Investors in a multitude of direct participation and non-traded REIT products are about to get a rude awakening as to the value of their investments.
On April 11, 2016, new rules were implemented by the Financial Industry Regulatory Authority (“FINRA”) which substantially modified the requirements relating to the inclusion of per share estimated values for direct participation program (DPP) and unlisted/non-traded real estate investment trust (REIT) securities on customer account statements.
Prior to these new rules, many brokerage firms had used the original offering price of DPP and REIT securities as the per share estimated value during the offering period, which could continue for as long as seven and one-half years. The offering price, typically $10 per share, often remained constant on customer account statements during the offering period even though various costs and fees had reduced investors’ principal and the underlying DPP and REIT assets may have decreased in value.
As a result, the true value of many of these investments was concealed from investors who were falsely led to believe – for years – that their shares were still worth $10.00 per share.
Brokerage firms will now be required to provide more accurate per share estimated values on customer account statements, shorten the time period before a valuation is determined based on an appraisal and provide various important disclosures.
In fact, under the new rules, brokerage firms will be required to include in customer account statements a per share estimated value for a DPP or REIT security developed in a manner reasonably designed to ensure that the per share estimated value is reliable.
The two methodologies for calculating the per share estimated value for a DPP or REIT security, that will be deemed to have been developed in a manner reasonably designed to ensure that it is reliable, are:
(a) the net investment methodology which will reflect either the ‘‘amount available for investment’’ percentage in the “Estimated Use of Proceeds’’ section of the offering prospectus or, where the ‘‘amount available for investment’’ is not provided, the amount which reflects the estimated percentage deduction from the aggregate dollar amount of securities registered for sale to the public of sales commissions, dealer manager fees and estimated issuer offering and organization expenses; or
(b) the appraised value methodology which will reflect the appraised valuation of the assets and liabilities disclosed in the most recent periodic or current report filed with the SEC by the issuer of the DPP or REIT.
Any brokerage firm that uses the “net investment” valuation methodology will also be required to prominently disclose, if applicable, enhanced disclosure relating as to whether any part of their distribution from the DPP or REIT investment included a return of the investor’s own capital.
Finally, brokerage firms will now be required to disclose that the DPP or REIT securities are not listed on a securities exchange, are generally illiquid and that, even if a customer is able to sell the securities, the price received may be less than the per share estimated value provided in the account statement.
If you are an individual or institutional investor who has any concerns about your investment in any direct participation or non-traded REIT investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).