Published on April 29, 2013 by the Investment Program Association ("IPA") Board of Directors, "Valuations of Publicly Registered Non-Listed REITs" seeks to promote transparency, uniformity and independence for investors in commercial real estate. According to the IPA website, these guidelines follow a 24-month period of discussion about how best to value non-listed Real Estate Investment Trusts ("REITs") and supercede the 1989 valuation standards for Direct Participation Programs ("DPPs") and 1993 and 1994 modifications.
One advantage cited by the authors of these guidelines is that a third party assessment may be superior to variable methods currently being used by broker-dealers who must report the value on investor statements. The Financial Industry Regulatory Authority ("FINRA") describes REITs that are not listed on a national securities exchange as "Non-Traded" with a "[v]ery limited secondary market." They urge investors to acknowledge "valuation complexities" and to query financial advisors about illiquidity risk. For more information, see "Public Non-Traded REITs - Perform a Careful Review Before Investing." A few days ago, FINRA released Regulatory Notice 13-18 entitled "Communications With the Public" about unlisted REITs and unlisted DPPs. They urge broker-dealers to provide information in a way that is "fair, balanced and not misleading" with respect to the following items:
- Distribution Rates;
- Redemption Features and Liquidity Events;
- Historical Information That is Consistent and Not Selective;
- Selecton of Appropriate Benchmark;
- Capitalization Rates; and
- Photos of Underlying Property With Clarification About the Ownership Structure.
In its investor assistance memorandum about REITs, the U.S. Securities and Exchange Commission ("SEC") lists lack of liquidity, difficulty in assessing value, conflicts of interest, large up-front fees and the source of distributions as caveats for non-listed REITs. See "Investor Bulletin: Real Estate Investment Trusts (REITs)", published by the Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission.
Interested readers can click to access "The Investor's Guide to REITs," published by the National Association of Real Estate Investment Trusts in January 2013. See page 6 for a discussion of benefits of investing indirectly in real estate via REITs. These include diversification and an "attractive risk/reward balance."