Category Archives: Subscribers Only

Will Real Estate Investors Benefit from Tax Changes?


Will Real Estate Investors Benefit from Tax Changes?

December 20, 2017 | Beth Glavosek | Blue Vault

closeup money in male hands

Now that the “Tax Cuts and Jobs Act” has been passed by Congress and signed by President Trump, investors in real estate investment trusts (REITs) and other alternative real estate investments may stand to benefit.

Tax benefits are part of REITs’ appeal, so it’s fair to wonder how any changes in tax code would affect these investments. Here’s a short list of some of the implications.

Reduction in taxes on dividends/distributions

REIT shareholders who now pay the top income tax rate of 39.6% on dividends they receive would see that rate drop to 29.6%, according to Nareit, formerly the National Association of Real Estate Investment Trusts. “Clearly this is a deduction that will lower the overall tax rate for individuals who invest in REITs,” said Dianne Umberger, REIT lead for Ernst & Young’s National Tax Department, as quoted in the Wall Street Journal this week. Note: the tax rate on any capital gains remains unchanged.

Like-Kind Exchanges Remain for Real Estate

The bill in its current form preserves the tax advantages of 1031 (like kind) exchanges for real estate properties. This is good news for those who need to relocate or upgrade into assets that better meet their business needs. However, 1031 benefits have been eliminated for other categories of investments like art and collectibles.

Asset Depreciation Schedules May Spur New Construction

According to Reis, businesses will be able to immediately expense many asset purchases; after five years of 100% expensing, the rate will phase out at 80%/60%/40%/20% rates over the ensuing four years.

As the implications from this tax bill unfold, Blue Vault will report updates as we receive them.

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How an Attack on a Nontraded REIT Sponsor Made a Hedge Fund Manager $60 Million


How an Attack on a Nontraded REIT Sponsor Made a Hedge Fund Manager $60 Million

Full-length confident person in formal suit. A sketch of New York city and forex chart on the background. A concept of the asset management.

December 18, 2017 | James Sprow | Blue Vault

When Blue Vault began seeing signs that United Development Funding V (UDF V), a nontraded REIT program sponsored by United Development Funding, L.P. (UDF) in Dallas, Texas, was not able to file the 10-K for 2015, it naturally raised suspicions that all was not right with the REIT or the REIT’s sponsor.  A previous nontraded REIT program from UDF, United Development Funding IV (UDF IV) had listed its common shares on the NASDAQ in June 2014, trading in the range of $16 to $20 per share.  When the news broke that the FBI had executed search warrants at UDF’s corporate offices on February 18, 2016, it seemed to confirm that where there was smoke, there was fire, and that rumors and web postings that had accused UDF of being a “Ponzi scheme” might have some merit.  On February 18, 2016, the day of the FBI raid, UDF IV traded below $4 per share, and trading was halted on the NASDAQ. 

On November 28, 2017, United Development Funding, L.P. and its related companies filed a lawsuit in Dallas County, Texas, accusing hedge fund manager J. Kyle Bass and his closely held company Hayman Capital Management, L.P., of perpetrating a “short-and-distort” scheme by spreading false and damaging information about UDF in order to drive down the company’s stock price and profit by covering their short positions by buying shorted shares at much lower prices. 

In the 61-page lawsuit filing, UDF lays out their case in great detail, documenting how, allegedly, J. Kyle Bass conspired to create a false narrative, using false identities, creating websites that purported to uncover negative facts about UDF, and accumulating a huge short position in UDF IV’s shares to profit as the false narratives shook investor confidence and caused panic selling.  Bass’ short position reached over 4 million shares prior to December 10, 2015.  By December 15, 2015, UDF IV’s share price had dropped almost 50% in five days.  By February 12, 2016, UDF IV’s shares were down to $6.67, and trading was halted on the NASDAQ on February 18 with the price below $4 per share.  Bass and his company closed out their massive short position by October 27, 2016, after posting a continual flurry of negative articles about UDF on a website they had created at “” 

The lawsuit filing by UDF vs. J. Kyle Bass makes fascinating reading, almost like a novel.  Blue Vault will continue to follow the case as it proceeds, but for now, it can be said that there are definitely two sides to the United Development Funding story, and there may indeed be a strong case made that an unscrupulous hedge fund manager perpetrated a fraud against a legitimate REIT in order to profit from their fall, harming many investors in the process.    

The full lawsuit document is available at:, using the Case No. CC-17-06253-B.

It will make fascinating holiday reading!

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How Interval Funds Compare with Traditional Closed-End Funds


How Interval Funds Compare with Traditional Closed-End Funds

December 7, 2017 | Beth Glavosek | Blue Vault

Balance concept

Last week, we looked at the similarities between closed-end interval funds and mutual funds. Like mutual funds, interval funds offer the transparency, regular valuations, and investor protection elements of the 1940 Act.

As a recap, both interval funds and mutual funds offer shares continuously that are priced daily based on net asset value (NAV). While open-end mutual funds can be redeemed daily, interval funds offer redemptions, as the name implies, at specific intervals such as quarterly or monthly. 

So, what are closed-end funds, and how are they similar and different from interval funds? Closed-end funds first became available in 1893, 30 years before open-ended mutual funds were created. Brought under federal regulation by the 1933 Securities Act, closed-end fund rules were further formalized under the Investment Company Act of 1940. Unlike open-ended funds, closed-end funds have a fixed number of shares to sell. Once the initial public offering is complete, shares may be bought and sold on public exchanges (like the NYSE). Share pricing may be above or below actual underlying NAV, depending upon market demand.

Similarities Between Closed-End Funds and Interval Funds

  • Allocations to illiquid holdings. Both closed-end funds and interval funds may allocate in unlimited amounts to illiquid assets.
  • Daily valuations. Unlike some unlisted securities that don’t provide more frequent valuations, both of these offer transparency through daily pricing.
  • Unrestricted access to both private and public investments. Open-ended funds are only allowed limited access to private investments, whereas closed-end funds and interval funds may allocate freely to private investments.

Differences Between Closed-End Funds and Interval Funds

  • Offering of shares. Interval funds make a continuous offering of shares, while closed-end funds offer shares one time through an initial public offering (IPO).
  • Exchange trading and pricing. Interval funds sell their shares directly to the public with direct redemptions available at NAV. Closed-end fund shares may be bought and sold on an exchange only at market pricing that may be more or less than NAV.
  • Frequency of redemptions. Closed-end fund holders may buy and sell shares at any time based on trading volume. Interval funds usually restrict redemptions typically to quarterly intervals.

In upcoming posts, we’ll continue to look more closely at interval funds and what they have to offer.

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An Introduction to Interval Funds


An Introduction to Interval Funds

November 29, 2017 | Beth Glavosek | Blue Vault

Investment on Pocket Watch Face. Time Concept.

Closed-end interval funds are a relatively new way for investors to participate in alternative investments like real estate. But what are they, and how are they different from other real estate offerings?

Interval funds are SEC-registered closed-end funds that provide continuous offerings of their securities. They usually price and sell their shares daily, but do not list them on an exchange. What does this mean from a layperson’s perspective? In general, it means that investors can access the real estate and other alternative asset classes offered traditionally by closed-end funds without committing their money for an undetermined amount of time.

Interval funds are basically very similar to mutual funds, but with a few differences.

What’s in Common with Mutual Funds

Interval funds offer shareholders and financial professionals the transparency, valuations, and investor protection elements of the 1940 Act. Some of the common elements between mutual funds and closed-end interval funds are:

  • Continuous offering of shares. Interval funds are similar to mutual funds in that they continuously offer their shares at a price based on net asset value (NAV). Unlike closed-end funds and other unlisted securities, there is not a single IPO price, and there are not specific periods in which shares are offered for the public to buy.
  • Regular valuations. Interval funds offer daily pricing that is reflective of regular valuations going on behind the scenes, much like mutual funds.
  • Not traded on exchanges. Both are not traded on stock exchanges. That means that you can buy and sell shares directly from the mutual fund or interval fund company without having to go to a stock exchange (like the NYSE).

Differences from Mutual Funds

  • Allocations to illiquid holdings. Mutual funds are NOT allowed to hold more than 15% of their assets in investments that cannot be readily liquidated or sold. This measure is intended to maximize investors’ ability to get in and out of the fund. However, closed-end interval funds are allowed more latitude in this area and may allocate much more to assets that cannot be readily sold.
  • The ability to sell shares daily. While mutual fund holders can buy and sell their shares on a daily basis as much as they like, most interval funds restrict buying and selling to a quarterly basis (some only offer to repurchase semi-annually or annually), and there are limits to selling shares.

In upcoming posts, we’ll look at some other characteristics of closed-end interval funds and why they may make sense for some of today’s investors.

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SEC Filings Part 1: What are All of Those Forms?


SEC Filings: What are All of Those Forms? 

November 10, 2017 | Beth Glavosek | Blue Vault

The U.S. Securities and Exchange Commission (SEC) logo hangs on a wall at the SEC headquarters in Washington, in this June 24, 2011, file photo.  As the U.S. Securities and Exchange Commission seeks to become a more formidable force in the courtroom, a string of trial defeats in the past six months has exposed a weak spot: witness testimony. In four of the five trials that the securities regulator recently lost, the jury or judge were not convinced by the witnesses brought in by SEC litigators, according to court transcripts, rulings and interviews with defense lawyers. While there were also other factors influencing the verdicts, some legal experts said the issues with witness credibility were significant and reflect the need for SEC litigators to better vet and prepare their witnesses - or drop cases where they aren't strong enough. To match story Insight USA-SEC/COURT     REUTERS/Jonathan Ernst/Files    (UNITED STATES - Tags: CRIME LAW POLITICS BUSINESS LOGO)

Reading companies’ Securities and Exchange Commission filings probably doesn’t rank as high on the fun factor as say, watching a good movie or going to a concert. However, they do serve an important purpose.

Finding valuable information

The SEC requires public companies, “to disclose meaningful financial and other information to the public, which provides a public source for all investors to use to judge for themselves if a company's securities are a good investment.”

Common reports that provide clues to a company’s health include:

  • Form 10-Q (contains unaudited quarterly financial statements)
  • Form 10-K (contains audited annual financial statements)
  • Form 8-K (current information including preliminary earnings announcements)
  • Registration statements, including Form S-1. A registration statement is required for new issuers under the Securities Act of 1933. This form number can vary according to the type of company. Nontraded REITs file S-11 statements, while Business Development Companies and Interval Funds file N-2s.

Offering documents – also known as prospectuses – are also filed with the SEC. Prospectuses are usually part of the registration statement or may be filed as supplemental documents or “supplements.” 

Other common filings

A post-effective amendment is required if a continuous offering makes fundamental or material changes after the effective date of the registration statement.

Companies are required to send proxy statements prior to any shareholder meeting, whether an annual or special meeting. The information contained in the statement must be filed with the SEC before soliciting a shareholder vote on any matter related to company business and must disclose all important facts that shareholders need to know in order to vote.

For more information

For additional guidance from the SEC on how to read company filings, check out their Beginner’s Guide to Financial Statements.

In future posts, we’ll look at how you can use SEC filings to find answers to specific questions and concerns you may have before or after investing in a company.

SEC Filings Part 2: A Closer Look at Some Key Issues

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The Impact of Amazon on Grocery Sector and Phillips Edison Grocery Center NTRs


The Impact of Amazon on Grocery Sector and Phillips Edison Grocery Center NTRs

October 20, 2017 | James Sprow | Blue Vault


Vegetables at a market stall

The June 16, 2017 announcement of the acquisition of Whole Foods by Amazon sent shock waves through the grocery industry. From June 1 through June 16, Kroger (KR), a grocery chain with 2,460 stores in the U.S., lost 26% in the value of its common stock. SuperValu Inc. (SVU), with 2,000 stores in the U.S., lost 20% in the value of its common stock over that same period. Even Wal-Mart (WMT), not nearly as dependent upon the grocery business, lost 6% in the value of its common stock over those 15 days. Was this attributable to the Amazon announcement? By comparison, the S&P 500 Index was up 0.1% for the same period, indicating that yes, indeed, Amazon’s entry into the grocery business was perceived by investors as damaging to the prospects for several large, publicly traded grocery chains.

For nontraded REIT investors, the two NTRs that are most closely associated with the grocery business are Phillips Edison Grocery Center REITs I (PEGCR I) and II (PEGCR II). These companies have investment strategies that focus on grocery-anchored, neighborhood and community shopping centers “that have a mix of creditworthy national and regional retailers that sell necessity-based goods and services in strong demographic markets throughout the United States” according to their annual reports.

How dependent are the two NTRs advised by Phillips Edison NTR and sponsored by Phillips Edison Limited Partnership on the lease revenues from large grocery chains such as Kroger? The following table gives an overview of the NTR portfolios and their tenant concentrations.

Screen Shot 2017-10-20 at 7.38.15 AM
Source:  SNL


The Phillips Edison NTRs are well-diversified in their tenant mix, with no single tenant contributing more than 8.8% of the REIT’s lease revenues. PEGCR I has 52.9% of its leased square feet in the grocery industry as of June 30, 2017, and that percentage was 52.7% for PEGCR II. The weighted average remaining lease terms for PEGCR I and PEGCR II were 5.4 and 5.8 years, respectively as of Q2 2017. As with other shopping centers, however, the economic success of the anchor stores has spill-over effects on other tenants.

The most recent analyst ratings for Kroger according to were upgrades, but Kroger’s stock is down 32% from June to October 17. Clearly, investor confidence in the long-term prospects for Kroger and other grocery chains has been shaken.

Necessity-based retailing, such as the grocery-anchored properties in the Phillips Edison NTR portfolios, has been one bright spot in the retail sector over the last several years. While other retailers have been reeling from the impacts of e-commerce in general and Amazon specifically, the grocery business has been spared some of the worst effects due to the nature of its products and their customers’ preferences for in-store shopping. However, most grocery retailers are also responding to the e-commerce trend by adding on-line shopping and pick-up and delivery options to their platforms. Amazon’s entry into the sector through its acquisition of Whole Foods will likely accelerate this trend.

On May 9, 2017, the board of directors of PEGC REIT I reaffirmed its estimated value per share of common stock of $10.20 based substantially on the estimated market value of its portfolio of real estate properties as of March 31, 2017, up from its $10.00 offering price. The board of directors of PEGC REIT II established an estimated NAV per share of $22.75 on May 9, 2017. The stock was originally offered at $25.00 per share.

On September 1, 2017, Phillips Edison Grocery Center REITs I and II entered into agreements that terminated all remaining contractual and economic relationships with American Realty Capital.



Learn more about Phillips Edison & Company on the Blue Vault Sponsor Focus page.

Click Here



Phillips Edison Grocery Center REIT I Internalizes Management

Phillips Edison Grocery Center REIT I Shareholders Approve Internalization

Phillips Edison Expands Holdings With Illinois Retail Buy


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America’s Data Centers Deliver Results


America’s Data Centers Deliver Results

October 13, 2017 | Beth Glavosek | Blue Vault

Data Center with 4 rows of servers

Given the destruction caused by recent hurricanes, it’s impressive to learn that internet service and the cloud remained intact and resilient, even as millions of people lost power or saw their homes and businesses flooded.[1]

What makes this connectivity possible, even after catastrophic storms, is the humble data center. Data centers house and maintain back-end information technology (IT) systems and data stores—mainframes, servers and databases – on behalf of major enterprises. As one technology executive puts it, “Data centers, to me, are 362 days of boredom [each year].” But, when they’re needed most is when they really shine.

Where are America’s data centers?

According to Data Center Knowledge, data centers historically have been located in remote locations because of cities’ expensive land and energy costs. However, they have been moving closer to end users in order to reduce ‘lag time’ in connectivity. After a push to build data centers closer to metro areas such as New York City, Los Angeles and San Francisco where there is a large concentration of customers – known as the ‘data center clustering effect’ – cloud computing gained momentum and data centers moved to locations where their tenants’ businesses were located, often outside of large cities. Today, data centers are increasingly being built in secondary and tertiary markets.[2]

How data centers weather disaster

Data centers are specifically designed to withstand external forces like storms or ice. In order to maintain industry certification through the Seattle-based Uptime Institute, they must demonstrate that they can keep running after a “plug is pulled.” When electricity is lost, data centers have powerful diesel generators that kick into gear. Other important considerations are building above the 500-year floodplain and having staff who are prepared to shelter in place. Sites are frequently stocked with thousands of gallons of diesel fuel for their generators, food and water, emergency medical kits, showers, bunkrooms and flares.[3]

Investing in data centers

According to the National Association of Real Estate Investment Trusts (NAREIT), there are six REITs that are currently focused on data center holdings. According to NAREIT, data centers led the entire REIT market’s performance in the first four months of 2017 with an 18.03% total return. Forbes reported in September that the average year-to-date total return for all Data Center REITs was 29.1%. Among nontraded REITs, Carter Validus Mission Critical REITs I and II have focused their property investments in data centers as well as health care facilities. The two nontraded REITs own 20 data centers each.

As e-commerce and other driving factors continue to fuel the demand for data, it’s clear that data centers will continue to play a very important role in business continuity and keeping America running even through challenging circumstances.

[1] James Glanz, “How the Internet Kept Humming During 2 Hurricanes,” The New York Times, September 18, 2017.

[2] Loudon Blair, “Finding Strength in Numbers: The Data Center Clustering Effect,” Data Center Knowledge, October 11, 2017.

[3] James Glanz, “How the Internet Kept Humming During 2 Hurricanes,” The New York Times, September 18, 2017.

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Do We Need to Re-Think Inflation Expectations?


Do We Need to Re-Think Inflation Expectations?

October 12, 2017 | James Sprow | Blue Vault

Growth Rise Up Chart

One big question that Fed officials and economists generally are grappling with is “What’s happened to inflation?” The standard benchmark that Federal Reserve policy makers have used is an annual consumer price index rising at 2%. The persistence of inflation rates below the 2% target has observers scratching their heads and considering the possibility that fundamental changes in the U.S. economy, and indeed in the world economy, have rendered the 2% expectation obsolete.

In an article in, Zachary Karabell states, “The economic truths of the past may or may not be true anymore.” As the economy improves and companies start hiring, unemployment falls and wages are supposed to go up, pushing up prices and increasing inflation. The Federal Reserve has recently been assuming that some economic conditions were simply taking longer to “return to normal.” Both Karabell and members of the Federal Reserve’s Open Market Committee are asking, “What if the stubborn lack of inflation is not just a short-term blip?”  

The minutes of the Federal Open Market Committee’s September meeting reveal much discussion and even some disagreement about the long-term trajectory of expected inflation:

“Based on the available data, PCE price inflation over the 12 months ending in August was estimated to be about 1-1/2 percent, remaining below the Committee's longer-run objective. In their review of the recent data and the outlook for inflation, participants discussed a number of factors that could be contributing to the low readings on consumer prices this year and weighed the extent to which those factors might be transitory or could prove more persistent.”

“Some participants discussed the possibility that secular trends, such as the influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying. It was noted that other advanced economies were also experiencing low inflation, which might suggest that common global factors could be contributing to persistence of below-target inflation in the United States and abroad.”

For now, the Fed will continue to watch their two key indicators, the unemployment rate and inflation, and they expect economic conditions to “evolve in a manner that would warrant gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run.” 

