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Secondary Markets

May 14, 2015

Nontraded REIT Share Online Auctions

Shareholders in nontraded REITs have limited options when attempting to liquidate some or all of their common stock holdings. While most nontraded REITs have share redemption programs, these programs may have been suspended due to liquidity issues or restricted to redemption requests filed due to death, disability, or other hardships. Blue Vault reports on the redemptions of nontraded REIT shares by each REIT on a quarterly basis, but a more complete picture of the redemptions issue would require a comparison of redemptions request to redemptions granted. For example, CNL Lifestyle REIT redeemed 319,000 shares of the 9,726,000 pending redemption requests in 3Q 2012. Behringer Harvard REIT I redeemed 880,000 shares (0.3%) of the 299 million shares outstanding in 2012. KBS REIT I imposed a $10 million limit on redemptions for all of 2012 and redeemed 1.38 million shares (0.7%) of the 191.1 million shares outstanding at an average price of $5.58 per share.

There have been a number of tender offers filed by companies that specialize in making significantly low share price offers to nontraded REIT shareholders and in some cases have offered as low as 20% of a REIT’s per share NAV. While the boards of the REITs usually file letters to shareholders advising against accepting such offers, the tender offering firms seem to persist. Even if a small number of shareholders tender their shares at such low prices, the company that buys the shares can cover its expenses and either hold the shares with a view toward future liquidation or turn them around quickly in the secondary market for a profit.

To meet the needs of nontraded REIT shareholders for a more competitive market for their shares, a new alternative has become available to sell shares before a full-cycle event is consummated. These “online auction” websites provide a forum for matching buyers and sellers of nontraded REIT shares. The IRS has ruled that the tax status of nontaxable investment vehicles such as nontraded REITs can be protected if the volume of secondary trading done through “Qualified Matching Services” does not exceed 10% of their interests in a given year. There are currently at least three companies that offer these online auction services which match sellers and buyers of unlisted shares. Sellers post the quantity of shares they wish to sell and set a minimum acceptable (reserve) price. Qualified buyers go to the site and post the prices they are willing to pay for the shares and compete against others to “win” the auction. Depending upon the specific REIT, dates of the auctions, and NAV estimates, it appears that these auction sites commonly facilitate sales at prices between 70% and 90% of NAVs, before fees.

Central Trade and Transfer (CTT) – www.CTTAuctions.com:

CTT began auction activities in early 2011 and is a branch office of Orchard Securities, LLC located in Lehi, Utah. A listing agreement allows sellers to select the duration of the auction and a reserve price. Auctions vary in duration from 5- to 30- day increments. After the high bidder is determined, the sale is cleared through the appropriate transfer agent for the REIT. CTT has more than 700 registered buyers. A history of past auctions of shares for particular REITs is available upon request. Typical time from auction ending to transfer date has been 30 days.

REITbid – www.reitbid.com:

REITbid is operated by JRL Capital Corporation and was founded by Ray Wirta and Bill Lange. Mr. Wirta is the former CEO and current director of CB Richard Ellis, while Mr. Lange is chairman of the LFC Group of Companies, one of which is LFC Internet Marketing, Inc., which owns and operates the international real estate auction platform, FRE.com, which auctions land and residential and commercial properties, as well as REIT shares and mortgage notes. REITbid and FRE.com partnered in 2011 to create an auction site just for nontraded REIT shares. Auctions are open for bidding for 14 days. There is a $50 auction posting fee for each auction you post on the website. Sellers are also responsible for clearing costs for each auction transaction. Sellers are allowed to set a reserve price for their shares, but once the auction has begun, the shares must be sold when the reserve price is met. Buyers pay fees in addition to the auction price. “Last Call” is a bid extension feature that extends the bid deadline by a specific time increment if bids are received within the last moments of an auction. This feature is intended to deter the practice of “sniping,” or bidding slightly higher prices at the last possible moment before the auction closes and giving other bidders no chance to respond.

It is important to note that investors who wish to purchase shares on these auction sites must be vetted by the dealers who manage these platforms and must meet the same qualifications required of investors who purchase shares in public offerings.

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Blue Vault is just what advisors need to size up the different offerings in the nontraded REIT market. Just as importantly, it’s what the industry needs to encourage best practices among REITs.

Gregory De Jong, CFP, Co-Founder of Paragon Advisors, LLC. July 7, 2015