Tuesday, May 8, 2012

The "New" Non-Traded REITs Look a Lot Like the Old Ones

By Tim Husson, PhD and Carmen Taveras, PhD

Yesterday's Wall Street Journal had an article describing the "new versions" of non-traded real estate investment trusts (REITs), which purport to solve some of the transparency issues which have made non-traded REITs the subject of regulatory scrutiny. In particular, several non-traded REITs are now offering daily updated net asset values (NAV) in an attempt to calm concerns regarding the lack of transparency in the pricing of non-traded REITs.

However, a review of the prospectus for American Realty Capital Daily Net Asset Value Trust, one of the new non-traded REITs, reveals that the daily updated net asset values for the new non-traded REITS may be far from any meaningful valuation for the securities. The most recent prospectus for American Realty Capital Daily Net Asset Value Trust provides the following description of the calculation of the NAV:
The fair value of our assets will be based on appraisals provided by the independent valuer and in accordance with our valuation guidelines. However, because such fair value calculations involve significant subjective judgments concerning factors such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses, valuations will be only estimates, and ultimate realization depends on conditions beyond our, the advisor’s, or the valuer’s control. Additionally, valuations do not necessarily represent the price at which we would be able to sell an asset. As there is no rule or regulation that requires us to use a particular methodology in calculating our NAV and there is no standardized practice established among public REITs for NAV calculations, other public REITs may use different methodologies to calculate NAV. [Emphasis added]
In addition, the appraisals used in calculating the NAV can be up to a year old. In summary, the advisor’s calculation of the NAV is based on stale real estate appraisals, need not follow a specified methodology, and is not an indication of market price. So far, inflows to these "new" non-traded REITs has been modest, and it remains to be seen whether investors will show interest in daily NAV products. But the question remains: if an investor is interested in daily updated market prices, why not simply purchase a traded REIT instead?

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