Monday, February 05, 2018

Know Your Basis

Non-traded REIT sponsors did not like the idea of having to determine frequent valuations of their illiquid investments, knowing full well that in the early years of an investment the load-adjusted value would be less than the price paid by investors.  But sponsors have found a twisted gift in their requirement to provide frequent valuations, it allows them to sneak in distribution cuts while saying the distribution rates are the same.  Here is an example of how this little shell game works:  A non-traded REIT offers its shares at $10.00 per share and pays a distribution of 7.0%, which equates to an annual distribution of $.70 per share.  After a period of time, the REIT must value its shares, and the new value reflects the impact of the initial fees. So in this example, a new per share value of $9.00 per share, which is lower than the original $10.00 per share price paid by investors.  The REIT sponsor, as part of its valuation disclosure, states that is going to maintain the 7.0% distribution rate, but now calculates the distribution on the new NAV, not the original purchase price.  In the example above the $.70 per share distribution is now $.63 per share.  The REIT lowered its distribution but can truthfully say its distribution rate has stayed the same.   Know your basis.

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