Clearly, if the fundamental forces that influence the rate of long-term inflation, both in the U.S. and globally, have changed, then the conventional thinking of the Fed and the financial markets may need to adjust to a new reality of lower long-term trends in inflation.

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SEC Working Toward a Proposal on a New Fiduciary Rule


SEC Working Toward a Proposal on a New Fiduciary Rule

October 4, 2107 | Beth Glavosek | Blue Vault

United States Capitol Building, Washington, DC

On Wednesday, October 4, in a Capitol Hill appearance, Securities and Exchange Commission (SEC) Chairman Jay Clayton told lawmakers that the agency is drafting its own proposal for a fiduciary rule, according to Investment News.

The commission has been accepting comments, and Clayton told the House Financial Services committee that, “We’re going to work with the Department of Labor. However, if this were easy, it would already have been fixed.”

According to Investment News and Barron’s, Clayton reiterated past comments insisting that such a rule must preserve investors’ choice to use a broker or advisor, be clear, apply to retirement and non-retirement accounts, and involve cooperation between the SEC and the Labor Department.

Clayton said that he’s confident that the SEC can create a rule that meets those standards and protects investors in a way which they understand. While not providing a timeframe, he reassured Republican lawmakers that opponents’ concerns about the DOL fiduciary rule will be addressed.



Delay in Fiduciary Rule Implementation Causing Issues

ALERT: DOL Fiduciary Rule Delay Published

House committees ready two assaults on DOL fiduciary rule this week


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The Art of Wholesaling


The Art of Wholesaling

September 28, 2017 | Beth Glavosek | Blue Vault

Euro coins. Euro money. Euro currency.Coins stacked on each othe

In an upcoming blog series, Blue Vault is going to examine the role of the wholesaler in the financial services industry.

It’s been said that wholesalers are the ‘muscle’ behind the billions of dollars of fund shares sold through advisors and bought by investors each year. A wholesaler is someone who represents a product sponsor and its offerings. Known for being ‘road warriors’ who travel the country, wholesalers visit advisors and Broker Dealers to educate them about the benefits of the sponsor’s offerings and the unique value they bring to the marketplace of investments.

According to Evan Cooper of Investment News, “knocking on advisors' doors is a tough (although potentially very lucrative) job that typically gets little attention and not as much respect as it deserves.”

So, what does a wholesaler do, in addition to convincing advisors and Broker Dealers to add an offering to their sales platforms? Because they’re on the front lines of representing product sponsors, wholesalers also must:

  • Understand the offering thoroughly and how it can benefit investor clients
  • Have thorough knowledge of competing products and how their offering stacks up against them
  • Provide value-added knowledge about the marketplace and what it takes for an advisor to meet client needs
  • Collaborate and share educational content, including offering opportunities for advisors of all kinds to get together and share ideas

In the coming weeks, we’ll talk with some successful wholesalers and learn more about their habits, what their typical days are like, how they stay at the top of their game, and what it takes to succeed in the world of financial wholesaling.

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How Are Markets Rebounding from Harvey?


How Are Markets Rebounding from Harvey?

September 22, 2017 | Beth Glavosek | Blue Vault


As the city of Houston continues its recovery after Hurricane Harvey and its catastrophic flooding, analysts are starting to size up the long-term implications on the real estate market, real estate investments, and the overall economy.

Here are a couple of areas to watch:

CMBS Offerings and Office Sector
Last month, Bloomberg Markets reported some key findings on the hurricane’s impact on commercial mortgage-backed securities (CMBS). Morgan Stanley estimates that Houston-area offices, malls, and hotels support nearly $9 billion of the loans packaged since the financial crisis. Flood damage could jeopardize the payoff of about $1.13 billion in loans maturing in the next 12 months, according to the Bloomberg article and analysts at Morningstar Credit Ratings.

In the immediate term, there are elevated expenses for office owners and landlords related to cleanup and any damage not covered by insurance, according to Bloomberg Intelligence analyst Jeffrey Langbaum. There shouldn’t, however, be any near-term impact on revenue for buildings if they are leased but, “if companies end up moving, or go under, there will be longer-term disruption,” he says. Large office buildings could struggle if they aren’t able to show or renovate their spaces in preparation for lease expirations.

REITs with significant exposure to Houston could see some effects if there are near-term tenant and lease risks related to the above issues. However, according to Blue Vault’s research, only one nontraded REIT has suffered a casualty loss due to a hurricane, and that was a relatively minor insurance claim of just a few million dollars for a large portfolio. Because most nontraded REITs have portfolios that span the nation and even the world, Blue Vault believes that the diversification available in these portfolios offers great protection against localized disasters. 

Energy and Fuels
According to IHS Markit, an information and analytics company whose data includes the energy industry, 15 of the 20 affected refineries in the Gulf Coast energy complex were at or near normal operating rates as of September 19. While around 1.0 million b/d of distillation capacity (5% of US total) is estimated to still be offline, steady progress appears to have been made to be operating normally in the near future. IHS Markit has observed that refined product markets have calmed considerably and that the NYMEX RBOB spot price was essentially back to its pre-Harvey level.


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How Commercial Real Estate Mitigates Disasters


How Commercial Real Estate Mitigates Disasters

September 15, 2017 | Beth Glavosek | Blue Vault


Whenever a natural disaster strikes, investors in commercial properties may wonder how their assets are being managed and protected. According to the Whole Building Design Guide, a program of the National Institute of Building Sciences, “the most successful way to mitigate losses of life, property, and function is to design buildings that are disaster-resistant.”

Ideally, a building’s resistance to disaster should be incorporated into the project planning, design, and development at the earliest possible stage so that design and material decisions can be based on an integrated "whole building approach," according to the guide. Later in the building's life cycle, risks from natural hazards may be addressed when renovation projects and repairs of the existing structure occur.

The term ‘building resilience’ describes a commercial building’s ability to withstand the rigors of nature and possibly man-made stresses. According to the Building Owners and Managers Association International, “Resiliency begins with ensuring that newly constructed buildings, alterations, additions and major renovations to existing buildings are constructed in accordance with applicable modern building codes, with the design focusing on the adaptability of the building over its life cycle to evolve with changes occurring in both the built and natural environment. Proper planning and design can significantly reduce the amount of damage sustained during a disaster, which in turn will lead to shorter recovery periods, increase business continuity and expedite the community’s return to normal.”

In other words, investors in commercial properties can take heart in knowing that today’s best practices include continuous attention to upgrades and standards that will allow buildings to better withstand the challenges that may come along due to weather or other hazards.

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Emergency Preparedness: Some Best Practices for Property Managers


Emergency Preparedness: Some Best Practices for Property Managers

September 6, 2017 | Beth Glavosek | Blue Vault



As we saw last week with Hurricane Harvey and now with Irma headed toward south Florida, Mother Nature can be relentless. When it comes to protecting property – whether personal or business-related – having a current emergency preparedness plan in place helps preserve human life and minimize damage as much as possible.

When it comes to protecting commercial real estate (CRE), property managers usually have the responsibility for preparing emergency plans. Such plans protect the safety of employees who work in the buildings as well as the buildings themselves as much as possible.

According to the Institute of Real Estate Management (IREM), the following are just some of the key components for CRE disaster planning:

Use all of Modes of Crisis Communications

When there is a disaster of any kind, one of the most important things to do is communicate with tenants, residents, staff, and clients to ensure everyone’s safety and security. IREM says that crisis responders should maximize use of the variety of options available for providing immediate notifications and ongoing updates. These options include: automated mass notifications that include text messages, phone messages (mobile, home, work or other phones), and e-mail; toll-free phone numbers with pre-recorded messages; online options (like Twitter, Facebook, or other social media); and backup phone systems that include mobile and satellite options.

Follow Business Continuity Plans

Effective business continuity plans contain multiple facets, but perhaps the most critical are protecting IT systems with adequate backups, hard copies, and vendor arrangements, as well as protecting the business’s contents, inventory, and production processes with adequate insurance. The Insurance Institute for Business and Home Safety provides a free toolkit that covers the array of components that a business continuity plan should have.

Take Protective Actions for Life Safety

An emergency plan should include detailed instructions on how to carry out protective actions to keep peoples’ lives safe. According to, protective actions for life safety include Evacuation, Sheltering, Shelter-In-Place, and Lockdown. Some actions will be more appropriate for certain situations than others. For example, in the case of hazards like fire, chemical spills, bomb threats, or suspicious packages, building occupants should be evacuated or relocated to safety. Other incidents like tornadoes would require that everyone be moved to the strongest part of the building and away from exterior glass. If a transportation accident nearby causes a release of chemicals, the fire department may warn to “shelter-in-place.” Lockdowns are appropriate when dealing with human intruders.

In future posts, we’ll look at how property managers get damaged buildings up and running again, as well as ways to protect investors’ assets.

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What’s Next for Houston’s Downtown Business District?


What’s Next for Houston’s Downtown Business District?

August 31, 2017 | Beth Glavosek | Blue Vault

Houston Flood adobe

As the nation witnesses the historic and catastrophic flooding in the city of Houston, one question on the minds of many is, “What will it take to recover and rebuild?”

According to the Houston Downtown Management District (HDMD), the city’s downtown area is headquarters to several prominent firms, including nine Fortune 500 companies, as well as more than 3,000 businesses housed in over 50 million square feet of office space. Houston’s downtown is one of the 10 largest CBDs in the nation with 150,000 people employed there.

While Hurricane Harvey created conditions that are impossible to fully prepare for, fortunately, and not surprisingly, it appears that the city has kept a detailed and current emergency response plan in place for quite some time. The plan, updated in April 2017, details specific steps for property managers and building owners to take in the event of a rapidly evolving storm and flooding.

A representative for HDMD issued a statement on August 30 saying, ”Over the next days, weeks and months, we will be working with our Downtown stakeholders to support the recovery of our great City. Overall, Downtown has fared well and is stable. While conditions are improving, we realize that many areas of Houston still have high water and/or no power.”

From a tactical standpoint, after the rain diminishes, key personnel will be expected to survey property damage and report their findings immediately to the HDMD, even if there is no damage. The HDMD will continue to issue advisories of roadway conditions for employees. Once properties are secured from hazards like falling glass and impassable sidewalks, and adequate water pressure and power are available, property managers can immediately proceed with repair work to be done in off-peak hours. Permits to ensure compliance with city standards are mandatory.

In future blog posts, we’ll look at disaster preparedness best practices for commercial property owners, as well as information that investors in commercial real estate might want to know when disaster strikes.

Ways to Help

Our hearts go out to our fellow citizens in the great state of Texas. We are praying for them! Donations to help with their relief and recovery may be made at one of the following:

Samaritan's Purse International Relief 
Southern Baptists of Texas Convention

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Have You Been Tracking Sales Lately?


Have You Been Tracking Sales Lately?

August 23, 2017 | Beth Glavosek | Blue Vault

Growth Rise Up Chart

If you’ve been following sales trends in alternative investments, you’ve likely noticed that sales are down. After reporting sales of $350.9 million in June, nontraded REIT (NTR) sponsors’ monthly total for July fell to $245.8 million – a difference of 30%.

Business Development Companies (BDCs), nonlisted Interval Funds, and nonlisted Closed-End Funds were also down in the month of July. Private Placement sales declined as well, albeit only by a very modest -0.7%.


Sales in MillionsJune 2017July 2017% Change
Nonlisted Interval Funds and nonlisted Closed-End Funds$133.3$111.8-16%
Private Placements$150.5$149.4-0.7%


The trailing six-month average for NTR sales was $371 million as of June 30, 2017, while BDCs’ trailing six-month average was $66 million.

So, what accounts for the decline in sales? Blue Vault’s Director of Research James Sprow notes that a drop in sales during the summer is not unusual for the industry and was also observed in 2016. “Average monthly NTR sales in 2016 for June, July and August dropped 29% from the NTR sales for the previous three months. So far in 2017, the average sales in June and July were 29% below the average for the previous three months, so it’s pretty consistent to see a drop in the summer months.”

Does anyone know what’s on the horizon for alternative investment sales? “The industry is continuing to evolve, just like every other industry. We’re seeing new products like nontraded interval funds and nontraded closed end funds. There’s also the latest nontraded REIT that just broke escrow in January and has dominated the NTR sales numbers since then, the Blackstone REIT. We’re seeing lower fees and multiple share classes as sponsors adapt to the latest regulatory issues, so it’s a challenge just to keep up with all of the changes,” Sprow says.

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Who’s Who in Alternative Investment Offerings?


Who’s Who in Alternative Investment Offerings?

August 16, 2017 | Beth Glavosek | Blue Vault

Stock market abstract background

Investors looking at prospectuses for nontraded REITs (NTRs), Business Development Companies (BDCs), and other alternative investments might see a diagram, organization chart, or other explanation of the entities involved in the offering. But, how can the reader make sense of their roles, especially if some of those entities have the same name or are the same company?

Blue Vault looked at a sampling of organization charts from five NTR offerings, noting that the Sponsor, Advisor, Property Manager and Dealer Managers are in almost all cases (4 of 5) totally owned by the Sponsor. In other words, the same people who run the Sponsor are also running the Advisor, Property Manager and Dealer Manager in those cases. 

We wondered if the definitions of these roles are uniform across the industry, so we asked the Head of Due Diligence for a major NTR sponsor for some basic descriptions. The following is a “cheat sheet” of terms that he identified that might help untangle some of these legal relationships.

Sponsor: The sponsor is essentially the owner of an NTR’s External Advisor, Property Manager, and Dealer Manager. “In our case, the sponsor is a trade name (not a legal entity itself) to identify a group of affiliated companies that are involved with different activities related to our NTRs. The companies within this umbrella are all separate legal entities,” he says. He notes that most sponsors are private companies owned by individual stakeholders.

Advisor: Unless an internalization transaction has occurred, the NTR itself does not have any employees and is managed by an “external” advisor. Here are some important points to remember about the advisor:

  • It’s a separate legal entity responsible for managing the NTR’s day-to-day affairs. It’s owned by the sponsor and not by the NTR itself.
  • Its officers and key personnel are typically employees of the sponsor.
  • It’s connected to the NTR through an advisory agreement, which can usually be terminated by either party under certain conditions.
  • The fees earned by the advisor for managing the NTR (i.e., advisory, acquisition, financing, property management, leasing, disposition, performance, etc.) roll up to the sponsor since it owns the advisor. 

Property Manager: NTRs acquire real estate properties that require some degree of management in order to properly maintain them. Most, if not all, NTRs have a separate legal entity responsible for managing the NTR’s properties. Some NTRs pay a separate property management fee for these services, while others receive property management services under the advisory agreement. In addition, the affiliated property manager for a few sponsors’ NTRs may contract out property management responsibilities to an unaffiliated third-party, but the affiliated manager still charges an “oversight fee” for overseeing the activities of the unaffiliated manager. The NTR compensates the unaffiliated manager for its services, as well as the affiliated property manager for its oversight.     

Dealer Manager: Raising capital for an NTR requires selling registered securities through FINRA-licensed salespeople who are associated with a FINRA-registered broker/dealer. The FINRA-registered broker/dealer is referred to as the dealer manager. The dealer manager employs the people in the organization whose job requires them to discuss NTR programs (i.e., internal/external sales, National Accounts, Due Diligence, etc.) and holds their requisite securities licenses. “Most sponsors own their own broker/dealer, but some sponsors contract with an unaffiliated dealer manager for those services,” our due diligence expert notes. “In those cases, the salespeople are not in any way employees of the sponsor’s dealer manager, but are compensated by the sponsor for raising capital through the NTR’s dealer manager fee.”  

Taxable REIT Subsidiary (TRS): A TRS is sometimes used to manage properties or contract out the management of properties. If the IRS deems some of its activities taxable, the NTR can create a subsidiary to carry out those activities. Through a TRS, the NTR may enter into management agreements with third-party management companies in order to maintain REIT qualification status


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The Latest on the DOL Fiduciary Rule


The Latest on the DOL Fiduciary Rule

August 10, 2017 | Beth Glavosek | Blue Vault

United States Capitol Building, Washington, DC

It looks like there’s yet another reprieve on the final implementation of the Department of Labor (DOL) Fiduciary Rule. After sitting on the back burner while President Trump called for a reassessment of the ruling, the DOL earlier this year said that it wouldn’t start full enforcement until January 1, 2018. Now the date has moved to July 1, 2019 – a full 18 months later. Investment News reported on August 9 that the DOL submitted this proposal to the Office of Management and Budget (OMB), and the OMB must review and approve the proposal before it can go into effect. The delay itself could require its own rule making process, according to the article.[1]

Industry groups are lauding the proposal. Dale Brown, President & CEO of the Financial Services Institute, says, “This proposed delay represents an important step in protecting Main Street Americans’ access to retirement planning advice, products and services. While the delay is significant, it is critical that the DOL uses the 18 months to coordinate with regulators, in particular the SEC, to simplify and streamline the rule.” He goes on to say, “We are already seeing the effects of the rule limiting investor choice and pushing retirement savings advice out of those who need it most. We stand ready to work with the DOL, SEC and others to put in place a best interest standard that protects investors, while not denying quality, affordable financial advice to hard-working Americans.”[2]

Other financial industry groups concur with Brown’s assessment about the effect of the rule so far. The Insured Retirement Institute (IRI), a trade association of insurance companies, asset managers, and brokerage firms, estimates that approximately 155,000 accounts have been ‘orphaned’ (accounts are no longer serviced by an advisor, leaving investors on their own) since parts of the rule went into effect on June 9, 2017.[3]

The American Council of Life Insurers (ACLI) stated that the regulation has caused “significant market changes that now deny consumers access to advice” and that the rule’s overly broad definition of a fiduciary constrains education and information about retirement planning options, and causes a bias against commission-based compensation. This bias restricts access to annuities, the only product available in the marketplace that provides guaranteed lifetime income, according to the ACLI.[4]

Blue Vault will continue to report on the latest information and perspectives available as this issue continues to evolve.

[1] Mark Schoeff Jr., “DOL seeks to delay fiduciary rule until July 2019,” Investment News, August 9, 2017.

[2] FSI Statement on DOL Proposal of Further Delay of Fiduciary Rule,” FSI, August 9, 2017.

[3] “IRI Submits New Data Exposing Detrimental Impact of DOL Fiduciary Rule,” Insured Retirement Institute, August 7, 2017.

[4] “ACLI Urges Labor Department to Revoke and Replace Regulation Harmful to Retirement Savers,” ACLI, August 7, 2017.


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Sector Focus: Necessity Retail


Sector Focus: Necessity Retail

Passage in multilevel shopping mall


August 1, 2017 | Beth Glavosek | Blue Vault

Despite the huge rise and popularity of online shopping, there’s still a need for bricks and mortar stores. According to a recent study, by 2025, the share of online grocery spending could reach 20% of the total market, representing $100 billion in sales. However, as one supermarket executive puts it, “You can’t forsake the 80% of consumers who are shopping in your physical stores.”[1]

Thus, the need for what is known necessity-based real estate, or necessity retail, persists.

Population growth means consumer growth

On May 7, 2017, the U.S. population clock was projected to cross the 325 million threshold. By 2060, the total population is expected to reach nearly 417 million.[2]

A growth in the population means growth in both current and future consumers. While economic conditions may dictate how much people have available to spend on luxury or nonessential items, there will always be a need for everyday goods and services, whether it’s food, apparel, appliances, or personal care items.

