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U.S. Securities and Exchange Commission

Division of Corporation Finance
Securities and Exchange Commission

CF Disclosure Guidance: Topic No. 6

Staff Observations Regarding Disclosures of Non-Traded Real Estate Investment Trusts

Date:  July 16, 2013

Summary: This guidance summarizes the Division of Corporation Finance’s observations in the review of Securities Act and Exchange Act filings of non-traded real estate investment trusts.

Supplementary Information: The statements in this CF Disclosure Guidance represent the views of the Division of Corporation Finance. This guidance is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.

Introduction

A real estate investment trust (REIT) is a corporation or trust that elects under the Internal Revenue Code of 1986 to be taxed as a real estate investment trust. 1  A REIT generally is not subject to U.S. federal corporate income tax on net taxable income that is distributed to shareholders.  Thus, income generated by a REIT and distributed to its shareholders generally is taxed only at the shareholder level upon the distribution of that income. 

To qualify as a REIT, a corporation or trust must have most of its assets and income tied to real estate investments and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.  REITs typically own and operate income-producing real estate, such as office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses or real estate-related assets, such as mortgages or loans. 

Many REITs do not have securities listed for trading on a national securities exchange and often are referred to as “non-traded REITs.”  In addition to not having a trading market, non-traded REITs and offerings by non-traded REITs typically have the following features:

  • at the commencement of its initial public offering, a non-traded REIT does not yet own real estate assets and has not identified any specific assets to acquire with the offering proceeds;
     
  • offerings are targeted toward retail investors with an emphasis on the anticipated income to be distributed as a percentage of the sale price for the REIT’s shares, which we refer to as the distribution yield;
     
  • a non-traded REIT’s operations are managed by an external, third-party manager, which often is an affiliate of the non-traded REIT;
  • offerings are conducted on a continuous basis over a period of years at a fixed offering price; and
     
  • a non-traded REIT offers shareholders limited liquidity through a share redemption plan.

The Commission approved Securities Act Industry Guide 5 for publication in 1976 to provide disclosure guidance for preparing registration statements relating to offers and sales of interests in real estate limited partnerships.2  While Guide 5, by its terms, applies only to real estate limited partnerships, in 1991 the Commission stated that “the requirements contained in the Guide should be considered, as appropriate, in the preparation of registration statements for real estate investment trusts and for all other limited partnership offerings.”3  Offerings conducted by non-traded REITs are the most common types of offerings for which Guide 5 can be used.  Non-traded REITs share many features common to public real estate limited partnerships at the time Guide 5 was published, including the use of continuous/best-efforts offerings, the lack of share liquidity, the blind-pool nature of the offering and an external management structure.    

While this Disclosure Guidance Topic is focused on disclosures by non-traded REITs, it also may be applicable to disclosures in connection with offerings by traded REITs or other registrants that have the features noted above or to which Guide 5 applies.  In addition, these observations may not be material to all non-traded REITs, may not encompass an individual registrant’s particular facts and circumstances and may not address all of the material disclosure issues applicable to each registrant’s circumstances.  Each registrant should consider its own facts and circumstances when preparing its filings.

Some of our observations in this Disclosure Guidance Topic reflect comments we have issued to non-traded REITs outside the context of Guide 5.  Other observations reflect, expand on or modify our policies and practices for non-traded REITS within the context of Guide 5. 

General Disclosures

Distributions

In our reviews of non-traded REIT prospectuses and sales materials, we often see disclosure emphasizing the distribution yield on offered shares.  We have observed that non-traded REITs often pay distributions in excess of GAAP cash flow from operations and/or earnings, particularly in their first few years of operations.  Given this practice we frequently issue comments requesting disclosure that enables investors to evaluate the registrant’s ability to maintain or increase the historical distribution yield.  For example, if the prospectus discloses the payment of historical distributions, we have requested supporting disclosure showing the distributions paid, including amounts reinvested through a distribution reinvestment plan, compared to the amount of GAAP cash flows from operations.  We commonly ask for this disclosure in tabular form, and we request information for both the most recent full fiscal year and the current year to date.

To the extent the GAAP cash flow from operations in these periods is insufficient to cover the total distributions paid, we have requested disclosure on the source of the cash used to cover the shortfall, such as offering proceeds or debt.  We often ask registrants with a shortfall to include risk factor disclosure on the risks of paying distributions in excess of GAAP cash flow from operations.  In addition, we have requested disclosure showing the relationship between the amounts of distributions paid, including amounts reinvested through a distribution reinvestment plan, and the amount of earnings.  For these purposes we have not objected if non-traded REITs show the relationship between distributions paid and funds from operations, as defined by the National Association of Real Estate Investment Trusts (NAREIT), instead of GAAP net income, assuming compliance with Item 10(e) of Regulation S-K. 

