Q&A - Blue Vault

How do I know that the fund is a solid company?
As with any investment, there is no surefire way of predicting company stability. However, factors such as longevity, track record, previous full-cycle events, and approach to debt could offer clues about a fund’s stability. Read prospectuses carefully, and discuss any concerns with your financial advisor.
How do I track performance? Are there benchmarks?
As with most investments, you’ll receive statements at least quarterly that show how much money you’ve invested in the fund and how many shares you own. During the initial public offering, funds sell their shares at a fixed share price, which is the price that will appear on your statement.

After the initial public offering, some funds declare a different share value (net asset value per share) and change their offering price as the value of their investment portfolio changes. Some even publish daily adjustments to their net asset values per share and offer to issue or redeem their common shares at these daily prices.

It’s possible that a fund could adjust the share price shown on your investment statements if it distributes any of your original investment back to you—also known as a “return of capital.”

Ideally, the investment portfolio will command a value that is higher than its original cost, resulting in unrealized gains. In the final years of the fund, the valuations of the investments are confirmed by the partial or complete sale of the portfolio, or by listing on an exchange.

The most widely recognized benchmarks for the nontraded REIT industry are available through the National Council of Real Estate Investment Fiduciaries.

Additionally, by becoming a member of Blue Vault, you can access our detailed reports and get sponsor and offering performance information, along with acquisitions and capital raising data.
How does a distribution reinvestment plan work?
A distribution reinvestment plan allows shareholders to have their cash distributions automatically reinvested in additional shares of the same class of our common stock to which the distribution relates. If you participate in a distribution reinvestment plan, the cash distributions attributable to the class of shares that you own will be automatically invested in additional shares of the same class of common stock to which the distribution relates. The purchase price for shares purchased under our distribution reinvestment plan is typically equal to the current net offering price of the relevant class of common stock.
How is a REIT tax-advantaged?
A REIT is a company formed to use investors’ pooled funds to invest them in properties. In the process, they can qualify for certain tax advantages in the eyes of the IRS. 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 translates into potentially higher yields.
How is net asset value (NAV) per share calculated?
An NAV per share valuation is determined based on the value of a fund’s assets less its liabilities, including accrued fees and expenses, divided by shares outstanding, as of any date of determination.
What are the risks of investing in alternative investments?
- Illiquidity – Once invested, your holdings in a “life-cycle” fund are sometimes not available to you until the fund reaches a liquidity event.
- Market risks – Market events and trends can affect real estate performance. For example, a sector such as the hospitality industry may be affected by a decline in the overall economy and a reduction in consumer spending.
- Interest rates
- Variable- versus fixed-rate debt
  - Hedging variable-rate debt
- Premiums and discounts to NAV
- Economic risks
- Tenant default/creditworthiness – The financial health of any real estate property—whether it’s an office building, hotel, or apartment complex—is dependent upon the entities that lease the property. If a tenant goes into default and cannot pay its rent, the fund’s income will be affected.
What does a nontraded BDC buy or invest in?
BDCs – both traded and nontraded – invest primarily in private companies. They 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 SEC reporting funds, retail investors have access to private equity and debt investments.

Many times, BDCs will invest in smaller or medium-sized businesses. BDCs may be diversified in the industries they invest in or have a specific industry specialization (i.e., energy, technology, healthcare). Additionally, they may focus on equity investments in companies, debt investments in companies or a hybrid of the two. BDCs utilize management teams and advisors to underwrite investments and make loans or equity investments into companies. So far, nontraded BDCs have primarily been focused on investing in the debt side of businesses.
What does a nontraded REIT buy or invest in?
Operationally, nontraded equity REITs have a lot in common with publicly traded REITs. Both types of REITs use investors’ money to buy properties – such as office, industrial, retail, or hotels – and they lease the buildings to tenants. Rent paid by tenants serves as income for the REIT, and this income is paid out in the form of dividends to investors.

Mortgage (or debt) REITs offer investors the chance to invest in real estate mortgages or mortgage-backed securities. They seek to earn income from the interest on these investments, as well as from the sales of mortgages to other buyers. Mortgage REITs have the same requirement as Equity REITs to distribute at least 90% of their income to their shareholders annually. They can invest in either residential or commercial mortgages.
What does debt refer to in commercial real estate?
Debt, as most of us know, means borrowing money to make a purchase. In the world of commercial real estate, debt and financing are standard practices that allow buyers to make large real estate purchases without the need to pay the full price in cash up front from their own accounts. Financing is generally obtained from a bank, insurance company, or other institutional lender to provide funds for the acquisition, development, and operation of a commercial real estate venture. Commercial financing loans are secured primarily by real estate and related assets owned by the borrower.
What is a “best efforts” securities offering?
When shares of common stock are offered to the public on a “best efforts” basis, the broker-dealers participating in the offering are only required to use their best efforts to sell such shares. Broker-dealers are not underwriters, and they do not have a firm commitment or obligation to purchase any of the shares of common stock.
What is a blind pool?
In its broadest terms, a blind pool means that a company is selling stock without specifying how invested money will be spent. In the alternative investments world, it means that the fund has begun fundraising by selling shares, but it does not yet own any properties. Investors entering a blind pool do so with the understanding that once enough money is raised, the fund will invest accordingly in the types of properties identified in its prospectus.
What is a fund advisor?
A fund advisor acts as its external advisor and manages the fund’s day-to-day operations and its portfolio of real estate investments, and provides asset-management, marketing, investor relations and other administrative services on the company’s behalf, all subject to the supervision of the company’s board of directors. The advisor is typically a wholly owned subsidiary of the fund’s sponsor. Some of the fund’s board members and managers will typically be board members and managers of the fund’s sponsoring firm.
What is a non-exchange traded, perpetual-life BDC?
A non-exchange traded BDC is a BDC whose shares are not listed for trading on a stock exchange or other securities market. The term “perpetual-life BDC” is used to describe an investment vehicle of indefinite duration, whose Common Shares are intended to be sold on a continuous basis at a price generally equal to the BDC’s monthly NAV per share.
What is a private placement 506(b) vs 506(c)?
Private Placement offerings under Regulation D of the U.S. Securities and Exchange Commission (SEC) can be conducted using two different exemptions: Rule 506(b) and Rule 506(c). Both exemptions allow companies to raise capital from accredited investors without having to register the offering with the SEC. The key differences are:

• Accredited Investor Verification: Rule 506(b) allows for self-certification by investors, while Rule 506(c) requires verification of accredited investor status. Under Rule 506(c), issuers must take reasonable steps to ensure that all investors are accredited, such as reviewing financial statements, tax returns, or obtaining written confirmation from a third-party verification service.

• General Solicitation and Advertising: Rule 506(b) prohibits general solicitation or advertising to attract investors. Issuers must have a pre-existing relationship with investors before offering the securities. On the other hand, Rule 506(c) permits general solicitation and advertising, allowing issuers to publicly promote the offering through various channels.

• Investor Eligibility: Rule 506(b) allows up to 35 non-accredited investors to participate in the offering, while an unlimited number of accredited investors may participate. Under Rule 506(c), all investors must be verified as accredited, meaning non-accredited investors are not allowed to participate.
What is a professionally-managed real estate company?
According to the Institute of Real Estate Management, professional real estate management is defined as the administrative operation and maintenance of properties to meet the objectives of the properties’ owners. It also involves planning for the future of the properties by proposing physical and fiscal programs that will enhance the value of the real estate.

Professional real estate managers manage a property’s physical site, on-site and off-site personnel, funds and accounts, and leasing activities and tenant services. They’re also called upon to take on asset management functions with responsibility for financial and strategic tasks.

Professional real estate management emerged as a profession the 1930s after lenders foreclosed on thousands of mortgages and discovered that real estate management required specialized skills. (Source: Institute of Real Estate Management)
What is a sponsor/asset manager?
The sponsor of an alternative investment is an asset management firm that may have many investment vehicles, which can include real estate, private equity, hedge funds, credit funds, BDCs and other investment structures.

Many sponsors of alternative investments have introduced several products in the past, taking the programs from the IPO to a full-cycle event such as a listing, merger or liquidation. Each fund will have an external advisor which is a subsidiary of the sponsoring firm, and a board of directors with outside directors who usually serve on the audit committees. There may be considerable duplication of officers, board members and managers across a given sponsor’s alternative investment programs.
What is an originated loan?
An originated loan is a loan where the fund lends directly to the borrower and holds the loan generally on their own. This is distinct from a syndicated loan, which is generally originated by a bank and then syndicated, or sold, in several pieces to other investors. Originated loans are generally held until maturity or until they are refinanced by the borrower. Syndicated loans often have liquid markets and can be traded by investors.
What is commercial real estate?
Commercial real estate (CRE) is broadly defined as any property that can produce income. The most common categories of CRE include office, retail, industrial, medical, hospitality, multi-family, land, and other leasable commercial space. More recent categories include self-storage, data centers, single-family rentals, and cell towers.
What is the difference between a dividend and a distribution?
In accounting terms, a “dividend” is typically a distribution from a corporation’s net income or retained earnings to its shareholders. Since commercial real estate investments have a unique tax advantage when owned by a REIT, the cash flows from real estate properties usually far exceed its net income as defined by Generally Accepted Accounting Principles or “GAAP.” This is due to accounting adjustments such as depreciation and amortization which reduce net income while not requiring cash outlays. Blue Vault reports “distributions” to stockholders from the REIT’s cash flows so as to not imply that such cash payments are always from net income. Distributions are funded from a REIT’s FFO (funds from operations) or MFFO (modified funds from operations) that are adjustments to GAAP net income that take into account depreciation, amortization and other non-recurring items that may reduce net income without reducing cash flows. In the early phases of a REIT’s life, distributions can also be funded in part or in whole from the proceeds of its public offering, until funds from operations are sufficient to fund all distributions.
What is the difference between an interval fund and a tender offer fund?
Interval funds and tender offer funds are very similar, but the biggest difference comes from their respective share repurchase programs. Interval funds are required to adopt a policy governing exactly what dates they will offer repurchases and the interval between repurchases. They are also required to repurchase between 5% and 25% of total outstanding shares. The typical policy is to offer to repurchase 5% of outstanding shares on a quarterly basis. The policy that is adopted cannot be changed without shareholder approval. Tender offer funds, on the other hand, have much more flexibility in terms of their share repurchase programs. Tender offer funds can choose to offer share repurchases at any time and for any number of shares. These decisions are made at the discretion of the board of directors, which must vote on the details of every tender offer the fund makes.
When will investors get their money back?
Most nontraded investments state in their prospectuses their targeted timeline for returning investors’ money. The fund must first go through the distinct phases in its life cycle—emerging, growth, stabilizing, maturing, and liquidating—before it’s in a position to return investors’ money. This process can be long-term—maybe 10 years or more.

Once a fund has reached the liquidation stage, investors can generally expect to be able to receive cash for their shares in the near future. If the fund lists on a public exchange, investors can stay invested or they can sell their shares to liquidate their positions. If the fund sells off its properties and liquidates, then investors can expect a check in the mail for the per-share market value of its portfolio less the value of its liabilities (debt).