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Timing and Selection in the Performance of Full-Cycle Nontraded REITs

In the recent study prepared in collaboration with The University of Texas called, “Nontraded REIT Industry Full-Cycle Performance Study” in addition to analyzing the total returns of the 17 nontraded REITs that went full-cycle between 1990 and March 2012, the findings also provided insights into what we might call “Timing versus Selection.”

Secondary Markets

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.

Crowdfunding in the Real Estate Arena

The Jumpstart Our Business Startups (JOBS) Act was intended to facilitate funding of small businesses by easing regulations. It was passed and signed into law on April 5, 2012. Title II of the JOBS Act went into effect on September 23, 2013, lifting a decades-old ban on the mass marketing of securities offerings. Title III will allow anyone, regardless of whether or not they are accredited investors, to participate in equity crowdfunding.

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John E. Moriarty, ChFC Founder & President, e3 ConsultantsGROUP December 2015 February 3, 2016