Bricks and mortar still relevant

While major grocery chains frequently provide the ideal anchor for a desirable retail asset, other popular retailers include discount clothing and shoe stores, warehouse stores (bulk shopping), sporting goods, and specialty or organic food stores.

According to the National Retail Foundation, despite the dot-com boom of 20 years ago and scales tipping slightly toward e-commerce, the impact is not readily noticeable in STORES Magazine’s annual list of the Top 100 retailers.[3] According to the report, the nation’s largest mass market retailers all still rank in the top 10, including Walmart, Costco, and Target. “The remaining top 10 retailers are arranged in pairs: two traditional supermarket operators (#2 Kroger and #10 Albertsons); two home improvement retailers (#4 The Home Depot and # 9 Lowe’s); and two drugstore chains (# 5 CVS and #6 Walgreens/Boots Alliance),” the report says.

Their success points to the fact that consumers are still pushing shopping carts and not just filling them online. Kiplinger has also reported that six mega retailers are still standing up to online giants like Amazon.

In conclusion, the need for destination-based, necessity-driven real estate will likely persist even in the age of point-and-click. After all, it’s difficult to try on those pants you’ve been eyeing or sniff the freshness of the produce from the comfort of your living room.

[1] Becky Schilling, “Are you ready for the digitally engaged shopper?” Supermarket News, January 30, 2017.

[2] U.S. Census Bureau, May 5, 2017.

[3] STORES Magazine, June 26, 2017.

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Sector Focus: A Look at Senior Adult Housing


Sector Focus: A Look at Senior Adult Housing

July 26, 2017 | Beth Glavosek | Blue Vault

An attractive senior couple at home on the couch together. Isolated on white.

It’s no secret that Baby Boomers make up a significant portion of the U.S. population. Born between 1946 and 1964, Baby Boomers are now reaching the ages of 53 to 71. As this group continues to age, the number of Americans ages 65 and older is projected to more than double from 46 million today to over 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24% from 15%.[1]

As this segment of society continues to expand, a corresponding need for senior adult housing will increase. In fact, senior housing has been a hot sector in real estate in recent years.

Outlook for the industry

Despite concerns about over-building in certain markets, there’s still an appetite for senior housing among many investors. In its annual U.S. Seniors Housing & Care Investor Survey and Trends Report that polls investors, real estate giant CBRE found that nearly 60% of survey respondents expected to increase the size of their senior living portfolios in 2017 compared with 47% polled in 2016.

In the report, CBRE professionals said that they expect valuations to remain stable in 2017 with a strong long-term outlook. “The industry’s fundamentals suggest the necessity for more capacity over the long term, with short-term oversupply in select markets becoming more likely as a result of recent record-setting construction levels,” according to the report.


Senior housing has been a solid performer. In fact, when looking back over one-, three-, five-, and 10-year periods, performance is in the double digits. NCREIF reports that at the end of the first quarter of 2017, one-year total returns were 12.05%; three-year returns were 14.87%; five-year returns were 14.78%; and 10-year returns were 11.13%.

Hot trends

CBRE notes that Investor interest seems to be gravitating to more lifestyle-focused segments of senior housing, with 40% of its survey respondents preferring independent living investment opportunities over assisted living or more health care-focused properties.

Hospitality is a major trend in senior living communities. Residents are often seeking concierge-style services including room service, car service, personal shoppers and one-on-one educational and cultural experiences.[2] Dining has gone beyond the traditional cafeteria-style meal. Seniors today want an appealing range of choices – whether it’s chef inspired meals, gelato, gourmet coffee, or even food trucks.

Providing memory care is more important than ever as diagnoses of Alzheimer’s disease and dementia are becoming more common. Industry experts say that memory care must be a component of senior living facilities if they are to meet a complete range of seniors’ needs.

Flik Lifestyles explains some other hot trends to watch in its Super Trends in Senior Living report.

[1] Mark Mather, “Fact Sheet: Aging in the United States,” Population Reference Bureau.
[2] Super Trends in Senior Living, Flik Lifestyles.
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A Primer on Student Housing


A Primer on Student Housing

July 14, 2017 | by Beth Glavosek | Blue Vault

Tablet touch computer gadget on wooden table, vintage look

Did you know that student housing is a robust and still-developing sector of real estate?

Some real estate operators are acquiring older student housing developments and modernizing them, while others are building brand-new housing that meets the expectations of today’s students.

Here’s a quick look at this sector and its opportunities.

Who invests in student housing?

According to a New York Times article from earlier this year, private developers, REITs and private equity firms make up the majority of student housing investors. It is still considered a relatively new asset class. Institutional investors find its growth prospects, steady revenue stream from rents, and comparatively high capitalization rates appealing.[1]

Why it’s in demand

Experts in the sector believe that a combination of higher college enrollment and tight supply have driven a need to develop and invest in more housing. According to CoStar, cash-strapped public universities are unable to fund new dormitory development due to state budget cuts. In addition, many Millennials plan to pursue post-graduate schooling, which extends the demand for student housing for a longer period of time beyond the undergraduate years.[2]

Not your parents’ (or your) dorm room

It’s probably no surprise that today’s students have higher expectations for comfort and convenience than previous generations. While those of a certain age might remember cramped accommodations without air conditioning and in sore need of repairs or updating, thankfully, students today have things a bit better. According to National Real Estate Investor, certain features are becoming the norm: substantial study space, recreational spaces, and places where students can meet and talk. Some student properties even offer fitness centers, game rooms, lounges, outdoor spaces, and sports simulators.[3]

In summary, the student housing sector appears to be healthy and is benefiting from high occupancy rates and high demand.

[1] Vivian Marino, “A Rush to Meet Rising Demand, and Expectations, for Student Housing,” The New York Times, February 28, 2017.

[2] Randyl Drummer, “Institutional Investors Coming Around to Student Housing, Sector Seen as Recession-Resistant Alternative to Apts.,” CoStar, March 30, 2017.

[3] Diana Bell, “What to Expect from Student Housing in 2017,” National Real Estate Investor, January 4, 2017.

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A Basic Overview of Commercial Real Estate Leases


A Basic Overview of Commercial Real Estate Leases

July 7, 2017 | by Beth Glavosek | Blue Vault

Close up of businessman holding city model in hands

Occupancy and tenant relationships are an important part of commercial real estate ownership. The structures of tenant leases can vary, depending upon who is expected to bear certain costs.

According to Certified Commercial Investment Member (CCIM) authors, versions of net leases have evolved through the years[1]. A net lease refers to an arrangement in which the tenant pays all or some of a property’s operating costs in addition to rent.

The following is a brief overview of some key types of commercial real estate leases, in descending order of the level of obligation for the tenant.

  • Bond Lease: in addition to monthly rent, tenant is responsible for ALL operating expenses, maintenance, repairs, and replacements for the entire building and site in the case of casualty losses or acts of God. This is the most extreme form of Triple Net Lease.
  • Triple Net Lease: in addition to rent, tenant is responsible for all of the property’s expenses, both fixed and operating, except that capital expenditures may be limited in the final months of the lease
  • NN Lease: in addition to rent, tenant is responsible for a good portion of the property’s expenses, except the landlord covers structural components, such as the roof, bearing walls, and foundation
  • Modified Net (or Modified Gross) Lease: in addition to rent, tenant pays for utilities, interior maintenance, interior repairs, and insurance. The landlord pays for everything else, including real estate property taxes.

According to NAIOP’s Development magazine, choosing the type of lease to negotiate on the spectrum from net to gross is ultimately about how to allocate certain economic risks between the landlord and tenants. “With the gross rent model, the landlord bears all the risk that actual operating expenses may exceed projected amounts,” says author Richard R. Spore III. “Of course, the tenant conversely bears all the risk that operating expenses may be less than anticipated, resulting in a higher than expected net operating income for the landlord. In other words, with the gross rent model, landlords and tenants make a bet on levels of future building operating expenses.”[2]

Triple Net Leases (NNN) have increased in popularity because the risk of operating expenses increasing over the life of the lease can be shifted to the tenants. NAIOP’s summer edition of its Development magazine offers a more in-depth look at these types of leases.

[1] Letty M. Bierschenk, CCIM, Kurt R. Bierschenk, CCIM, and William C. Bierschenk, CCIM, “Singling Out Triple-Net Leases,” CIRE Magazine, May/June 2017.

[2] Richard R. Spore III, “The Benefits and Risks of Triple Net Leases,” Development, Summer 2017.

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What are Cap Rates?


What are Cap Rates?

June 30, 2017 | by Beth Glavosek | Blue Vault

Businessman touching financial dashboard with key performance in

If you spend any time around commercial real estate professionals, chances are good that you’ll hear the term ‘cap rate.’ Short for capitalization rate, the term offers a metric for a real estate asset’s performance. Cap rates’ ups and downs are a frequent topic of discussion in real estate forums.

But what should investors and advisors understand about them?

Why they are important

A cap rate is a reflection of the expected returns that real estate properties can produce. Investors and advisors can look at them as just one way of gauging expectations for how the investment might perform.

Cap rates are taken into account when properties are acquired and when they undergo valuations. For example, if a real estate company is considering acquiring a property from another owner, it will want to know what the cap rate is because it’s reflective of the amount of income the building is generating.

The value of a property at acquisition is sometimes described in terms of its cap rate to provide a reference or relative value to other similar transactions occurring in a similar timeframe.

How they are calculated

Real estate investments produce income available to investors in the form of Net Operating Income (NOI). This is the revenue a property generates adjusted for normal operating expenses. One method of estimating the market value of a REIT’s portfolio of properties is to “capitalize” the REIT’s NOI using a cap rate.

The math is simple: Estimated Property Value = NOI/Cap Rate

As with stock or bond investments, this equation relates the value of the investment to the average return it is expected to produce. It is an inverse relationship. The lower the cap rate for a given level of NOI, the more valuable the property.

Other points

A common misconception is that cap rates somehow equate to distribution yields. This is not the case. Just as Earnings/Price (E/P) ratios are not the same as dividend yields for common stocks, cap rates are not the same as distribution yields for REIT shares. Neither metric captures the rate of return to be expected or realized at the end of the investment holding period, because both are based upon current conditions and current valuations only, rather than long-term changes in cash distributions and share values. Remember that cap rates relate current levels of NOI to current valuations while NOI can be expected to grow over time. Other things equal, the higher the expected rate of growth in NOI, the lower the cap rate for a given property or portfolio.

Blue Vault has more in-depth articles about cap rates available to subscribers only. If you’re not a subscriber, become one today!

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Advisors’ Perspectives: What are the Cons to Alternatives?


Advisors’ Perspectives: What are the Cons to Alternatives?

June 16, 2017 | by Beth Glavosek | Blue Vault

equity investment

We’ve been looking at the pros and cons of nontraded REITs and other alternative investments from advisors’ viewpoints.

We heard from several independent Broker Dealer (IBD) sales and marketing executives that alternative investments are showing a lot of promise right now because of their ability to provide income-seekers with potentially higher yields, diversification that’s noncorrelated to the stock market, and an institutional style of investing.

However, we also heard from some IBD representatives about a few of the potential drawbacks to alternative investments.

Disclosure of inherent risks

As with any investment sector – whether it’s stocks, bonds, or others – there are risks to be weighed. Advisors should explain the risks of alternative investments as carefully as they would for anything else. One IBD representative says that this requires due diligence on the part of the advisors, many of whom are pressed for time and may not have a complete understanding of the products themselves. “Alternatives are not as mainstream as they could or should be, so education is critical. Care should especially be taken when it comes to working with elderly clients,” he says. “They need to understand what they’re buying.”

“Fatigue” around illiquidity

Both advisors and investors alike may become impatient when waiting for an investment program to complete its life cycle and either list, liquidate, or sell assets to another buyer. This process could take seven years or more. One IBD representative noted that there could even be disappointment in performance at the conclusion of the programs. Even though a ‘capital pop’ of appreciation is hoped for, it may not happen. “The ‘illiquidity premium’ seems to be missing from the returns realized in some of these products,” he notes.

Regulations and tightening concentration limits

Regulatory scrutiny and uncertainty have made some advisors reluctant to offer the products in their current forms. It still feels risky or unknown. Others are hampered by limits to the amounts that their clients can place into alternative investments. “Investors want to own more shares, but state imposed limitations prevent them from doing so,” says one spokesperson.

If you’re an advisor, what is your opinion? Are you bullish on alternative investments, or do you remain skeptical? We’d love to hear from you and feature your opinions, experiences, and success stories in future blog posts.

Please Note: Responses and/or opinions are confidential and will NOT be published without prior consent.

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Advisor's Perspectives: What are the Pros to Alternatives?


Advisor's Perspectives: What are the Pros to Alternatives?

June 9, 2017 | by Beth Glavosek | Blue Vault

Stock market graphs monitoring

We’ve been looking at the pros and cons of nontraded REITs and other alternative investments from an investor’s standpoint. But, how are advisors and Broker Dealers feeling about them these days?

We spoke with independent Broker Dealer (IBD) sales and marketing executives to get their perspectives on why there may be a renewed interest in alternatives right now.

Yield appeal

“With interest rates remaining very low, investors seeking yield are asking their advisors where they can find sources of higher income,” says one IBD executive. “Advisors are looking at alternative investments to meet the challenge of finding this income. I see this demand as only increasing as more and more people retire each day.” With their relatively higher distribution yields, these investments can be a good source of generally reliable income.

“When you have some interval funds delivering a yield of 7%, they’re so much more attractive to investors than what they might earn from a CD or bond,” he says.


It has become common practice among IBDs to allow a certain percentage of an investor’s portfolio to be allocated to alternative investments. In many cases, the maximum is 10% of a portfolio’s assets. Whatever the allocation, there’s an opportunity to invest in assets that aren’t correlated to the stock market, that fit a conservative profile (depending upon their investment objectives), and that can provide diversification into actual real estate assets, not just real estate securities.

Institutional quality

“Banks, hedge funds, pension plans, and insurance companies have invested in alternatives for years,” one IBD executive notes. “They’ve always known the value of including them in a diversified portfolio. However, we’re just now starting to see an emerging culture of clients who want the same thing. If the industry can come up with a clear and cohesive system of offering alternative investments to the public, it will be very beneficial for individual investors, and I think we’ll see a lot of growth in this area.”

Because of these supporting factors – demand driven by retirees, a desire for noncorrelated diversification, and an appetite for institutional investing styles – many in the IBD channel expect alternative investments to take off in popularity.

Next week, however, we’ll look at some of the potential ongoing cons to these kinds of investments in order to provide a balanced perspective to advisors and investors alike.

If you’re an advisor, what is your opinion? Are you bullish on alternative investments, or do you remain skeptical? We’d love to hear from you and feature your opinions, experiences, and success stories in future blog posts.

Please Note: Responses and/or opinions are confidential and will NOT be published without prior consent.

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Nontraded REIT Pros and Cons – Putting it All Together


Nontraded REIT Pros and Cons – Putting it All Together

May 26, 2017 | by Beth Glavosek | Blue Vault

We’ve been looking at the pros and cons of nontraded REITs for individual investors. To sum things up, nontraded REITs may be appropriate for investors who can set aside a portion of their investment holdings (usually no more than 10%) for a period of up to seven years or so, are comfortable with illiquidity, and can tolerate the ups and downs of the real estate market.

The following is a simple overview of the pros and cons an investor might consider when deciding if a nontraded REIT investment is right for his or her portfolio.

20170526_Pros and Cons table


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What are Some ‘Cons’ to Owning Nontraded REITs?


What are Some ‘Cons’ to Owning Nontraded REITs?

May 19, 2017 | by Beth Glavosek | Blue Vault

Business meeting with work on contract

We’ve been looking at the merits of nontraded REITs for individual investors, including the opportunity for potentially higher yields, dividend distributions, diversification, a potential inflation hedge, and owning high quality, commercial grade, professionally managed properties.

However, as with any investment, there are risks and suitability concerns. Nontraded REITs may not be for everyone. Let’s look at some considerations that investors should be aware of before buying shares of a nontraded REIT.


This is perhaps one of the top concerns expressed by investors. Their money is likely to be committed to the REIT for at least seven years – the average time that it takes for a REIT to mature and consider its exit strategy. While there typically are provisions for share redemption in the event of shareholder death or disability, the expectation is that the investor will leave the money alone as the REIT builds its portfolio.

As we’ve said before, illiquidity doesn’t have to be a negative. Knowing that money in the investment is not readily available for a period of time may mitigate the impulse to trade in and out of the market when market emotions are running high. However, investors should know what they’re getting into and be prepared to leave the investment untouched for a period of time.

Market risk

Nontraded REITs can be affected by factors such as market ups and downs, supply and demand, adverse economic climates, and regulatory changes. There is the chance that when shares are eventually sold, they may be worth more or less than what was paid for them.

Fees and expenses

Nontraded REITs have come under criticism because their fee structures are more costly than less expensive investment products like no-load mutual funds. The sales load paid upfront through the purchase of A shares, for example, is used to compensate the advisor and other entities associated with the investment offering. As a result, a $10 A share may result in $8.50 or so going “in the ground” in actual real estate. It’s uncertain when the REIT will overcome this load and bring share value back to (or above) the price paid.

The fairly recent introduction of nontraded REITs with lower fees and multiple share classes that don’t charge as high of an upfront fee has somewhat mitigated these concerns.


Unlike publicly traded REITs, nontraded REITs have historically not offered a great deal of visibility into portfolio or share value, unless the REIT has opted for a third party appraisal or valuation. However, as with the changes in fees, nontraded REITs are evolving to provide more frequent valuations, especially for those known as Daily NAV/Interval Funds. FINRA now mandates third-party appraisals of a REIT’s share net asset values within 29 months following the breaking of escrow of the public offering.

In upcoming posts, we will continue to look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.

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The $19.5 Billion Dollar Industry No One Was Paying Attention To:


The $19.5 Billion Dollar Industry No One Was Paying Attention To:

Interval and Closed-End Funds

May 16, 2017 | by Jared Schneider | Blue Vault

Full-length confident person in formal suit. A sketch of New York city and forex chart on the background. A concept of the asset management.

Recent headlines have continued to talk about the decline in sales of some alternative investment types, but what is not discussed is the growth in other alternative investments. For example, the combination of interval funds and nontraded closed-end funds (“nontraded CEFs”) amounts to approximately $19.5 billion in assets under management as of December 31, 2016.

While many in the alternative investment industry have been focused on other investments, these nontraded CEFs and interval funds have been quietly growing, with big asset manager names like PIMCO, Blackstone, BlackRock, Apollo, Invesco, FS Investments and Griffin Capital. In 2016 alone, net capital inflows were well over $3 billion. There are a few reasons why these investments have been picking up steam as of late.


One reason is that the structure allows for regular liquidity provisions through a tender offer or repurchase program, although still a relatively illiquid investment. Liquidity typically comes as a via a quarterly liquidity program versus daily as in a mutual fund structure.

Another reason is that the valuation policies allow the investments to sit in an RIA (registered investment adviser), hybrid, or self-directed brokerage account more easily.