Sometimes a newly-formed non-traded REIT that has not yet paid distributions discloses to investors an estimated distribution yield.  When a registrant estimates a future distribution or distribution yield in a Securities Act registration statement, we ask the registrant to demonstrate that it has a reasonable basis for the estimate.  Prior to the time of the acquisition of operating assets, we typically object to non-traded REITs disclosing an estimated distribution yield because we do not believe there is a reasonable basis for the estimate.  We also object when a non-traded REIT discloses an annualized distribution yield based on a single distribution; however, we typically have not objected to disclosure of an annualized yield when the non-traded REIT has paid distributions at the disclosed annual distribution yield for two or more quarters.

Dilution

Non-traded REIT offerings typically are conducted by broker-dealers on a best-efforts basis over a period of years at a fixed price per share.  Since there is no trading market through which the shares are valued, investors must make their own assessment of the relationship between the offering price and the value of the shares.  A key part of this analysis is to understand the extent to which the value of the shares has been diluted below the offering price from the time of the inception of the REIT to the time of investment.  Dilution may occur as a result of operating losses, a decrease in the value of the REIT’s assets, the sale of equity at below fair value or the payment to shareholders of distributions in excess of earnings. 

In our reviews of non-traded REIT prospectuses, we often issue comments regarding dilution disclosure.  For example, we remind non-traded REITs conducting continuous offerings to annually update the dilution disclosure in the prospectus as required by Item 506 of Regulation S-K when the non-traded REIT has had losses for the last three fiscal years or for the fiscal years since it commenced operating activities if less than three years.  In addition, as noted above, we have observed that non-traded REITs often pay distributions in excess of earnings, particularly in their first few years of operations.  To highlight for investors the dilutive impact of the aggregate distributions paid in excess of earnings from company inception to an investor’s time of investment, we have asked non-traded REITs to disclose cumulative earnings since inception and cumulative distributions paid since inception.  For these purposes we do not object if the non-traded REIT uses a non-GAAP performance measure that backs out real estate depreciation and amortization instead of using GAAP net income, assuming compliance with Item 10(e) of Regulation S-K.  

Redemptions

Non-traded REITs often provide investors limited liquidity through share redemption programs.  These redemption programs typically have significant restrictions, such as a cap on the total number of shares that can be redeemed in a year and limits on the amount and source of funds that the registrant is permitted to use for redemptions.  In addition, non-traded REITs generally have broad discretion to amend, suspend or terminate their redemption programs.

Because redemption programs may be the only way for shareholders to liquidate their investments, we often ask registrants to summarize in the prospectus their recent redemption program history.  We have asked registrants to describe, for both the last full fiscal year and the current year to date, the number of redemption requests received, the number of redemption requests honored, the number of redemption requests deferred or rejected, the source of funds used to honor redemption requests and the average price per share for these redemptions. 

Estimated Value Per Share or Net Asset Value

In recent years, some non-traded REITs have begun to provide shareholders with a periodic estimate of the value per share based on a valuation of the REIT’s investment portfolio.4  When a non-traded REIT includes an estimate of share value or asset value in a Commission filing, we have asked that the registrant include the following supporting disclosures to facilitate investor understanding of the basis for the estimate:

  • the process by which the value estimate was determined, including the role of each of the parties involved in the process, the valuation methods used, any conflicts with third party advisors, and to the extent the final value disclosed was materially different from the value recommended by any third party advisor, an explanation of the difference;
     
  • a breakdown of the value assigned to each major asset type (e.g., properties, securities, cash), the liabilities, and the share number used to calculate the per share amount, along with a comparable breakdown for any prior period value estimate;5
     
  • the key assumptions used in the primary valuation method, including the weighted average for each key assumption broken out by material property type (such as office, industrial, multifamily), cautionary language regarding the sensitivity of assumptions, and a quantitative example of the sensitivity of the estimate to changes in key assumptions;
     
  • the relationship between the aggregate purchase price of the properties (including property capital expenditures) and the value assigned to the properties; and
     
  • a list of any prior period value estimates and the approximate date on which the next value estimate will be provided.

With respect to non-traded REITs that update their estimated value per share for purposes of offerings and redemptions on a quarterly or more frequent basis, we have asked for updated disclosure on a quarterly basis.6

Supplemental Information

Guide 5 calls for registrants to undertake to provide investors with certain information.  For example, Item 8.A directs registrants to include an undertaking to provide, upon request, the most recent Form 10-K for a sponsor’s public prior program and the Table VI acquisition data.  Similarly,  Item 20 includes undertakings to furnish to limited partners and shareholders annual statements of transactions with and compensation paid to the sponsor, financial statements required by Form 10-K for the first year of operation, and information about probable acquisitions.  In lieu of physically providing this information, we do not object if the registrant satisfies its undertakings by making the information available on its publicly-accessible internet web site, provided the prospectus discloses the website address and investors can obtain the information without a subscription fee.  Registrants should consider applicable provisions of state law and their organizational documents in determining the appropriate means of delivering information to investors.

