WSJ: Nontraded REITs to Come Under Regulatory Microscope

Wall Street’s self-regulator, the Financial Industry Regulatory Authority, is planning some rule changes for non-traded real estate investment trusts, reports the Wall Street Journal.

Those changes include requiring this segment of the REIT market to improve disclosures on fees, along with a faster timeline for reporting changes to property values in their portfolios. 

“The move comes amid a boom in demand for these types of funds, which buy office buildings, stores and other commercial real estate and send most of the properties’ income to shareholders,” says the article. “Unlike typical REITs, shares in these funds don’t trade on public exchanges, making them less liquid.”


Investors are expected to buy $20 billion of new shares in non-traded REIT funds in 2013, the WSJ says citing investment bank Robert A Stanger & Co.—the highest amount ever, and nearly twice the $10.3 billion raised last year.

“But Finra believes investors aren’t getting a clear enough picture of the performance of their funds, according to Joseph Price, Finra’s senior vice president for corporate finance,” the article says. “These funds and their brokers can charge fees and expenses of as much as 12%, yet that cost isn’t required to be taken into account when the funds value their stock in reports to investors.”

The rules Finra is planning on implementing would require the REITs to include those fees when valuing their stock in investor reports. By that method, in cases where the initial share price is $10 with 12% fees, the share value actually reported to investors at the get-go would be $8.80. 


Another change is expected for when REITs disclose their true asset values following the close of a fundraise. Currently, REITs can delay this disclosure for years, as fundraising can go on for long periods of time. 

“The new rules would require funds to get a third-party valuation and report it to investors two years after they start buying properties,” WSJ reports, adding that Finra is aiming to propose the rule changes to the Security and Exchange Commission by the end of 2013.

If implemented, the new rules would be a “game changer” for the non-traded REIT industry, Michael McTiernan, former head of the SEC’s REIT group and now partner at Hogan Lovells, told WSJ. 

American Realty Capital Healthcare Trust, Inc., CNL Healthcare Properties Inc., and Griffin-American Healthcare REIT II are among public, non-listed healthcare REITs.

Read the full article at the Wall Street Journal. 

Written by Alyssa Gerace

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