Additionally, multiple share classes can accommodate different classes of investors and types of brokerage accounts.

There are drawbacks, of course, and Blue Vault will cover these topics in future articles. We will also delve into the types of assets in which these broad-reaching funds invest. For more information on Interval Funds and Nontraded CEFs, see our Interval Fund and Nontraded CEF Review.

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Benefits of Nontraded REITs


Benefits of Nontraded REITs

May 12, 2017 | by Beth Glavosek | Blue Vault

Touch Screen financial symbols

Last week, we discussed the features of nontraded REITs that make them an attractive consideration for investors, including potentially higher yields and dividend opportunities.

They also can give investors a chance to diversify into a different sector than traditional asset classes, as well as the ability to set aside some of their investable assets into a vehicle with illiquid access, which can help manage emotional reactions to market drops.

Some of the other merits of nontraded real estate point to the benefits of high quality, commercial grade, professionally managed properties. Let’s look into each of those benefits:

Access to Large Scale Real Estate Portfolios

Nontraded REITs typically build sizable portfolios by investing on behalf of many shareholders. In fact, by the time a nontraded REIT has entered its maturity phase, it typically owns at least 30 properties, has been in existence for four to eight years, and has more than $500 million in assets under management. This scale is beyond what most individual investors can achieve on their own.

Access to High Quality Real Estate and Sectors

A nontraded REIT provides a vehicle through which individuals can invest in high quality real estate and tailor their strategies to fit their goals and risk tolerance. In Core real estate, for example, properties usually are well located in desirable areas, not under a lot of debt, have high-quality tenants (like FORTUNE 500 companies), and are generally very attractive assets. The tenants usually are committed to long-term leases, even if they vacate early, and may have many years left before lease expiration. REITs that invest in these kinds of properties may appeal to investors seeking a more conservative approach.

Access to Professional Management

Individual investors can leave the day-to-day concerns of real estate management to people who know it best. A nontraded REIT’s real estate team knows how to make the capital improvements necessary to maximize a property’s performance, including pursuing desirable designations like LEED and Energy Star certifications. They also are highly skilled at attracting tenants and negotiating their leases.

Potential Inflation Hedge

Nontraded REITs may provide long-term capital appreciation to investors when they sell their properties or list on a public exchange. A REIT also may require tenants’ rents to increase each year to keep pace with inflation. These features may provide investors with an inflation hedge.

In upcoming posts, we’ll continue to look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.

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New Series: Why Nontraded REITs?


New Series: Why Nontraded REITs?

May 5, 2017 | by Beth Glavosek | Blue Vault

Businessman touching financial dashboard with key performance in

If you’re new to the concept of nontraded alternative investments, you may be wondering why financial advisors turn to these products as part of their investment recommendations.

The following are some of the features that set nontraded REITs apart: 

Potentially Attractive Yields

To qualify as a REIT, the company must pay out at least 90% of the money it makes in the form of dividends to the investors. By avoiding taxation at the corporate level, REITs are able to pass on a greater portion of earnings to investors. This can translate into potentially higher yields. 

Dividend Opportunities

REITs are generally considered an "income play" because they’re required to pay out dividends. Investors can expect to receive quarterly distributions in the form of a check. They also may reinvest dividends back into the REIT to purchase additional shares, often at a discount to the offering price. 

Diversification from Other Asset Classes

Real estate values are generally considered to behave somewhat independently of the stock market. This is known as “low correlation.” When other types of investments may be down, real estate may be up, and vice versa. For this reason, real estate can offer a measure of diversification.


While the term "illiquid" may seem negative, some view it as a positive. Knowing that money in the investment is not readily available for a period of time may mitigate the impulse to trade in and out of the market when market emotions are running high. This illiquidity also gives the REIT the flexibility to invest the proceeds of the offering in long-term investments that will have the potential for income and capital gains over five- to 10-year horizons. Managers of nontraded REITs do not need to please analysts with their quarterly earnings reports the way managers of listed companies too often feel pressured to do.

In upcoming posts, we’ll look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.

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NTR and BDC March Sales Recover

NTR and BDC March Sales Recover

April 28, 2017 | by by Beth Glavosek | Blue Vault

Businessman Placing Coin Over Stack Of Coins

In March, we witnessed a significant one-month recovery in sales of nontraded REITs (NTRs) and Business Development Companies (BDCs). NTR sales in March were $622.6 million and BDC sales were $94.1 million, according to Blue Vault research.

What accounts for this sudden change, and can it be sustained? We asked some industry spokespersons for their thoughts and perspectives.

Securities America’s Pete Zimmerman offered some observations about this sudden surge in sales. “I think that there’s been a lot of uncertainty in the industry, and perhaps advisors are starting to rebuild their confidence in recommending these investments,” he says. “We’ve seen the DOL fiduciary rule implementation delayed, and at the same time, advisors have had a chance to become more comfortable with new compensation structures.” The combination of delaying pending regulations for the foreseeable future and gaining familiarity with the ‘new norm’ of compensation may have propelled advisors forward.

1st Global’s Mike Pagano says that nontraded REIT sales at his firm are up 22% over sales levels at year-end 2016. “I think we’re starting to see an uptick because advisors’ comfort levels around FINRA 15-02 have increased,” he says.

Zimmerman points out that, any time that change is introduced, it can take a while to fully embrace it. “Clouds have lifted a bit, so to speak, and advisors may have needed time to adjust to changes over the last couple of years. They also may be attracted to new products that sponsors are rolling out,” he says.

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Crowdfunding—a Viable Source of Capital?


Crowdfunding—a Viable Source of Capital?

April 14, 2017 | by Beth Glavosek | Blue Vault

Stock market abstract background

In October 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules to permit companies to offer and sell securities through “crowdfunding.” Mary Jo White, SEC Chair at the time, stated, “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”

What is crowdfunding, and how does it apply to capital raising?

Crowdfunding is a product of the Jumpstart Our Business Startups (JOBS) Act signed into law on April 5, 2012, by President Barack Obama. The Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. The JOBS Act was intended to help small businesses by easing regulations.

Title II of the JOBS Act lifted a decades-old ban on the mass marketing of securities offerings. Title III (which became effective May 16, 2016) allows anyone, regardless of whether or not they are accredited investors, to participate in equity crowdfunding. In other words, the concept of crowdfunding opened up new avenues for product sponsors to reach individual investors.

Who can participate?

The SEC states that anyone can invest in a crowdfunding securities offering. However, because of the risks involved, investors are limited in how much they can invest during any 12-month period in these transactions. Limitations are based on net worth and annual income. For example, if your annual income is $150,000 and your net worth is $80,000, JOBS Act crowdfunding rules allow you to invest the greater of $2,000 or 5% of $80,000 ($4,000) during a 12-month period. So in this example, you can invest $4,000 over a 12-month period.

How are REITs using crowdfunding?

According to an article in National Real Estate Investor, crowdfunding firms have stepped into the REIT space to attract commercial real estate investor capital. Regulation A+ and Title III of the JOBS Act allow REITs to market to large groups of non-accredited investors. Reg A+ offerings allow sponsors to raise up to $50 million over a 12-month period from both accredited and non-accredited investors.

Industry sources say that there is a huge demand from non-accredited investors to get exposure in commercial real estate and access opportunities historically only available to institutional investors. In addition, some traditional nontraded REITs may find new avenues for capital raising by opening up their offerings to crowdfunding.

Crowdfunded REITs are similar to nontraded REITs in that they don’t experience the same market volatility or daily liquidity as publicly-traded REITs. Some do calculate net asset values (NAV) at regular intervals.

For more complete information on the final rulings related to the JOBS Act, visit the SEC’s guidance page. For information on what investors should know about crowdfunding, visit FINRA’s guidance page.


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Traditional vs. Daily NAV REITs


Traditional vs. Daily NAV REITs

March 30, 2017 | by Beth Glavosek | Blue Vault

Businessman Placing Coin Over Stack Of Coins

Traditionally, nontraded REITs have been designed to follow a predictable life cycle. These investments move through distinct developmental stages over time as they grow from inception to maturity.

The nontraded REIT’s ultimate goal is to create a liquidity event for investors to return their capital and, ideally, some appreciation. They also seek to deliver regular income via distributions. These REITs lock in investors’ money in order to develop their portfolios and ultimately deliver a “capital pop” in a best-case scenario. In other words, investors will have enjoyed regular income distributions along the way and then experience capital appreciation on assets when the REIT either goes public, liquidates, or sells its portfolios to another REIT.

Daily NAV REITs Shake Things Up

Historically, nontraded REITs have relied on capital raising through investors who have dedicated an illiquid portion of their investable assets for hard assets that are earning income. However, with the demand for greater liquidity and transparency, product sponsors have introduced Daily NAV REITs. These REITs offer share classes that allow investors to have improved liquidity and more frequent pricing, combining the distribution yields of nontraded REITs with the transparency in pricing and greater liquidity of traded REITs. The daily NAVs are also much less volatile than the traded REIT market, tracking more closely with the underlying real estate portfolio values.

This option can be beneficial for those who want the benefits of holding high-quality real estate, but who aren’t necessarily committed to the life cycle imposed by the traditional nontraded REIT. Investors have the option to redeem some or all of their shares at their NAV values and will not have to wait for a life-changing event (i.e. death, disability, hardship, etc.) to access their invested money.

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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NAV in the Nontraded REIT World


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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What’s in Store at Summit 2017?


What’s in Store at Summit 2017?

February 28, 2017 | by Beth Glavosek | Blue Vault



The 2017 Blue Vault Broker Dealer Educational Summit is just around the corner now that March is here. Have you marked your calendar for March 13-15, 2017? The Summit will be held at the Ritz-Carlton in downtown Atlanta.

Broker Dealers can get to know sponsor firms’ plans for 2017 and learn more about their efforts to restructure offerings to meet market demands. Our goal is that all attendees leave the Summit with a richer understanding of the direct investment environment and new insights about the future.

Topics include:

  • Why a joint venture sponsorship arrangement may be better for the retail channel
  • How certain real estate offerings are addressing the need for satisfactory liquidity
  • The benefits of net lease investing
  • Why 1031 exchanges have made a comeback
  • How a subordinated sponsor investment can help mitigate investor risk
  • New fund structures, and
  • Fees to accommodate the regulatory environment 


We look forward to seeing you in Atlanta in a few weeks!

Click below and subscribe to Blue Vault's NewsWire.


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NASAA Guidelines


NASAA Guidelines

February 23, 2017 | by Beth Glavosek | Blue Vault

Touch Screen financial symbols

In July 2016, the North American Securities Administrators Association (NASAA) issued a request for public comment regarding an amendment to its policy on REITs.

The proposal would add a uniform concentration limit of 10% of an individual’s liquid net worth, applicable to their aggregate investment in a REIT, its affiliates, and other non-traded REITs. Liquid net worth consists of cash, cash equivalents, and readily marketable securities. The proposal also includes a carve-out for Accredited Investors under the income and net worth standards set forth in Regulation D, Rule 501.

The comment period purportedly closed on September 12, 2016, and Blue Vault is awaiting comment from NASAA as to the current status of the proposal. For now, some of responses to the proposal are as follows:

Investment Program Association (IPA)

Alternative and Direct Investment Securities Association (ADISA)

Public Investors Arbitration Bar Association (PIABA)

We will keep you posted as we hear of updates to NASAA’s proposal.

Click below and subscribe to Blue Vault's NewsWire.


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“Usually change is good, and that’s a good thing...”


“Usually change is good, and that’s a good thing...”

Blue Vault’s 3rd Annual Summit

January 30, 2017 | Stacy Chitty | Blue Vault

Broker Dealers discussing important industry topics at Summit 2016

Blue Vault’s 3rd annual educational Summit will be held March 13-15. The purpose of the meeting is to give leading alternative investment product sponsors, including those offering nontraded REITs, nontraded BDCs, Interval Funds, and Private Placement offerings, a platform to demonstrate their investment strategy and expertise for the products they offer and answer questions posed by the industry’s leading Broker Dealers. 

WebEach party has a responsibility in the communication process. Sponsors have a need, and that need is to educate the Broker Dealer community about the benefits of their current open offerings. Broker Dealers have a need as well, but their need is much different. They must be informed and kept educated on the strategy and performance of the sponsor’s current open offerings, but also the sponsor’s offerings already closed to investors. It’s not an easy task to keep up with all the moving parts and changes happening in the alternative securities world these days. 

Therefore, Blue Vault brings together the leading players to converse in an attempt to create what Blue Vault’s, Stacy Chitty, calls a “robust dialogue” says Chitty,
“Usually change is good, and that’s a good thing, because change is what’s happening in our industry today.  We just believe it’s fundamentally important to create an environment where serious information can be exchanged, and where hard questions can be asked and discussed. That’s what occurs at the Blue Vault Summit. The Broker Dealer attendees have a load of responsibility on their shoulders. We just try to help facilitate healthy conversation.” 

But Blue Vault has help doing so. A Broker Dealer task force is formed for each Summit to help guide the agenda and the overall discussion. The 2017 Summit task force is made up of industry veterans Amanda Teeple of Triad Advisors, Mike Pagano of 1st Global Capital, and Thayer Gallison of Advisor Group. Chitty adds, “They have been a tremendous help. They really know the market place and the important issues which need to be addressed during the meeting. They and their Broker Dealers are the type of leaders and influencers the IBD channel needs right now.  The success of the Summit would not get very far without their input and involvement.” Sixteen sponsors and personnel from approximately thirty Broker Dealers plan to attend and participate in the 2017 Summit, being held in Atlanta.                


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Common Questions about IFCEFs


Common Questions about IFCEFs

January 26, 2017 | by Beth Glavosek | Blue Vault

businessman is analyzing  through  magnifying glass contract and

Over the past year, Blue Vault has more closely tracked the sales of Interval Funds and nontraded Closed-End Funds (IFCEFs) and now includes their data in its research reports. 

 The following are common questions we hear about these types of investments: 

 Why invest in IFCEFs? 

IFCEFs have a longer holding period than open-end investments. It’s believed that the longer time horizon can yield higher returns. In addition, limited liquidity can help investors stay the course for the long term during periods of market volatility – a characteristic that could be an advantage. 

What makes an IFCEF different from other investments? 

All open-end (mutual) and closed-end funds fall under the Investment Company Act of 1940 set forth by the U.S. Securities and Exchange Commission. However, unlike open-end funds, closed-end funds have one initial public offering and then they close to new investors. Additionally, closed-end fund investors cannot get regular liquidity unless the fund is traded on an exchange, which many are. However, closed-end funds that do trade on an exchange may trade at a significant premium or discount to the NAV (net asset value) and are subject to stock market swings. 

What types of IFCEFs are out there? 

Interval funds are a blend of closed-end funds and mutual funds, but are legally classified as closed-end funds. An interval fund is open to investors and may accept new investors daily or weekly. They also are required to offer a minimum liquidity feature to their investors. 

Nontraded CEFs are closed-end funds that are not listed on an exchange. They are not required to have specific levels of liquidity for investors, but many do have quarterly tender offer programs that buy back shares from investors. 

Technically a nontraded Business Development Company (BDC) is a type of nontraded closed-end fund, but the BDC election exempts the fund from some of the 1940 Act provisions and adds additional portfolio requirements that other 1940 Act funds do not have.  

What do IFCEFs invest in? 

There are few limitations on what goes inside one of these fund types. Asset classes inside these funds could be stocks, bonds, real estate, private debt, private equity, insurance-linked securities, home mortgages, or many other types of assets. 

 For more comprehensive information about IFCEFs, become a Blue Vault subscriber and receive the latest Insights on all kinds of alternative investments.


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Nontraded REIT Industry Review - LifeStage™ Summary


Nontraded REIT Industry Review - LifeStage™ Summary

January 12, 2017 | by Laurie Brescia | Blue Vault

Nontraded REIT Industry Review LifeStage Tables Q3 2016

In each quarter's Nontraded REIT Industry Review you will find... a host of Nontraded REIT Industry data and charts preceding the individual REIT pages.

Some of the data is in the "LifeStage™ Summary".

In the Q3 2016 Review:

  • Five REITs were Emerging
  • Eleven REITs were Growth
  • Two REITs were StabilizingLifeStages_Image
  • Thirty-seven REITs were Maturing
  • Ten REITs were Liquidating

In the review there is a table for each LifeStage listing each REIT in that LifeStage and the following facts:

  • Total Assets (in $ Millions)
  • Cash to Total Assets Ratio
  • Number of Properties/Investments
  • Current Distribution Yield
  • Debt to Total Assets Ratio
  • YTD FFO Payout Ratio
  • YTD MFFO Payout Ratio Blue Vault
  • YTD Interest Coverage Ratio

For each of these metrics Blue Vault also calculates the Median, Average, Minimum, and Maximum and lists them at the end of each table. 

See pages 20-26 of the Nontraded REIT Industry Review, Third Quarter 2016, for details such as this, as well as assets under management, average yield, number of funds that are currently raising capital, and more.


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Nontraded BDCs Post Annualized Return of 14.7%

Nontraded BDCs Post Annualized Return of 14.7%

December 9, 2016 | Blue Vault


Nontraded BDCs this year have produced a median annualized return of 14.7%. Through the end of September 2016, BDCs have performed exceptionally well despite the slowest capital raise in four years.

"Unfortunately, many investors are missing out on these returns because financial advisors have backed off of nontraded fund sales in the wake of recent regulations. Not only have BDCs been able to produce a consistent distribution income for investors, but most BDCs have seen significant increases in their net asset values," says Jared Schneider, a Managing Partner at Blue Vault.

The unannualized median return for the nine months ended September 30, 2016 was 11.05%, and at Blue Vault we expect to see further gains through the end of the year. You can find out more about individual BDC performance in the Q3 2016 Nontraded BDC Industry Review, which will be released the week of December 12.

Click Here

All 3rd Quarter 2016 Nontraded BDC Review individual pages have been posted to Blue Vault's website.

  • Business Development Corporation of America
  • Carey Credit Income Fund
  • CION Investment Corporation
  • Corporate Capital Trust II
  • Corporate Capital Trust, Inc.
  • FS Energy & Power Fund
  • FS Investment Corporation II
  • FS Investment Corporation III
  • FS Investment Corporation IV
  • HMS Income Fund, Inc.
  • NexPoint Capital, Inc.
  • Sierra Income Corporation
  • Terra Income Fund 6, Inc.

You may access these pages by logging on to the Blue Vault website and clicking on "Subscriber-Only Research,"Nontraded Business Development Companies", then "BDC Individual Reports" links on the toolbar at the top of the home page. Scroll down to 2016, then 2016 Q3.

Blue Vault research is available to paid Subscribers only. If you do not have a current subscription, call Dawn McDaniel at 877-256-2304, Option 2, to see how you can get access today!


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Understanding Asset Management Fees


Understanding Asset Management Fees

December 1, 2016 | by Beth Glavosek | Blue Vault

Asset management fees (also known as Advisory Fees) are ongoing fees charged to investors in nontraded REIT programs. These fees accrue monthly or quarterly and are based on the sponsor’s definition of asset totals.

