holding city model in hands

Important regulatory changes have led the nontraded REIT industry to improve its reporting of net asset values (NAV) per share.

It’s a relatively new concept for nontraded investments. NAV reporting has increased as a result of FINRA Regulatory Notice 15-02, which was released January 2015. The notice required more accurate per-share estimated values on customer account statements, a shortened time period in which a REIT performs a valuation, and various important disclosures.

No more ‘fixed’ share values

Previously, the industry generally used the securities’ offering prices as the per-share estimated value during the offering period. This price often remained constant on customer account statements even though various costs and fees had reduced their principal. Underlying assets may have also increased or decreased in value.

With 15-02’s transparency requirements, product sponsors were faced with disclosing the immediate impact of fees on the investor’s first account statement. A $10 share purchased could easily dip closer to $8.50 actually going “in the ground” once the sales load was taken out. FINRA wanted to ensure that investors understand their true ‘net investment.’

Calculating estimated share values

REITs are now permitted to use two methods to determine net asset value per share. One is the net investment methodology, which requires the sponsor to disclose the impact of sales commissions, dealer manager fees, and estimated issuer offering and organization expenses on the offering share price. The rule permits the net investment value to be used on customer account statements until 150 days following the second anniversary of breaking escrow in the public offering.

The second method is the appraised value methodology, which can be used at any time to determine a reasonable share value. This NAV approach requires that the per-share estimated value be based on appraisals performed at least annually by a third-party valuation expert or service.

The latter method is intended to provide some measure of market-based transparency into share values. With a lump sum investment, investors can access real estate portfolios that are priced more regularly than nontraded REITs have been in the past. Some say that this is the way that institutional investors have traded in and out of portfolios for years. Some nontraded REITs provide daily pricing, but one caveat is that the NAV is largely based on retroactive valuations, not daily public trading prices.

For more information

Blue Vault published its first-ever Nontraded REIT NAV Study on March 10, 2017. It’s available exclusively to Blue Vault subscribers. To view the report, become a subscriber today!

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