IPA sets valuation guidelines

The Investment Program Association, the leading trade group for nontraded REITs, is addressing the thorny issue of how to place a value on nontraded real estate investment trusts.

Guidelines released by the IPA last week call for faster and improved disclosure valuations. They include:

• Conforming with institutional real estate valuation standards and creating a net asset value per share for nontraded REITs.

• Making the valuation process more independent.

• Quickening valuations for investors.

• Enhancing the quality of valuation disclosures to investors.

The IPA’s 24-person board of industry executives unanimously adopted these guidelines.

Until now, valuations of nontraded REITs have varied. For example, many REITs’ boards have determined a value for the trust, creating a potential conflict.

The IPA’s new guidelines recommend that a third-party firm perform an appraisal of the company’s real estate after the REIT stops raising money and at least every two years after that.

Securities regulators require REITs to establish a valuation 18 months after they stop raising money.

The nontraded-REIT industry is booming, but REIT sponsors haven’t modified or reissued standards for valuation in 20 years, according to the IPA.

Since 2000, nontraded REITs have seen strong growth. The number of registered offerings has increased to 62, from 11, and the dollar amount in these offerings totaled $93 billion at the start of this year.

‘Uniformity’

“These changes, and the proliferation of sponsors and investment programs, present an increasing challenge for the industry in terms of maintaining uniformity and consistency of financial reporting and valuation standards, and providing comparative performance data and information,” according to the IPA’s report.

“The current regulatory requirement for valuations … arises in connection with a broker-dealer including the security on a customer account statement,” the IPA guidelines state. “The determination of fair value of such a nonlisted interest held by a broker-dealer is typically exceedingly difficult.”

Investors buy nontraded REITs — blind pools of capital — to invest in commercial real estate, typically for $10 a share. Placing a per-share or per-unit value on that investment has been problematic, as some of the largest nontraded REITs saw sharp drops in value when commercial real estate prices struggled during and immediately after the credit crisis.

“The IPA is endorsing the institutional approach to producing value, which is NAV,” said Mark Goldberg, a managing director at W.P. Carey Inc. and the IPA’s chairman-elect for 2014. “We need a standard approach that will create greater confidence for investors and improve their experience.”

“There are all sorts of ways to value,” Mr. Goldberg said. “The challenge is if every sponsor does it their own way, then the investor or broker-dealer doesn’t have the opportunity to compare and contrast [the REITs] with confidence.”

The Financial Industry Regulatory Authority Inc. soon will issue rule proposals — guidelines that are similar to those of the IPA — to the Securities and Exchange Commission about valuations for REITs and private placements that appear on client account statements. Finra began work on proposed rule changes in 2011.