Börsenkurse mit Lupe und Taschenrechner

While Blue Vault’s recent Fee Study found that there are at least 12 different methods used by current nontraded REIT offerings to calculate their asset management fees, fees are typically calculated as a percentage of the following four general categories:

  1. Aggregate Net Asset Value (NAV)
  2. Gross Assets or Average Invested Assets
  3. Cost of Investments Less Debt
  4. Aggregate Market Value

In a few cases, there’s also a performance component. Once a target level of assets under management is reached, the fee becomes a higher percentage of the value of investments.

All effective REIT offerings as of September 2016 had asset management fees, with a median rate of 1.00% annually. Blue Vault found that these fees have the largest impact on average shareholder returns of any of the various fees paid by the REIT to its sponsor because they’re assessed each quarter for the life of the REIT program and can increase with the value of the REIT’s portfolio. When they are calculated on the basis of the REIT’s total assets, the effect on shareholder wealth is magnified as the REIT utilizes leverage.

For example, a 1.00% annual fee on the assets of a REIT that has financed the assets with 50% debt has an annual impact on shareholder equity of 2.00%, having a larger impact on shareholder returns than any other single type of fee or expense.

In short, asset management fees are the most important fees with regard to impact on average shareholder returns because they’re paid continually over the life of the REIT. These fees have much greater relative impact on shareholder returns than upfront fees, transaction fees, or fees paid at the liquidity event.

Other Blog Posts in this series:

The Future of Acquisition and Disposition Fees

Different Types of Fees and How They Impact Shareholders – Part 3

Different Types of Fees and How They Impact Shareholders – Part 2

Different Types of Fees and How They Impact Shareholders

What’s Up (or Down) with Fees?

From the Vault:

Which current nontraded REIT program recently eliminated acquisition, disposition and financing coordination fees?

How do asset management fee rates based upon gross asset values present a potential conflict of interest for nontraded REIT sponsors?

Which current nontraded REIT offerings have asset management fees which combine an annual fixed component rate plus an incentive rate based on annual performance?


Introducing Blue Vault's New Nontraded REIT Fee Study.
Learn more about this study and how you can access it here.

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The Future of Acquisition and Disposition Fees


The Future of Acquisition and Disposition Fees

November 16, 2016 | by Beth Glavosek | Blue Vault

Equity Raised

Acquisition and disposition fees have long been a part of many nontraded REIT sponsors’ programs. The fees presumably cover costs related to acquisition and disposition activity. One sponsor, for example, states in its prospectus that it will pay its advisor a disposition fee if the advisor or its affiliates “provide a substantial amount of services in connection with the sale of properties.” In addition to compensating the advisor for services, the fee serves as a reimbursement for any real estate commissions incurred.

Perspectives differ among sponsors, some of whom charge these fees and some of whom have elected to lower or discontinue them. Inland Residential Properties Trust, Inc. announced earlier this year that it would completely eliminate acquisition, disposition, and coordination fees that cover financing activities. Such actions may put pressure on other sponsors to follow suit, but it’s not clear the actual impact that such fees have on shareholder returns.

Blue Vault’s Fee Study looked in-depth at sponsor fees and found that some sponsors may have lowered upfront fees in an effort to drive sales; however, they have raised or already have higher asset management fees, which have a much larger impact on shareholders because they are charged annually for the life of the program and are based in many cases on total assets rather than just shareholders’ equity. For example, a 1.00% annual fee on the assets of a REIT that has financed the assets with 50% debt has an annual impact on shareholder equity of 2.00%, reducing shareholder returns by much more over the life of the program than any other type of fee or expense.

The bottom line: Blue Vault believes that acquisition and other upfront fees can certainly raise the cost of the REIT program and possibly reduce net returns to shareholders over the life of the program. However, in our analysis, choosing asset investments that appreciate or generate higher net operating income over the life of the investment has much more of an impact than any upfront fees. Thinking this way, if a sponsor finds an investment for the REIT and purchases it for a good price, locking in a profitable opportunity, the 1.00% fee would be a very minor tradeoff.

More blog posts from this series:



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Different Types of Fees and How They Impact Shareholders – Part 2

Different Types of Fees and How They Impact Shareholders – Part 2

October 28, 2016 | by Beth Glavosek | Blue Vault

stack coins, rising curve, symbol photo for increasing profits and rising costs

The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.

These fees can be classified in three categories: Upfront, Ongoing and/or Portfolio-Related, and Full-Cycle Related.

In this blog post, we’ll look at the Ongoing and/or Portfolio-Related fees that shareholders may experience depending on the product offering and share class purchased.

Annual Distribution/Shareholder Servicing Fee

These fees comprise the “trail” or that portion of the dealer manager fee that is paid over time rather than at the time the shares are sold in the public offering. For Class T shares, these are most commonly at the rate of 1.00% annually and will cease when the total underwriting expenses from all sources reaches 10.00%, upon a listing or merger, or within a specified time period following the issuance of the shares. For the 23 Class T offerings open as of September 2016, 19 had trailing shareholder servicing fees of 1.00%, two had rates of 0.80% annualized, and one each had rates of 0.85% and 1.125% annualized.

Acquisition and Origination Fees

A percentage of the cost of investments acquired or originated by the REIT, including in some cases the origination of loans, as well as significant capital expenditures for the development, construction or improvement of real estate property. For the effective REITs as of September 2016, these fees ranged from 0.00% to 4.50%, depending upon asset type and investment style of the REIT.

Development Services/Development Oversight Services Fees

Paid to the Advisor as a development management fee equal to 1.00% up to 5.00% of the cost to develop, construct or improve any real property assets. This fee is currently in the fee structure for 15 share classes among effective REITs as of September 2016.

Estimated Acquisition Expenses

Reimbursement of customary acquisition and origination expenses (including expenses relating to potential investments that the REIT does not close), such as legal fees and expenses (including fees of independent contractor in-house counsel that are not employees of the advisor), costs of due diligence (including, as necessary, updated appraisals, surveys and environmental site assessments), travel and communications expenses, accounting fees and expenses and other closing costs and miscellaneous expenses relating to the acquisition or origination of real estate properties and real estate-related investments. For the effective REITs as of September 2016, these fees ranged from 0.50% to 6.00%, with a median of 1.00%.

Financing Coordination Fees

A percentage of the amount made available by a loan or line of credit either directly or indirectly related to the acquisition of properties or other permitted investments. There were eight effective REIT programs as of September 2016 that had these fees, ranging from 0.25% to 1.00%. This can also apply to a refinancing of a loan.

Asset Management Fees

A monthly fee equal to one-twelfth of 0.50% to 1.60% of the cost of the REIT’s investments, less any debt secured by or attributable to its investments. The cost of real property investments is calculated as the amount paid or allocated to acquire the real property, plus capital improvements, construction or other improvements to the property, excluding acquisition fees paid to the advisor. All effective REITs as of September 2016 had asset management fees, with a median rate of 1.00% annually.

Property Management Fees

A monthly fee equal to a percentage of the rent, on a property by property basis, consistent with current market rates, payable and actually collected for the month, for those properties subject to a property management agreement with the sponsor or advisor. For 15 of the effective REIT share classes as of September 2016, these fees ranged from less than 2.00% to 6.00% per year.

Development Services and Construction Management Fees

There are 15 REITs that had development services and/or construction management fees, ranging from 4.00% to 6.00% of the total cost of the work done. These should be based upon the usual and customary fees for such services in the geographic area of the property.

Property Management Oversight Fees

Paid to the advisor for oversight of a 3rd party’s management of a property. Only six of the 30 effective REITs as of September 2016 had this fee in their prospectuses, and the rates are usually at 1.00% annually.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

Other posts in this series:

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Different Types of Fees and How They Impact Shareholders

Different Types of Fees and How They Impact Shareholders

October 20, 2016 | by Beth Glavosek | Blue Vault

Money, finance, business concept abstract background

The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.

These fees can be classified in three categories: Upfront, Portfolio-Related, and Full-Cycle Related.

In this blog post, we’ll look at the Upfront Fees that shareholders may experience depending on the product offering and share class purchased.

Key Term: Total Front Load

The sum of selling commissions, dealer manager fees and organization and other offering expenses. For the open nontraded REIT offerings as of September 2016, the total front loads ranged from 0.60% to 15.0%, depending upon the share class and the total proceeds raised in the offering. 

Selling Commissions – The portion of the offering price paid to Broker Dealers who sell shares in the public offering. The selling commission can range from as low as 0.00% to as high as 7.0%. In the prospectus for each offering, look for the section that describes “Use of Proceeds,” which will typically estimate the percentage of both the minimum offering and the maximum offering that will be paid in selling commissions.

Dealer Manager Fees – Fees paid to the dealer manager from the offering proceeds. The dealer manager may “reallow” a portion of these fees to participating broker dealers based upon their sales volume and other factors. These fees, which range from 0.00% to 3.00%, will not apply to shares sold via the REIT’s Dividend Reinvestment Plan (DRIP).  For the 30 nontraded REIT open offerings as of September 30, 2016, dealer manager fees ranged from 0.00% to 5.00%, with a median for all share classes of 2.00%.

Offerings that include Class T shares will also pay a “trailing” Annual Distribution/Shareholder Servicing Fee to the dealer manager, typically at the rate of 1.0% per year, for up to four to six years, bringing the total dealer manager fees paid for Class T shares over that time period to 7.0% or 7.5%. The trailing fees are discontinued when the total selling compensation and expenses reaches 10% of gross offering proceeds.

Organization & Other Offering Expenses – Reimbursed organization and other offering expenses paid by the REIT to its advisor and dealer manager. The most common estimate for these fees is 1.0% of the offering proceeds, but the actual amounts will vary depending upon the success of the offering.

In no cases will the sum of selling commissions, dealer manager fees, and other organization and offering expenses incurred exceed 15% of the aggregate gross proceeds from the primary offering and its DRIP.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

Other blogs in this series:

What’s Up (or Down) with Fees?

Blue Vault will publish its first ever Nontraded REIT Fee Study at the end of October. 

The first Blue Vault Nontraded REIT Fees Study provides in-depth analysis of all fees associated with nontraded REIT investments currently offered, including definitions of the fees, how the fees impact shareholder returns, and a complete data set with each of the REIT’s share class fees as well as ranges, averages, and medians for the industry. 

This study is the first of its kind to be a comprehensive view of the fee structures of nontraded REIT offerings, and the first to analyze the impacts of those fees on eventual shareholder returns. As the industry evolves with new share classes and class-specific expense allocations, such as the shareholder servicing fees assessed to Class T shares, it is more important than ever to understand how fees are calculated, assessed and will impact shareholders. The study provides both a glossary of terms as well as extensive tables and appendices with specific examples from the prospectuses of nontraded REITs. It also examines historical trends from closed offerings to identify how current offerings compare to those of the past.


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What’s Up (or Down) with Fees?

What’s Up (or Down) with Fees?

October 12, 2016 | by Beth Glavosek | Blue Vault

The introduction of Class T shares has had an interesting impact on the nontraded REIT industry from a sales perspective and distribution yield perspective.


As we’ve discussed previously, the T share was introduced in response to investor concerns about upfront fees. It reduces the upfront load traditionally paid on nontraded REIT Class A shares and instead pays a trailing commission (sometimes called a shareholder servicing fee) over time. This structure is thought to put more investor money “in the ground” upfront, while the trailing commissions are paid from returns generated by the REITs’ performance.

Blue Vault’s newest Fee Study¹ looked at data from the 30 effective nontraded REITs raising funds as of September 30, 2016. Of those, all but one offered common shares classified as Class A shares or had only one class of common shares. Four offered “perpetual” offerings that have a daily NAV feature. Three of those daily NAV REITs had share-class specific expenses or fees that reduced the effective distribution yields for their Class A shares by 0.50% annualized.

The Fee Study also revealed some key findings about T shares:

  • The impact of Class T shares on effective nontraded REIT offerings has been dramatic, as 22 of the 30 open offerings now include Class T shares.
  • This class of shares has trailing shareholder servicing fees ranging from a low of 0.80% annualized to as high as 1.125% annualized, which effectively reduces the distribution yields for Class T shares by that amount relative to the same REIT’s Class A distribution yields.
  • These trailing commissions or fees are expected to continue for up to four or five years after the Class T shares are sold, depending upon when total underwriting compensation for an offering reaches 10% of gross offering proceeds. At that point, the trailing fees will be eliminated.
  • The trailing commissions or shareholder servicing fees are based upon the initial offering prices or daily NAVs of shares (once reported.) After the limit on total underwriting compensation is reached and the shareholder servicing fees are eliminated, the Class T shares will be equivalent to Class A shares with regard to distributions per share.

The initial offering prices of Class T shares in most effective offerings are set such that, after selling commissions, dealer manager fees, and other offering expenses are deducted, the net proceeds to the REIT are the same for Class A and Class T shares. Still, the lower upfront fees for Class T shares results in a higher percentage of the Class T offering proceeds being available for investment.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

¹Blue Vault will publish its first ever Nontraded REIT Fee Study at the end of October. 

The first Blue Vault Nontraded REIT Fees Study provides in-depth analysis of all fees associated with nontraded REIT investments currently offered, including definitions of the fees, how the fees impact shareholder returns, and a complete data set with each of the REIT’s share class fees as well as ranges, averages, and medians for the industry. 

This study is the first of its kind to be a comprehensive view of the fee structures of nontraded REIT offerings, and the first to analyze the impacts of those fees on eventual shareholder returns. As the industry evolves with new share classes and class-specific expense allocations, such as the shareholder servicing fees assessed to Class T shares, it is more important than ever to understand how fees are calculated, assessed and will impact shareholders. The study provides both a glossary of terms as well as extensive tables and appendices with specific examples from the prospectuses of nontraded REITs. It also examines historical trends from closed offerings to identify how current offerings compare to those of the past.


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Blue Vault’s Second Quarter Report – What’s New?

Blue Vault’s Second Quarter Report – What’s New?

File Aug 30, 10 57 50 AMBlue Vault has released its Second Quarter 2016 Nontraded REIT Industry Review. Here are some key findings from our research:

  • Sales by nontraded REITs totaled an estimated $1.09 billion, down from the $2.35 billion recorded in Q1 2016. This number is more than 57% below the average quarterly totals for 2015 of $2.54 billion.
  • At the current pace of capital-raising, the industry may not exceed $5 billion in sales in 2016.
  • There were 25 nontraded REITs raising capital during Q2 2016. There were no new full-cycle events consummated in the second quarter.
  • As the industry continues to evolve, 27 nontraded REITs offered multiple share classes compared to just six REITs as recently as 2014.

New in the Second Quarter: We began posting individual REIT reports from the Quarterly Review to our website as soon as possible after the REITs’ SEC filings, well before all of the data was compiled. This helped to shorten the time that subscribers waited to receive our analyses. Blue Vault continues to work to improve our processes to shorten the release dates and publishing cycle as much as possible for the benefit of our subscribers.Blue Vault remains committed to providing continuing performance data, standardized analysis, and complete transparency on every nontraded REIT. Additionally, we’re committed to expanding our information services to include detailed educational content on nontraded REITs, nontraded BDCs, closed-end funds, and private placements.

Current Subscribers can click here to go directly to the Second Quarter 2016 Nontraded REIT Review, just click on the plus next to 2016.

Read more about what is contained in this quarter's report, read our cover letter and view the table of contents by clicking below.



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Getting Started with the Due Diligence Process

Getting Started with the Due Diligence Process

September 16, 2016 | by Beth Glavosek, in collaboration with Alan Royalty and Scott Brown | Blue Vault and Blue Vault Due Diligence Services

businessman is analyzing through magnifying glass contract and

In a previous blog post, we highlighted the importance of using due diligence to make informed decisions. For Independent Broker Dealers in particular, due diligence is a critical function in the investment selection process.

So, let’s say that there’s a new alternative investment product offering from a product sponsor. How do Broker Dealers get started with the due diligence process of evaluating the offering, and what are the first steps?

  1. Broker Dealers initiate the process. When Broker Dealers are interested in considering a particular alternative investment product offering, they require the product sponsor to utilize a third-party due diligence firm like Blue Vault Due Diligence Services as a tool to assist them in evaluating the sponsored investment product. In some cases, the Broker Dealers engage the third-party due diligence firm directly, while in other cases, a product sponsor engages the firm to perform due diligence for the benefit of Broker Dealers.
  2. The process usually kicks off with an introductory conference call. During this call, a Broker Dealer and/or a third-party due diligence firm may review a list of documents or information requested from the sponsor’s due diligence team. This call usually takes place a few weeks before the Broker Dealer and/or third-party due diligence firm is planning to make an on-site visit to the sponsor. At this time, a third-party firm can provide valuable assistance in determining what information to ask for and collecting the data requested.
  3. The on-site visit will then be scheduled. It’s critical to make sure that the sponsor’s executives and key personnel will be available and accessible during this visit.
  4. After the on-site visit is complete, it’s time for the third-party firm to prepare a due diligence report for the Broker Dealers. Blue Vault Due Diligence Services performs this function for its Broker Dealer clients. There will, undoubtedly, be follow-up questions and additional information requests for the sponsor as the report is drafted, and the third-party due diligence firm streamlines this process.
  5. The last step is issuing the completed due diligence report. Blue Vault Due Diligence Services typically schedules a conference call with the sponsor’s due diligence team once the report is ready to be finalized. The call reviews the report’s executive summary, strengths and weaknesses, and particular points with the sponsor’s due diligence team in order to ensure factual accuracy.

Once this call has been completed, any necessary resulting changes or edits are made to the due diligence report, and it is ready for issuance to Broker Dealer clients.

In future posts, we’ll discuss other aspects of the due diligence process and best practices that are mutually beneficial to the Broker Dealer, product sponsor, and third-party due diligence relationship.

Other blog posts in this series:

Due Diligence Basics, posted on September 9, 2016


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A Closer Look at Today’s 1031 Exchanges – Part 2

A Closer Look at Today’s 1031 Exchanges – Part 2

August 24th, 2016 | by Beth Glavosek | Blue Vault

hand pushing share button with global networking concept


In last week’s post, we discussed how 1031 exchanges can benefit investors looking to defer a sizable tax burden on appreciated investment property. 1031s allow taxes on gains to be deferred when the proceeds from the original property are used to purchase “like-kind” property.

So, let’s dive deeper into investor suitability for a 1031 exchange and what the pros and cons may be.

First, 1031s are not limited to wealthy investors, and net worth is not necessarily a contributing factor to one’s ability to participate in a 1031 exchange. “Non-accredited investors can participate in 1031 exchanges, but they are limited to fee-simple (i.e., direct) alternatives,” says Jean-Louis Guinchard, a Senior Managing Principal with San Diego-based Silver Portal Capital. “Accredited investors, however, can acquire beneficial interests in one or more Delaware Statutory Trusts (DSTs) that qualify as replacement property for a 1031 exchange.”

There are several benefits to investing in a single DST or multiple DSTs. First, one can defer potential gains from the sale of a single property and diversify into multiple investment properties with multiple tenants and in different geographies. For example, you could deploy money received from the sale of an investment property into a DST that holds multifamily, retail, office, or industrial assets. Guinchard says that “Like-Kind” does not mean replacing the original property with one from the same asset class (i.e., retail for retail).

Second, one can diversify any gains from the initial property among different DSTs. “Assuming that you have a $1 million gain from your original property, you can reinvest the gross proceeds in one DST, or you could place $250,000 in four different DSTs and still get the same tax benefits,” Guinchard says.

Third, strong sponsors of DSTs can obtain better lease financing terms than individuals can get on their own, and they can asset and property manage these assets more efficiently as well.

Lastly, the investment returns will likely generate a higher yield than other investment alternatives in today’s market, especially comparable high quality fixed income products like corporate bonds.

Investors must use a Qualified Intermediary to comply with legal requirements regarding the exchange of properties. “Those seeking to effect a 1031 exchange must identify replacement property in 45 days and close on the purchase of replacement property in 180 days,” explains Guinchard. “One should definitely plan ahead if he or she knows that they are going to sell a property with sizable investment gains because they only have a limited time to identify and deploy the proceeds and must follow three very specific rules if one is going to take advantage of the tax benefits of a 1031 exchange.” Guinchard notes that many people may find it easy to identify replacement property within 45 days, but closing on one or all of those properties within the 180 day time frame is easier said than done, particularly in a heated real estate market.

As far as drawbacks to DSTs, Guinchard says, “There is currently no active secondary market for beneficial interests, so liquidity may be a concern for a few individuals. Most individuals should be prepared to hold these assets for 7 to 10 years.” Some people also have the impression that the fees associated with DSTs are relatively high. Guinchard encourages individuals to compare the costs of fee simple alternatives on an apples-to-apples basis with those of DSTs, which he believes will dispel much of this myth.

In all, 1031s can be an attractive option for those looking to defer taxes on a sizable gain in real estate holdings, those who could benefit from monthly cash distributions, and those looking for a competent manager to oversee and manage all of the day-to-day issues associated with these properties. Guinchard strongly recommends that individuals enlist the advice of qualified financial professionals, tax consultants, accountants, and attorneys to weigh the pros and cons of each potential solution.

Silver Portal Capital is a leading placement firm in the field of 1031 exchanges and replacement property alternatives. Its clientele includes several of the nation’s leading RIA and accounting firms, tax professionals, qualified intermediaries and attorneys who work with real estate and accredited investors.

August Blog Series on Private Placements




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A Closer Look at Today’s 1031 Exchanges – Part 1

A Closer Look at Today’s 1031 Exchanges – Part 1

August 19, 2016 | by Beth Glavosek | Blue Vault

Editor’s note: Last week, we reported that most 1031s are structured as a Tenants-in-Common (TIC) arrangement. TICs were popular at one time; however, the Delaware Statutory Trust (DST) is a more favored structure today.

As we discussed in a previous blog post, 1031 exchanges can be helpful when selling an investment property in order to avoid a sizable tax burden. 1031s allow taxes on gains to be deferred when the proceeds from the original property are used to purchase “like-kind” property.

There’s reason to believe that the 1031 is growing in popularity. According to Jean-Louis Guinchard, a Senior Managing Principal with San Diego-based Silver Portal Capital, several demographic trends are contributing to renewed interest in 1031s.

“Americans are aging and living longer, and an investment that can provide stable, predictable income can be very attractive,” he explains. “Quite a few people, particularly those in gateway cities such as New York, Los Angeles, San Francisco and Boston, face significant real estate appreciation on properties they purchased long ago. The cost basis in these properties is likely relatively low and the capital gains could be very high. Unless they are willing to pay a substantial tax bill, an option they should consider includes entering into a 1031 exchange, then reinvesting the proceeds from the sale in a Delaware Statutory Trust or DST.”

Guinchard notes that by using a 1031 exchange and reinvesting the proceeds in a DST, these investors could receive certain benefits including, among others: 1) a beneficial interest in a professionally managed and typically a higher quality property than most individuals could acquire on their own; 2) the tax benefit derived from depreciation and other non-cash operating expenses on the improvements; 3) tax deferral on state and federal capital gains and depreciation recapture; 4) geographic, asset class and tenant diversification; 5) monthly or quarterly cash distributions; and 6) the potential for meaningful tax-equivalent yields. Distributions are, essentially, paid to the holders of beneficial interests from the building’s rent after operating expenses and debt repayment and principal amortization are deducted.

The pitfalls of the legacy TIC structure contributed to a dip in 1031s’ popularity. Guinchard maintains that the more investor-friendly structure of a DST from a legitimate and experienced sponsor merits serious consideration for those looking to effectively defer real estate gains.

“TICs had several factors working against them,” he says. “First, many TICs were syndicated to investors by unscrupulous and poorly capitalized sponsors who went out of business or disappeared when the cycle rolled. Secondly, TICs allow for up to 35 investors to participate in the ownership of a property. In order for any material decisions to be made, all 35 owners have to agree unanimously, which poses significant challenges. Lastly, debt placed on most properties was typically fully recourse to the investors, meaning that they were individually responsible for the repayment of their respective interest in the underlying property or properties. This adversely affected investors during the downturn, especially amid falling property values.”

Guinchard maintains that the concept of shared economy – pooling funds to own larger and higher quality properties – is still valid. “A DST eliminates many of the weaknesses of TIC structure. First and foremost, a competent and experienced trustee makes all decisions instead of the holders of the beneficial interests, and unanimous consent among all investors is no longer required. Second, debt is recourse to the DST, not the individual investors,” he says. “Third, restrictions are placed on sponsors to ensure that the beneficial interests of a DST are treated as qualified property for purposes of Internal Revenue Code Section 1031 and a DST. By definition, the trustee may not have the power to accept contributions from other investors after the offering is closed, enter into new leases or renegotiate the current lease, renegotiate the terms of existing loans or borrow any new funds, nor sell the properties and use the proceeds to acquire other properties. Equally as important, the trustee must distribute all cash on a current basis and invest cash held between distributions in high quality instruments. All of this inures to the benefit of the investors.”

In next week’s post, we’ll talk about 1031 suitability, its pros and cons, and the potential benefits to a certain class of investors.

Silver Portal Capital is a leading placement firm in the field of 1031 exchanges. Its clientele includes 1031 product sponsors, accounting firms, tax professionals, and attorneys who work with accredited investors.

August Blog Series on Private Placements

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1031 Exchanges – What are They and How Do They Work?

1031 Exchanges – What are They and How Do They Work?

Part two in a series on private placements.

August 09, 2016 | by Beth Glavosek | Blue Vault

Businessman touching financial dashboard with key performance in

1031 exchanges can be helpful for people selling a piece of business or investment property. If they expect to sell the property for more than they paid (their cost basis), they will face capital gains taxes on their gains. 1031s allow these taxes to be deferred when the original property is exchanged for a property of “like-kind” value.

A bit of history: 1031 exchanges are named after Internal Revenue Code Section 1031 and are also known as ‘like-kind exchanges.’ Created as a provision of the Revenue Act of 1921, the like-kind exchange resulted from Congress’s decisions about how to treat capital gains taxes. According to the U.S. Department of the Treasury, Congress recognized that the dramatic increase in tax rates on capital gains during the first World War hampered the ability to purchase a replacement property. Since that time, Congress has allowed these exchanges in order to defer capital gains and has only made modest changes in the rules through the years.

Over time, the definition of eligible exchanges has been expanded, and like-kind exchanges of real estate have grown to involve third-party qualified intermediaries. However, both the original property and the replacement property must be used for business or for investment. 1031s cannot be executed for personal property like primary residences or second homes.

Most 1031s are structured as a Tenants in Common (TIC) arrangement. With Tenants in Common, each owner owns a share of the property – these shares can be of unequal size and can be freely sold to other owners. TICs are often sponsored and administered by professional real estate companies, which gives individual investors the opportunity to pool their funds, qualify for a higher level of financing, buy larger-scale properties than they could on their own, and take advantage of professional property management.

These investors not only can defer what could be a significant tax bill; they also can potentially receive stable cash flow from the replacement property.

According to the IRS, it’s important to note that when the investor’s interests in the replacement property are ultimately sold (not as part of another exchange), the original deferred gains plus any additional gains from the replacement property are subject to tax.

In future posts, we’ll look at why 1031s have been popular at times with investors, while falling out of favor at other times.

August Blog Series on Private Placements

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Brushing Up on Private Placements

Brushing Up on Private Placements

August 3, 2016 | by Beth Glavosek | Blue Vault

File photo of the U.S. Securities and Exchange Commission logo hangs on a wall at the SEC headquarters in WashingtonAlthough private investments into companies have existed for hundreds of years, the Securities Act of 1933 set the rules for modern-day private placements. Depending on net worth and risk tolerance, private placements can be a good choice for investors seeking capital growth and tax advantages.

According to the Securities & Exchange Commission (SEC), private placements are securities offerings exempt from registration with the SEC. Generally speaking, private placements are not subject to the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private placements are intended to raise funds from investors with a relatively high net worth.

You will often hear of private placements, especially in the broker/dealer world, referred to as Reg D offerings. Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.

Reg D offerings may be sold to an unlimited number of accredited investors. An individual will be considered an accredited investor if he or she:

  • - Has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year,  OR
  • - Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence).

Non-accredited investors may also participate in the offering if they are financially sophisticated and have sufficient knowledge and experience in financial and business matters to evaluate the investment.

Reg A and Reg A+ are other types of private placements that allow smaller companies to raise capital from qualified individual investors. They provide exemption from registration for smaller issuers of securities.

Not surprisingly, FINRA and the SEC caution investors to tread carefully into private placement territory. However, certain investors wanting to take advantage of tax benefits may consider such offerings. Product sponsor Inland offers an overview of why private placements can make sense for certain investors.

Are private placements making a comeback? We’ll look into them further in future blog posts.

August Blog Series on Private Placements

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Sales of T Shares May be Bright Spot in Nontraded REIT Market

Sales of T Shares May be Bright Spot in Nontraded REIT Market

Share Classes Blog Series - Part Four

July 27, 2016 | By Beth Glavosek | Blue Vault

It’s no secret that nontraded REIT sales have slowly tapered off since hitting a high of $6.5 billion in the third quarter of 2013. In the first quarter of this year, $1.4 billion in investor proceeds was raised – a 39% decrease from the last quarter of 2015 in which $2.3 billion was raised.


Data from Laurie's tabs raw JS Rev. 2


While June’s sales at approximately $340 million were better than May’s at nearly $300 million[1], the industry will need to explore new avenues for reaching investors in today’s highly charged regulatory environment.

As we’ve discussed previously, the T share will play a significant role in how nontraded products are sold to new investors. T shares reduce the upfront load traditionally paid on nontraded REIT A shares and instead pay a trailing commission over time. One advantage to the T share commission structure is that more of the investor’s funds are available to the REIT to put “in the ground” in the form of real estate investments, and the trailing portion of commissions may be funded by the REIT’s operating cash flows.

According to Blue Vault research, this idea is gaining traction. In September 2015, for example, sales of nontraded REIT A shares were approximately $466 million, while T shares were only $26 million. In the nine months since, T shares have taken on a greater proportion of total sales. In April, A share sales were around $255 million, while T shares were $136 million. By June, A share sales had declined to $133 million, but T shares held relatively steady at $125 million.

The T share is just one example of how the industry continues to evolve and adapt to changing regulatory and investor needs.

[1] Source: Blue Vault Partners Research

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Transparency & Liquidity in the Nontraded Space: What’s Hot, What’s Not



Transparency & Liquidity in the Nontraded Space:
What’s Hot, What’s Not

Part three in our month-long blog series on REIT Share Classes.

July 20, 2016 | by Beth Glavosek | Blue Vault


In last week’s post, we talked about how nontraded REIT and BDC sponsors have introduced the T share in response to regulators’ requirements.

The T share addresses the past concern that clients’ account statements only reflected the share price paid, not any costs taken off the top. In addition to a better understanding of the impact of fees, T shares are expected to offer greater visibility into actual share values through more frequent valuations.

However, two other nontraded variants – the Daily NAV REIT and the interval fund – were also introduced over the past decade in an effort to address liquidity concerns.  Where are they now?

As of December 31, 2015, Blue Vault noted that there were five nontraded REITs that provided daily valuations and enhanced liquidity features. These five Daily NAV REITs had raised an estimated $973 million since their inception – only 1.5% of equity raised from all active nontraded REITs as of December 31, 2015. Of the five, one announced its intention to liquidate.

So, in an era of investors asking for more visibility and transparency into share values, why haven’t these Daily NAV REITs raised more money?

Stacy Chitty, Managing Partner for Blue Vault, says, “It’s a complicated question with a multifaceted answer. Most advisors would rather continue to use the traditional IndustryWordsArtboard 1real estate play with less liquidity, if they still have that choice. To them, real estate investing is a 100% diversification strategy, and liquidity falls low on the priority spectrum because of that strategy. One can’t have both. In contrast, shares being valued every day and a structure that provides more liquidity has the opposite effect. There are advantages and disadvantages to both. And sometimes, it just takes time for people to learn and become comfortable with any new way of buying and selling.”

Interval funds have also been touted as a means of providing liquidity in nontraded investments. These funds provide a mix of institutional-quality real estate assets with public real estate securities. Investors have the option of redeeming a percentage of their shares at the end of each quarter, which provides some measure of liquidity.

Earlier this year, Kevin Gannon of industry research firm Robert A. Stanger & Co. predicted a renewed interest in Daily NAV and interval funds, in addition to T shares. He believes that, “Interval funds are here to stay.” In an in-depth look at interval funds, the Alternative & Direct Investment Securities Association (ADISA) also cited Stanger research in its Spring Alternative Investments Quarterly publication, concluding that with 22 active interval funds on the market and 13 in new registration, interval funds seem to only be gaining in popularity.

Product sponsor Resource Real Estate seems to agree. In a white paper on interval funds, the company supports the conclusion that they are leading to new ways for advisors and their clients to access alternative investments. By replicating the benefits of institutional real estate and offering a structure that allows adaptation to an evolving regulatory landscape, interval funds can open up alternatives to a wider audience of investors than ever before.

In conclusion, Jared Schneider, Managing Partner for Blue Vault, states, “It is certainly difficult to invest in illiquid assets like real estate, private credit, and private equity, and yet maintain liquidity for investors. I believe there will be a bifurcation in the market going forward. For one, a significant number of advisors and their clients will value liquidity over returns, and that is why Daily NAV and interval funds will flourish. On the other hand, some advisors and clients will appreciate the returns that come with sacrificing liquidity. The less liquid funds could come in the form of a similar structure to today’s nontraded REITs and BDCs or in the form of private placements.”

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Dot Your I’s and Cross Your T’s – Get Ready for the Next Generation of Share Classes

Dot Your I’s and Cross Your T’s – Get Ready for the Next Generation of Share Classes

201607_ABC-[Converted] July 13, 2016 - Part Two in a month long series of Share Class blog posts.

This week, we’re taking a closer look at some of the more specialized share classes available through alternative investments.

June’s sales data revealed that sales of nontraded REIT T shares are catching up to A share sales. A shares clocked in at approximately $132.6 million for the month, while T shares weren’t far behind at $125.3 million.

But, just what are T shares, and how do they compete with A shares? By definition, A shares charge a load or sales charge upfront. With nontraded REITs, this means that less money is invested initially “in the ground” than the client may think due to sales charges. In the past, nontraded REITs were criticized because the client only saw the stable share price they paid into the REIT reflected on their statements. This price didn’t necessarily reflect the amount actually invested on behalf of clients into properties.

Once FINRA began requiring that REIT sponsors show how much of an effect the upfront load can have, REIT sponsors introduced the T share. The T share replaces the front-end load with trailing commissions. Clients pay a lower share price upfront, but their distributions going forward will be subject to ongoing distribution fees. The T share is intended to give the client more visibility into how much he or she has invested “in the ground” so that performance can be better measured going forward.

Critics say that T shares are simply spreading the upfront fee out over the course of the investment. Proponents say that the new shares are better for investors over the long haul by making sure more of their money goes into the investment initially, while commissions are taken gradually.

It’s worth noting that FINRA limits dealer manager and distribution fees charged on an ongoing basis to 10% of the gross proceeds of a primary offering. However, share class-specific expenses will still be applied to distributions.

I shares are low-cost institutional shares available to investors who can invest higher upfront capital. They’re available to institutional clients like pension plans, bank trusts, retirement plans, foundations, endowments, and certain financial intermediaries. I shares are also structured so that advisors affiliated with registered investment adviser firms (RIAs) can offer them as a fee-only service. I shares may be an attractive option for individual investors who can take advantage of their availability through their RIA advisor.

In upcoming blog posts, we’ll look at some other share class options and examine their popularity and success among investors.

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Understanding the World of Share Classes

Understanding the World of Share Classes

Part One in a Four-Part Series on Share Classes

201607_ABC-[Converted]From ABC to Z, the variety of share classes in the investment world seems to have proliferated across the entire alphabet.

The differences in share classes really boil down to one thing: fees and expenses that provide compensation for those involved in sponsoring and selling investment products.

Despite a nearly universal desire among investors to minimize fees and avoid costs as much as possible, it’s entirely reasonable for those involved in selling investments to make money. It’s a business, after all, and even regulators understand the need for advisors to be compensated for what they do.

The suitable share class choice for an investor will depend upon his or her time horizon, the amount of the investment, and possibly whether the investor needs investment advice or not. For example, a “do-it-yourself” type of investor may not wish to pay fees intended to cover advisor guidance.

The following is an overview of many of the share class types found in the marketplace.

A shares

A front-end load (sales charge) is taken upfront, and it reduces the initial amount invested in a fund. However, over the long-term, A shares are generally regarded as most cost-effective. This share class offers the opportunity for discounts at breakpoints, and 12b-1 fees[1] are lower.

B shares

A back-end load (sales charge) is applied when shares are sold. Even though the investor doesn’t pay sales charges upfront, he or she may be subject to higher expense ratios each year.

C shares

Also known as a “level” load class of shares, there’s no front-end sales charge; however, penalties may apply if shares are sold before holding them for one year, and yearly expense ratios may be significantly higher – a feature that’s unattractive to long-term investors because of the higher potential expenses over time.

D shares

These are no-load shares often sold through large mutual fund houses that sell directly to the public. While these shares may feature no loads and lower expenses, transaction charges may apply.

Other types

F shares are sold exclusively through financial professionals. Fees are asset-based, and some carry no 12b-1 fees.

I shares are low-cost institutional shares available to investors who can invest higher upfront capital. They’re typically sold through fee-only advisors.

M shares are similar to C shares.

R shares are created exclusively for retirement plans offered through employers and 401(k)s. Costs vary, but there’s typically no load, and some carry 12b-1 fees.

S shares are no-load share classes, but there may be higher ongoing distribution fees. They may be converted to A shares after a certain holding period.

T shares are offered as an opportunity for investors to take advantage of a lower share price upfront due to lower upfront fees and expenses; however, their distributions going forward will be lower than A class shares due to higher ongoing distribution fees.

Y shares are institutional shares sold directly from a sponsor to an institution.

Z shares are similar to S shares in that they are no-load; however, these are typically older shares that are closed to new investors.

As you can see, the world of investments is growing more complex as fund sponsors create offerings that respond to investor and regulator needs and expectations. Check back soon for a closer look at some of the more specialized share classes available through alternative investments.

Sources and further reading:

Christine Benz, “Making Sense of Share-Class Alphabet Soup,” Morningstar.

Jack Hough, “Beware Fund Share-Class Fees,” The Wall Street Journal.

Introduction and Overview of 40 Act Liquid Alternative Funds,” Citi Prime Finance.


[1] 12b-1 fees are charged to cover a fund’s marketing and distribution expenses.

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Interactive Banking – How Digital Banking Will Affect Branch Bank Real Estate

Guest Blog - Written By Ira Bellinkoff

Banks are modernizing by embracing technology, providing more interactive customer experiences and conducting the same amount of work in a branch with a smaller footprint. Large, regional, and local banks are updating the traditional teller counter to provide a more self-service experience, opting instead for multiple kiosk-type stations on the branch floor. The kiosks are staffed by employees who can assist customers or direct them to a virtual (headquarters office) assistant. Remaining floor area is dedicated to higher margin services such as brokerage and investment services.

As consumers continue to increase their utilization of online banking functions, the physical building requirements for branch banks are changing. What does this mean for the value of bank real estate?

Smaller Branches: Not uncommonly, legacy freestanding branches that opened over 30 years ago typically ranged in size between 5,000 and 8,000 square feet with several drive-through lanes. New branch banking sites are shrinking, with newer facilities ranging between 2,500 and 3,500 square feet and situated on 0.75 to 1.50 acres. Some newer facilities in urban areas are even forgoing drive-through lanes.

Deposits Matter: As a “rule-of-thumb,” a bank can pay rent equal to or less than 1% of its deposits at a particular location. The number of branches is declining not only due to technological revolutions but also due to burgeoning regulatory costs. If an existing bank location has a rent-to-deposit ratio above 1.0%, there is a much higher probability it might be shuttered.

Pledged Investment: Most banks are developed as build-to-suit assets encumbered by a ground lease. New leases typically have a base term of 20 years, with an additional 20 to 30 years in renewal options. According to Calkain Companies, excluding California, bank cap rates range between 3.94% and 6.57%, with an average of 5.22%. Credit quality, length of the remaining term, and the risk-free premium over the 10-year Treasury are the three most important factors affecting cap rates—aside from the real estate. Having the return characteristics of a bond, bank real estate, meeting modern standards, is a safe-haven investment for well-heeled and 1031-exchange investors.

Overall, banks will continue to exist. While technological changes will likely result in branch contraction, surveys indicate that customers frequently choose their bank based on the availability of nearby branches, presumably when they encounter situations that warrant interaction with bank staff. Additionally, there always be a need for immediate cash and consumers prefer to avoid ATM fees of non-member systems. Aside from freestanding branches, complementary “micro branch” locations will likely become more common and serve as a way to balance costs.

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Department of Labor (DOL) Fiduciary Rule: Counterintuitive Reaction or True Investor Protection?

by Jared Schneider (Managing Partner) | Blue Vault

One of the hottest topics right now in the alternative investments space is the DOL’s Fiduciary Rule legislation. The rule is designed to redefine what it means to be a fiduciary and how that affects retirement accounts (i.e., IRAs, 401ks, etc.). The rule stipulates that certain investments and commissions for those products are no longer allowed. For example, the rule, as it’s currently worded, would prohibit nontraded REITs, nontraded BDCs, private equity funds, hedge funds, and other alternatives from retirement accounts.

The outcome of the rule, however, contradicts our country’s general desire to encourage public participation in investments. For example, the recently passed JOBS Act was created to encourage entrepreneurship and job creation, and the ability for everyday investors to participate in these endeavors. But now, we have a rule stating that if that investment is part of your retirement account, you cannot invest in those types of opportunities. In the past couple of years, we’ve seen crowdfunding and general solicitation of private offerings become legal, but at the same time regulators were working on a way to discourage investors’ access to those very same investments.

Now, this is not to say there is no fault to be placed on the misconduct of bad brokers and fund sponsors. Additionally, the nontraded product and private fund space has lagged behind the rest of the investment world when it comes to transparency. Commissions and fees have driven up the cost of ownership for these investments, and many investors were unaware of the fees associated with them. Even so, as a whole, these nontraded products have provided very good returns to their investors. Blue Vault, in collaboration with the University of Georgia, has a study1 on the performance of all nontraded REITs that have gone full-cycle or provided liquidity to investors.

If the regulators’ goal is to expose and reduce commissions and fees, then by all means, do that. But rather than prohibiting investors from the ability to invest in alternatives, a much simpler solution would be to limit commissions and provide more transparency in reporting them. When this happened years ago in the mutual fund industry, assets under management grew after commissions came down and many no-load products were introduced. If fees and commissions are simply reduced, there is a strong argument that the masses would embrace and adopt nontraded funds and private funds.

The DOL Fiduciary Rule, while having good intentions of limiting conflicts of interest, has the unintended consequence of limiting access to investments. After all, access to the broadest range of asset classes and investment types should provide the best opportunity to diversify and mitigate risk. That is what a financial advisor wants to help clients accomplish for their portfolios.

1If you are not a Blue Vault Subscriber and would like a sample of the 4th Edition Nontraded REIT Full-Cycle Performance Study, click here.

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Traded REIT Premiums and Discounts to NAVs – Reading the Tea Leaves

Full-cycle events within the nontraded REIT sector provide interesting and potentially valuable insights.  Whenever a nontraded REIT lists its shares on a public exchange, or merges with a listed company, the market valuation of its shares is revealed after years of reporting share prices based upon the original issue price or subsequent “NAV” reports based upon periodic third-party appraisals. In some cases, the nontraded REIT’s SEC filings may not have reported a net asset value for its shares that comes very close to approximating its subsequent full-cycle value.

For example, the merger of Griffin-American Healthcare REIT II with NorthStar Realty Finance Corp., which closed December 3, 2014, revealed a per-share value to the nontraded REIT shareholders of $11.50, compared to its previously published NAV of $10.22. On November 21, 2014, Monogram Residential Trust listed its shares on the NYSE and had a closing price of $9.25 compared to its published NAV on September 30, 2014, of $10.41.

Are there any data available to nontraded REIT shareholders prior to these full-cycle events that provide hints as to the actual values to be expected relative to reported NAVs? Maybe there are useful answers in the analyst estimates of premiums and discounts to NAVs by traded REIT property sectors published by SNL.

Looking at the data, we see some traded REIT sectors that were trading at values significantly higher than their average NAVs, and some sectors that were trading closer to their average NAVs. Note that at the time Griffin-American Healthcare REIT II merged with NorthStar, the average premium to NAVs in the publicly traded Healthcare sector was about +24%. When American Realty Capital Healthcare REIT listed on the NYSE on April 4, 2014, public healthcare REITs were trading at an over 20% premium to NAV. When Monogram listed, the average premium to NAVs in the Multifamily sector was just +2.2%, a significant difference. 

From a REIT manager’s point of view, the successful investment and management of a portfolio of properties could add value over time. For example, a well-managed portfolio of properties could appreciate 10% in NAV under ideal market conditions. But looking at the change in market values of traded REITs relative to their respective NAVs, both healthcare sector REITs and self-storage REITs experienced per share appreciation relative to NAVs of over 20% between September 30, 2014 and January 2015. This indicates that market timing might also play an important role in determining nontraded REIT full-cycle returns.


Moving forward into 2015, it might not be unreasonable to anticipate those nontraded REITs in property sectors where the public market values shares at a higher premium to NAV will look more optimistically toward a full-cycle event, either as a listing or a merger with a listed firm. As of February 5, the two sectors with the highest premiums to NAV were Healthcare (+31.9%) and Self-Storage (+30.0%).

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What’s MFFO and Why Should I Care?

In investing as in sports, a few people tend to focus on statistics while most don’t, but we all care about winning and losing. There are some numbers that reveal a lot about whether we’re winning or losing, and some numbers that only the “stats geeks,” or in the case of investing, the analysts, seem to care about or even understand.

Most investors in nontraded REITs correctly focus their attention on cash flows, or more specifically the cash distributions the REITs pay and whether they are sustainable. Unfortunately, the basic REIT financial statements prepared according to Generally Accepted Accounting Principles (GAAP) don’t provide sufficient information to answer the investor’s most basic questions about cash flow and distribution sustainability.

Nontraded REITs go through a life cycle of fundraising, portfolio construction, property management, and eventual liquidation. That life cycle, together with the unique characteristics of real estate accounting, means traditional accounting measures such as Net Income and earnings per share (EPS) can’t be relied upon to answer questions about distribution sustainability. As the industry evolved, companies recognized the shortcomings of GAAP in measuring cash flows available for distributions, and some REITs began reporting additional measures: funds from operations (FFO), modified funds from operations (MFFO), and adjusted funds from operations (AFFO).  Initially, not all companies used the same definitions for these metrics, making apples-to-apples comparisons difficult. Finally, in 2010, IPA* issued guidelines for calculating MFFO to standardize its reporting. Today, most nontraded REITs report their MFFO consistent with those IPA guidelines.

Each of these measures adjusts GAAP Net Income to better approximate the cash flows that will be available to pay distributions to shareholders. The first adjustments add back depreciation (which is not a cash expense), as well as gains or losses from property sales and extraordinary items to arrive at FFO.  But there are still many non-cash items within GAAP Net Income that require adjustments to better estimate funds available to pay distributions. These include such things as “straight-line rent” which GAAP requires to average escalating lease revenue over the life of the lease; amortization of above-market rents; impairments which are write-downs of asset values; gains or losses on securities and foreign exchange; and expenses related to acquisitions and dispositions which are not expected to recur. After all of these adjustments, which are defined by IPA, we arrive at MFFO. While not a perfect metric, MFFO gives investors a better idea of the cash flows being generated by a nontraded REIT that can, in the long run, be available for cash distributions.

When cash distributions exceed MFFO, they cannot be sustained. When MFFO exceeds cash distributions, the distributions can be sustained. The trends in MFFO are important.  Over the life of the nontraded REIT, this number can make the difference between winning and losing.

*Investment Program Association.

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In a League of Their Own

Real estate cycles and the stock market do not move in lockstep with one another. And while there may be a few good reasons to use publicly traded REIT indexes as a comparison for nontraded REIT performance, the values of nontraded REITs are more closely tied to the real estate cycle. As a result, direct real estate investment benchmarks such as the NCREIF (National Council for Real Estate Investment Fiduciaries) property index offer a more appropriate performance comparison tool.

Much like direct real estate investments, nontraded REITs, private equity, and other illiquid investments move through distinct stages such as raising capital, investing in a portfolio and managing properties, and liquidating after a period of several years. In addition, returns for nontraded REITs, like private equity funds, are often low or negative in the early years, due in part to upfront fees and to the time it takes to acquire portfolio assets and for those assets to appreciate in value. This financial principle, called the “J-curve effect,” means that an initial loss is followed by, hopefully, a significant gain. 

Based on preliminary results from the soon-to-be-published 2014 Nontraded REIT Full-Cycle Study, actual data are available to illustrate this point. When we compared the performance of 35 nontraded REITs that had completed a liquidity event between 1990 and July 2014 to the NCREIF National Property Index Returns, we found that over a third outperformed the NCREIF results and an additional seven out of the 35 REITs were within 1.5% of the NCREIF returns over matched holding periods. If we recognize that the NCREIF index does not include any fees, it is meaningful that 20 of 35 nontraded REITs had better or comparable fee-adjusted shareholder returns to private portfolio investments in commercial real estate.  

For nontraded REITs — like private equity — real progress is gauged over time. The strategy and efforts of the sponsor to acquire and manage real estate can take several years and can be evaluated only after equity offerings are concluded and independent appraisals are done.

Nontraded REITS in a League of Their Own

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Blue Vault Questions Investment News Article

In the article written by Bruce Kelly of InvestmentNews on September 17, 2014, titled “Nontraded REITs stack up well compared with traded REITs,” he states that an August 2014 Green Street Advisors study is the “first to track nontraded REIT performance in comparison with their traded counterparts.” Unfortunately, Mr. Kelly forgot to check his facts when he wrote this statement because in another article he wrote on June 10, 2012, he stated that the Nontraded REIT Full-Cycle study prepared by Blue Vault Partners LLC and The University of Texas at Austin McCombs School of Business and released in 2012 was, “likely the first systematic examination of the realized returns for investing in nontraded REITs.”

In the latest article, Jim Sullivan of Green Street was quoted as saying “No one has done [this type of study] before. It quantifies what had been a gut thesis on relative performance.” Actually, Blue Vault has completed two such studies and will soon be releasing a third, which will update the full sample of all full-cycle events among nontraded REITs through July 2014 to 35 events. For the past two years, Blue Vault’s studies have focused on understanding the performance of nontraded REITs compared to their traded counterparts via the use of customized benchmarks that have been adjusted for property types, property locations, and differences in leverage. In addition, these annual studies compare nontraded REIT performance to institutional portfolios using NCREIF data. They have also measured returns over different holding periods, for the early, middle, and late offering period investors, and they have addressed the effects of sales loads on total returns.

It appears that this reporter has a different interpretation of full-cycle results depending upon whose study he quotes. The 2012 article’s headline was “Most nontraded REITs underperform market,” while the latest article’s headline took a more positive tone with “Nontraded REITs stack up well compared with traded REITs.” Interestingly, in the 2012 study by Blue Vault, which covered 17 full-cycle cases through mid-2012, the performance gap was actually less between the nontraded REITs and the publicly tradeds than in the Green Street update, which added 17 more full-cycle events to reach a sample size of 34.

The use of custom benchmarks by Blue Vault to measure nontraded REIT full-cycle performance recognizes that the best way to make “apples-to-apples” comparisons between the returns to investors in nontraded REITs versus traded alternatives is to adjust for asset types, locations, and leverage differences, as these all impact both returns and risks, and should be taken into account. It is also important to note that the nontraded REITs in the Blue Vault studies are only included when shareholders have achieved full liquidity, excluding nontraded REITs that have delayed the listing of a portion of their common shares by using different share classes that do not immediately trade on exchanges. Blue Vault’s samples exclude those REITs until common shareholders achieve full liquidity for all of their common share holdings, which in several cases has been 18 months after listing of their Class A common shares.

In November 2014, Blue Vault will publish its third annual performance study prepared in collaboration with The University of Texas. The updated study will include eight new companies with full-cycle events, benchmarks for healthcare and mortgage REIT performance, as well as comparisons of holding period returns for those investors who tendered shares to third parties via tender offers prior to the full-cycle events. It will also report holding period returns for investors who redeemed shares prior to the full-cycle events via share redemption programs.

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Blue Vault LifeStages 101

When considering an investment in nontraded REITs, both investors and financial advisors need to be aware that these investment vehicles move through distinct developmental stages over time as they grow from inception to maturity. As a result, their performance characteristics more closely mirror those of direct property investments, private equity, and other illiquid vehicles. In addition, metrics such as total assets, debt, distribution yields, and MFFO payout ratios may vary greatly from REIT to REIT, depending on where each program is in its life cycle.

In 2010, Blue Vault created a proprietary classification system that enables investors and financial advisors to more effectively compare nontraded REITs within their appropriate peer group and avoid meaningless comparisons to nontraded REITs that are in different LifeStages. For example, a performance metric such as the MFFO payout ratio will vary greatly for a newly effective nontraded REIT that has been raising capital for less than one year compared to a nontraded REIT that is five years old and closed to new investments.

Blue Vault’s LifeStage™ classification system accounts for differences in metrics by categorizing each nontraded REIT according to its life cycle. This system is based on two broad categories that are further divided into five smaller sub-categories. The first category, known as the “effective” phase, occurs at the initial launch of a nontraded REIT and primarily focuses on raising capital and acquiring properties. The three LifeStages™ within the effective phase are defined as Emerging, Growth, and Stabilizing. The second category known as the “closed” phase, begins when the nontraded REIT no longer accepts new investments and is more focused on managing an existing portfolio of assets rather than acquiring properties. The two LifeStages™ within the closed phase are defined as Maturing and Liquidating.

Since we began tracking key metrics for the nontraded REIT market in 2009, we have begun to see a significant shift as the industry is comprised of more “closed” REITs than “effective” REITs. We believe these changes indicate a positive trend in the industry as more nontraded REITs decide to limit the number of months they spend raising capital and focusing on completing full-cycle events more quickly. In fact, as we noted in our June 2014 publication of the Nontraded REIT Industry Review, looking back over the past 18 months, we see a clear pattern as it relates to shorter fundraising and holding periods.

Furthermore, for the 15 nontraded REITs that have completed full-cycle events between January 1, 2013 and June 4, 2014, the average number of months from inception to the completion of a liquidity event dropped from 6 years (72 months) down to 5.25 years (63 months). Additionally, as it relates to the period post fundraising and prior to a liquidity event, we see that the average number of months spent “maturing” the portfolio dropped from 2.3 years (28 months) down to 1.8 years (21 months). Overall, we believe this is both good for investors as well as for the industry.

As a thought leader in the nontraded REIT industry, we believe that evaluating nontraded REITs by LifeStage™ offers a more meaningful way to compare performance. While this article highlights the benefits of this classification system, we have also created a short video that further explains each LifeStage™ which can be viewed below.

The LifeStages Of A Nontraded REIT 

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Separating Fact from Fiction: A Rebuttal to Recent Articles Regarding Nontraded REIT Performance

In our opinion, recent articles and blog postings have presented a biased view of nontraded REIT performance. For example, in the June 15, 2014, Wall Street Journal article titled “Nontraded REITs are Hot, But Have Plenty of Critics” and in online blog posts by the Securities Litigation & Consulting Group, we believe the data fall short of offering readers a balanced view of nontraded REIT performance. Moreover, this commentary completely ignores the results of our past two Nontraded REIT Full-Cycle Performance Studies prepared in collaboration with The University of Texas, which would have given readers an unbiased perspective from experts in the space.

So in order to separate the facts from fiction, we have provided some additional points of clarity and thoughts for consideration.

As it relates to the use of benchmarks, does the research reference reasonable and truly comparable data for comparative purposes?

In a recent report by Securities Litigation, the author states that investors “lost $27.7 billion investing in nontraded REITs” by comparing returns on 27 full-cycle nontraded REITs to a single index, the Vanguard Real Estate Index Fund (VGSIX). As researchers dedicated to presenting the facts, we believe it is inappropriate to suggest that investors who averaged 8.27% annualized returns* in nontraded REITs have “lost” $27 billion because their average returns were less than those of a particular traded index. By that logic, any investment portfolio that underperforms relative to an index has “lost” value, a conclusion that is not defensible at the most basic level.

To further illustrate this point, this statement is no different than saying that because the majority of all mutual funds underperform broad market indices such as the S&P 500, investors have also “lost billions” annually by investing in mutual funds simply because they could have, with the benefit of hindsight, invested differently.

Is the presentation of results complete or does it focus on certain examples of relatively poor performance?

In the articles mentioned above, one nontraded REIT is singled out as an example because it underperformed 24 of the 27 full-cycle REITs analyzed. By shining the spotlight on one underperforming example, the authors are trying to bias readers into concluding that all nontraded REIT investments are poor choices compared to one real estate index.

Introducing additional data that were ignored in these articles, according to the 2013 Blue Vault Full-Cycle Performance Study, results showed that for all of the 27 nontraded REITs with measurable data that had completed full-cycle events from inception of the industry (1990) through November 2013, nontraded REITs outperformed both the S&P 500 and Intermediate U.S. Treasury Bonds. In fact, when comparing results over matched holding periods, these 27 nontraded REITs averaged total annualized returns of 8.27% versus the S&P 500 return averages for the same periods of 6.08% and returns on Intermediate Term U.S. Treasury Bonds of 6.22%.

Do the critics' comparisons truly take into account the attributes that make nontraded REITs attractive investments for some portfolios?

While critics of nontraded REITs are quick to point out the difference between the average annual shareholder returns for a small sample of nontraded REITs and the traded REIT index, they fail to mention two important characteristics of nontraded REITs that appeal to investors:  distribution yields and lack of return correlations with other asset classes.

Distribution Yields: The trailing 12-month dividend yield on the Vanguard REIT Index (VGSIX)** was 3.69% at March 31, 2014, while the average distribution yields for nontraded REITs were 6.40% for effective REITs and 6.13% for closed REITs as of that date. For many investors this difference in yields is a significant benefit.

Correlation: The 2013 Blue Vault Full-Cycle Performance Study also showed that the total returns for 27 full-cycle REITs had no significant correlation with returns on stocks or Treasury bonds over matched holding periods, while exceeding both asset classes in average returns. This indicates potential for portfolio risk reduction via allocation of some portion to nontraded REITs.

It is also relevant to REIT investors that the benchmark VGSIX index fell 37% in 2008 and had a 10-year Beta of 1.13**, displaying above-average systematic risk. The disadvantages of illiquidity are sometimes offset by the increased volatility and systematic risk of alternatives, which the critics conveniently fail to mention.

* Average annualized returns for all REITs analyzed in the Blue Vault Partners Full-Cycle Performance Study dated November 2013.
** Yahoo Finance ticker VGSIX, +Risk

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Going Beyond the Basic Rating System: Introducing Blue Vault’s New Performance Profiles

Blue Vault was founded on the belief that financial professionals need data and analysis based on fact, not opinion. For the past five years we have developed analytical tools and financial models that offer our clients the full picture of performance free of subjectivity and personal opinion.  From our perspective, a truly effective performance measurement system should be based on multiple metrics using verifiable data and not limited to one-word labels or a simple color code.

With the introduction of our new Performance Profile System, we are continuing to enhance the transparency of nontraded REIT performance by leveraging the best practices of financial analysis. By adapting proven financial models used by public company analysts to nontraded REITs, we have taken our financial reporting to the next level by adding multiple layers within our measurement system that focuses on three essential areas; Operating Performance, Refinancing Outlook, and Cumulative MFFO Payout.

At the most basic level, here is a concise explanation of how we are doing it and what it means to you:

Optimal_LocationUsing a four-quadrant performance profile system, we showcase the essential areas of
operating performance, refinancing outlook, and cumulative MFFO payout. Like many quadrant diagrams, the preferred location is the upper-right corner, while the less-than-optimal location is the lower-left corner.


1. Operating Performance

This dimension examines the operations of a REIT based on the Leverage Contribution and Return on Assets.  To provide shareholders with retuHigh_Lowrns on a risk-adjusted basis, the REIT’s return on assets, which we measure as the latest 12-month MFFO as a percentage of the REIT’s assets, should exceed the yields available on 10-year Treasuries. In addition, when adjusted for the REIT’s use of debt, this return should exceed the REIT’s cost of debt, which indicates that leverage is effectively adding to shareholder returns. When the upper-right quadrant is highlighted, the REIT has managed its assets to provide a positive risk premium and has been effective in using debt to magnify returns to shareholders. Over time, any portfolio that includes debt financing should meet and exceed these two criteria.

2. Financing Outlook

The purpose of this metric is to illustrate Interest Coverage Ratios and Refinancing Needs for each REIT.  These two factors taken together will display the likelihood of a REIT’s need for refinancing in the near future and its ability to meet debt obligations. HigherNeed_LowerNeedThe optimal placement for this dimension would be the upper-right quadrant, where there is a “lower need” to refinance because there is an Interest Coverage Ratio greater than the standard benchmark of 2.0x and less than 20% of its debt maturing within two years or at variable interest rates. Conversely, a REIT that has more than 20% of its debt maturing within two years or at variable rates and an Interest Coverage Ratio below 2.0x can improve its Financing Outlook by refinancing its short-term financing to longer maturity debt, converting variable-rate debt to fixed-rate, or improving its interest coverage by boosting income or lowering its cost of debt.

3. Cumulative MFFO Payout

The Cumulative MFFO Payout dimension gives an overview of the REIT’s cash distributions versus MFFO since inception, as well as the trend over the latest 12 Covered_NotCoveredmonths. This analysis highlights the REIT’s ability to cover its cash distribution payout to shareholders over time and indicates whether the trend is toward improved coverage. The optimal location is the top-right corner, which shows that a REIT has been able to fully cover its cash distributions on a cumulative basis and over the most recent 12-month period.


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Franklin Square to List First Nontraded BDC on the NYSE

Franklin Square recently announced that it will be listing its first nontraded BDC, FS Investment Corp., on the New York Stock Exchange under the symbol “FSIC.. It is expected to list in April 2014.

FSIC was the first nontraded business development company (BDC) product in existence. Launched in 2009, FS Investment Corp. is a partnership between alternatives powerhouse Blackstone through its credit investment arm GSO Capital Partners and Franklin Square Capital Partners. The fund invests primarily in the senior debt of privately owned companies.

Franklin Square is the largest BDC manager with over $9 billion in assets under management across its funds.  And upon listing, FSIC will be one of the largest traded BDCs with over $4.6 billion in assets under management and investments in over 180 companies.*

What has allowed Franklin Square to be so successful with this strategy?
Franklin Square’s success can be attributed to a number of factors. First, they created a new category for the BDC industry by being the first nontraded BDC in existence.  Additionally, their timing was impeccable; they were buying debt and lending in 2009 and 2010, when every major bank was pulling back on credit lines and loans. This allowed them to acquire syndicated loans at very low values, which have subsequently been sold or are being held at or near par value. And finally, the team that Franklin Square assembled and the partnership with GSO/Blackstone were critical to gaining credibility and attaining attractive returns in the portfolio.

Implications for the Industry
For an industry that is only five years old, the listing of FSIC is a milestone event and one that will raise public awareness not only for nontraded BDCs but for the entire BDC industry.

This transaction may also get the attention of financial advisors and investors who are in search of above-average yields in a historically low-interest-rate environment. Nontraded BDCs are currently paying annual yields between 6.5% to 8.5%, while 10-year Treasury bonds are yielding roughly 2.7%.

Because it is common practice for BDCs to be managed externally and pay advisory fees even after they have completed an exchange listing, this liquidity event will be perceived as an attractive exit strategy for the broader nontraded BDC industry and perhaps set a precedent for others to follow.


*Data as of September 30, 2013.

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Fundraising Does Not Equal Performance

Pick any article published about, nontraded REITs within the past year and most likely the primary focus of the article will be about how much money the industry has raised. Over and over again, we continue to see a significant amount of emphasis placed on this topic and are troubled by the suggestion that fundraising equals performance. In our opinion, that couldn’t be further from the truth. In fact, our most recent Full-Cycle Performance Study shows that the top fundraisers were rarely among the top performers, and many of the companies raising significant amounts of capital today have yet to show measurable full-cycle results.

As an industry observer and researcher, our focus is to provide transparency and the facts behind the industry’s true performance. We do that by monitoring each REIT’s financial performance on a quarterly basis and also by measuring the results of all full-cycle events on an annual basis. It is only through this type of analysis that we believe investors and the industry at large will have a real sense of how well these investments have performed. With that in mind, here are three important points we encourage our readers to consider:

  1. MESSAGE: Raising an estimated $20 billion during 2013 will be a significant milestone for the nontraded REIT Industry.

    FACT: While we agree that this is a significant milestone for the industry, the part of the story that is often left out of these articles is “Why?”  Is it because new investors are recognizing the benefits of nontraded REITs and are investing for the first time, or is it something bigger?

    The real facts behind this figure include a conversation about the amount of money that is being recycled back into the industry, which is a direct result of the $16 billion in full-cycle events that have been completed during 2013. It is our estimate that without this return of capital to existing investors and their subsequent reinvestments, the industry would have only seen about $6-8 billion in new money from new investors.

  2. MESSAGE: The industry is growing at a rapid pace.

    FACT: The industry is actually in a period of contraction in terms of the number of new product offerings and new product sponsors entering the space. During 2010 the industry saw 15 new offerings come to market, the most ever introduced in one year. Since then, the number of new offerings has declined on an annual basis, with only nine new product offerings having been introduced to date in 2013. Moreover, the number of sponsors managing nontraded REIT investments has also been declining. At the end of 2012, there were a total of 37 nontraded REIT sponsors. Our current forecast indicates that there will be only 32 active nontraded REIT sponsors remaining by the end of 2013.

  3. MESSAGE: It’s all about the dividend.

    FACT: It’s not only about the dividend—it’s also about the total return. While we agree, and our Full-Cycle Performance Study supports the fact that roughly 85% of the total return to investors is made up of income, it is also important for nontraded REIT portfolio managers to add value for its investors by generating capital gains or avoiding capital losses via full-cycle events. Additionally, our performance analysis shows that for approximately 45% of the nontraded REIT portfolio managers who have completed a full-cycle event to date, on average, a higher portion of the total returns they have generated have come from either a capital gain or a capital loss rather than from dividend income.*

*Based on averages of all full-cycle events completed per sponsor.

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BDCs - A Primer

Blue Vault has formed a strategic alliance with Blue Springs Capital to launch a new report that will  monitor and analyze the performance of nontraded Business Development Companies (BDC). Created for the purpose of providing education and enhanced transparency for the nontraded REIT industry, Blue Vault is expanding the firm’s research of nontraded investment products by offering financial intermediaries' unbiased analysis and standardized BDC performance reporting in a user-friendly format.

Business Development Companies Defined

A business development company (BDC) is an SEC-registered investment company that invests primarily in private U.S.-based businesses. This form of company was created by Congress in 1980 as amendments to the Investment Company Act of 1940.  BDCs are typically taxed as regulated investment companies (RICs). Similar to REITs, BDCs are required to distribute at least 90% of taxable income as dividends to investors, and as a result, the company itself  pays little or no corporate income tax. Although the regulation for BDCs was passed in 1980, the creation of these companies did not come until the late 1990s and early 2000s.

BDCs are required to invest 70% or more of their assets in U.S.-based private companies. This is an investment type that was previously limited to institutional and wealthy individuals through private equity and private debt funds. Now through these funds, who must report their financials to the SEC quarterly, retail investors have access to private equity and debt investments advised by world-renowned investment firms such as Blackstone, KKR, and Apollo.

Historically, BDCs have been traded on public exchanges. Mirroring what happened over two decades ago in the REIT industry, nontraded BDCs have only become available to individual investors within the past few years. The first nontraded BDC, FS Investment Corporation, became effective in January 2009. The second nontraded BDC did not become effective until 2011, when Corporate Capital Trust did so.

Similar to REITs, BDCs can be externally or internally managed. External management is a structure where an advisor makes investments and manages the portfolio on behalf of the BDC. The BDC itself has no employees, but pays a management fee to the advisor. Internal management means the BDC has employees and overhead that are a normal operating expenses to the BDC. Most BDCs in the market today, both traded and nontraded, are externally managed.

To date, the industry consists of over $9.8 billion in total assets and is comprised of 11 companies, 10 of which are currently raising capital and one that is closed to new investments.  During the first half of 2013, nontraded BDCs have raised over $2 billion from investors.

Blue Vault’s first edition of the BDC Review will be released to members the week of September 16, 2013.  Contact Blue Vault for additional information.

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When One Door Closes....

The pace of nontraded REIT offering closings has accelerated significantly over the past six months.  In fact, through June 2013, there have been a total of ten offerings that have closed to new investments compared to eight offerings that closed during all of 2012.

While some might have their concerns about this recent trend, these closings actually bode well for the industry as they signal a significant LifeStage transition towards portfolio maturation and planning for an ultimate liquidity event.  These closings may also come as no surprise to others given that the industry experienced a spike in new offerings between 2009 and 2010 which have now reached the end of their three-year offering period.

In addition to the increase in the number of offering closings, the pace with which nontraded REITs are completing full-cycle events has also accelerated.  In fact, for the four full-cycle events that have been completed year to date, the average number of months between the offering closing and the completion of a liquidity event was 30 months.  This compares to an average of 53 months between the offering closing and the completion of a liquidity event for the four full-cycle events that were completed during 2012, and 60 months for the 17 nontraded REITs analyzed in our 2012 Nontraded REIT Full-Cycle Performance Study.

For more information regarding the long-term performance of nontraded REITs, new Blue Vault subscribers can enter promo code NTRFC12 to receive a free copy of last year’s full-cycle performance study prepared in collaboration with the University of Texas.  In the coming weeks, we will also make an announcement regarding the release of our new 2013 study which will provide updated full-cycle performance results for approximately 24 nontraded REITs.  Stay tuned…..

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The FFO and MFFO Debates

Ask anyone in the real estate investment industry and they will tell you that the metric known as “Funds from Operations,” or FFO, is not perfect.  In fact, there has been an ongoing debate within the publicly traded REIT community for years on this very topic.

The FFO metric was originally adopted by the National Association of Real Estate Investment Trusts (NAREIT) in 1991 and was further clarified in 1995, 1999, and 2002. According to NAREIT:

 “Funds from Operations (FFO) means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.”

Still, because the majority of REIT investment managers believe FFO does not provide investors with a clear picture of the company’s true operating performance, many publicly traded REITs supplement this figure with alternative FFO calculations that are sometimes referred to as “Adjusted Funds from Operations (AFFO),” “FFO after Adjustments,” “Recurring FFO,” “Normalized FFO” or “Core FFO.”  However, for the average investor that is trying to make a balanced comparison among REITs, these alternative FFO calculations are only adding to the confusion because there are no consistent guidelines regarding the items that may be included in these calculations.

As it relates to the nontraded REIT industry, a similar debate exists regarding “Modified Funds from Operations,” or MFFO.  The MFFO calculation was adopted by the Investment Program Association in 2010 and has become the standard for supplemental FFO reporting among many nontraded REITs since that time.  In fact, of the 72 nontraded REITs in the industry today, approximately 70% are reporting MFFO consistent with these best practice guidelines.  But just as publicly traded REITs have been using alternative methods of calculating FFO; we are also beginning to see several nontraded REITs move in the direction of providing alternative MFFO calculations. Many investment managers believe MFFO still has its limitations and may not tell the full story.

In response to these discussions, and in an effort to continuously foster transparency, we agree that these alternative FFO calculations may provide valuable supplemental information.  As a result, in order for our readers to be more fully-informed, we have begun to make accommodations for these calculations by including this data in our performance reports and commentary.

However, we note that until further clarifications are made by NAREIT or the Investment Program Association, it is our view that the operating performance of nontraded REITs should be measured using both the NAREIT-defined FFO and IPA-defined MFFO metrics and they remain the foundation for our peer-to-peer comparisons and LifeStage classifications.

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The New Kids on the Block

As we welcome in a new year, last week the nontraded REIT industry welcomed its newest member and the eighth offering to incorporate a daily pricing model.  Continuing with a trend that began in 2011 and maintained momentum throughout 2012, as of January 8th, daily priced nontraded REITs represent more than a third of all offerings declared effective during the past two years.

Currently, nontraded REITs that offer daily priced shares make up 18% of all REITs raising capital from investors.  And while there may be much applause over this innovative product design from sponsors within the industry, the true measure comes by analyzing how well these offerings are being received by investors and financial advisors.  One way to do that is by comparing how quickly daily priced REITs have been able to break escrow compared to those nontraded REITs with a traditional pricing model.  Our findings to date indicate that there is no significant difference.  In fact, it is taking an average of five months for all nontraded REITs launched within the past two years to raise the minimum capital needed to break escrow.

But the innovation in the industry is not limited to daily pricing.  In fact, we have seen a number of “industry firsts” within the past six months that have ushered in a new way of thinking for the industry.   Examples of this include the re-introduction of a previously closed offering, the creation of a multi-share class system in several offerings, and the conversion of an eight-year old privately offered REIT into a publicly registered nontraded REIT offering.  And as the table below illustrates, the industry is well positioned for further enhancements in 2013.

Nontraded REIT
SEC Effective
Existing Operations
and Prior
Class Offering
Single Share
Daily Share Valuation
Daily Share Valuation
Begins at End of Offering
American Realty Capital Daily Net Asset Value Trust, Inc.8/15/11
American Realty Capital
Global Trust, Inc.
Clarion Partners Property
Trust, Inc.
Cole Real Estate Income Strategy (Daily NAV), Inc.12/6/11
Dividend Capital Diversified Property Fund, Inc.7/12/12
Jones Lang LaSalle Income Property Trust, Inc.10/1/12
RREEF Property Trust, Inc.1/3/13
United Realty Trust, Inc.8/15/12

For more information on each of the nontraded REITs mentioned above, click on the name of the company to download a copy of the prospectus.

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One Bad Apple Doesn’t Always Spoil the Whole Bunch

Nontraded REITs continue to get a bad reputation as a result of fines and sanctions like the one just handed down by FINRA against David Lerner Associates.  On the whole however, sponsors of nontraded REITs and the broker/dealers that distribute them are among the most highly regulated groups operating in the securities industry today.

For example, the disclosure in the FINRA press release that states David Lerner Associates is required to file all advertisements and sales literature with FINRA at least 10 days prior to use is not unusual, but rather, part of a standard operating procedure for all nontraded REIT sponsors.  In addition to filing sales literature with FINRA, nontraded REITs are also required to file communications to financial intermediaries and investors with the SEC and certain state regulatory agencies prior to use.  This process gives the SEC and the state regulators the opportunity to provide comments, scrutinize word choices and verify data sources before the sales literature is ever distributed to the public.

As an industry observer, we feel it is important to address misperceptions, demystify the industry and provide ongoing education about the nontraded REIT market.  To that end, the communications we provide are regularly obtained through SEC filings and other public sources in an effort to continuously foster transparency.

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Corporate Property Associates 15 Completes its Full-Cycle Event

After a quiet 2011, the nontraded REIT industry has responded with several full-cycle events such as the listing of American Realty Capital Trust (NASDAQ: ARCT), Healthcare Trust of America (NYSE: HTA) and Retail Properties of America (NYSE: RPAI).

With the merger of Corporate Property Associates 15 Inc. (CPA 15), into W.P. Carey & Co., LLC, on September 28, 2012, this will be the fourth full-cycle event to take place this year. 2012 is potentially the year that the industry meets or surpasses the all-time record...

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Welcome to the Blue Vault Blog

Since the beginning of 2009, the industry has introduced 45 new nontraded REIT offerings, seen seven full-cycle events, and has grown to an almost $80 billion industry.  In addition, sponsors of new offerings continue to improve investment strategies, introduce innovative product designs, and provide fee enhancements for the benefit of investors.  And throughout this period, Blue Vault has been a key player in tracking and analyzing these milestones.

We are proud to be the first research firm to provide an unbiased performance measurement tool that enables both financial intermediaries and investors to make more informed decisions.  As we enter into our fourth year of business, it is our goal to continue to enhance the services we provide to our customers and to introduce new tools to help them stay informed of news and events taking place in the industry.

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