Guide 5 Disclosures

Compensation to Sponsor

Item 4 of Guide 5 calls for disclosure of compensation, fees, profits and other benefits that the sponsor and its affiliates may earn or receive in connection with the offering or operation of the registrant.  Paragraph B of Item 4 indicates that registrants should disclose the maximum aggregate dollar amount of front-end fees7 to be paid during the first fiscal year of operations, assuming that the registrant’s maximum leverage is utilized.8  Non-traded REITs typically have a targeted leverage level that is well below the maximum level permitted in their charters. 

In our reviews of non-traded REIT registration statements and periodic reports, we have observed that actual leverage amounts employed by non-traded REITs generally remain at or below targeted leverage amounts and do not approach the maximum leverage levels permitted by the charter.  Consequently, we do not object if non-traded REITs use targeted leverage amounts instead of maximum leverage amounts in making these fee estimates.  In addition, for any fees and other benefits that are based on the amount of securities sold, we ask registrants to assume the sale of the maximum amount of securities covered by the registration statement in estimating the fee amount.  We do not object if registrants also disclose fee amounts based on any offering minimum.   

In the initial public offering of a non-traded REIT, the registration statement at the time of effectiveness typically includes disclosure of the estimated compensation to be paid to the sponsor, rather than actual compensation paid, because the non-traded REIT will not yet have commenced operating activities.  After effectiveness, registrants must consider their duty to update the prospectus disclosure during the continuous offering to include actual compensation paid to the sponsor.  Item 4.A of Guide 5 specifies that registrants should provide disclosure in a tabular presentation that covers all compensation, fees, profits and other benefits.  We ask registrants to provide this information for both the last full fiscal year and the current year to date.  The table should be organized by stage of operation, e.g., organizational, offering, developmental, acquisition, operational or termination and liquidation stage, and fee type as specified in Item 4.A.  In addition, we often ask registrants to:

  • disclose the amount of any accrued and unpaid compensation;
     
  • break out any compensation, fees, profits and other benefits paid to the sponsor or its affiliates pursuant to the expense reimbursement provisions of the management agreement; and
     
  • specify any amounts reimbursed to the sponsor for salaries or benefits of a named executive officer of the non-traded REIT.

Prior Performance

In a typical public offering of securities registered under the Securities Act, a potential investor can evaluate, among other things, the registrant’s financial condition and operating history in making an investment decision.  In the case of an initial public offering of shares of a non-traded REIT, the registrant typically does not yet own real estate assets, has no operating history and has not identified any specific assets to acquire with the offering proceeds.  Therefore, potential investors in the initial public offering of a non-traded REIT cannot base their investment decision on the registrant’s financial condition or operating history or on an analysis of its stated use of proceeds.  This raises the question of how investors can evaluate the sponsor in order to make an informed investment decision.

Since 1976, Guide 5 has acknowledged the importance of information about the sponsor and included detailed disclosure guidance on the performance of prior programs managed by the sponsor.  We continue to believe that prior performance disclosure is appropriate in non-traded REIT offerings; however, in the period since Guide 5 was first published, the real estate capital markets have undergone substantial change, including changes in the corporate structure of the issuers, the tax motivations of investors, and the size of offerings.    

Our application of the prior performance guidelines to non-traded REITs has evolved in response to these changes.  Given concerns about the length and complexity of prior performance disclosures, our comments often are designed to focus the disclosure on information that is most likely to be material to investors.  We believe our current views reflect an appropriate balance between the benefits of providing investors useful prior performance disclosure and the risk that voluminous and complex prior performance disclosure may obscure other material information about the registrant. 

The following summarizes our current views on certain Guide 5 prior performance disclosure items, specifically as they apply to non-traded REITs.

Item 8 of Guide 5

Definition of “Public Track Record:”  Guide 5 provides that sponsors with a “public track record,” as defined in Item 8,9 generally may limit prior performance disclosure to information about public programs.  In evaluating how much information the sponsor should disclose to potential investors about its prior performance, we also consider such factors as the amount of proceeds raised and the value of assets acquired by the sponsor’s prior public programs, as well as the reporting history of prior public programs, to determine whether the sponsor may limit prior performance disclosure to public programs.  We find it makes the review process more efficient if registrants contact us to discuss their particular facts and circumstances prior to filing the registration statement.

Summary of Acquisitions:  Given the acquisition disclosure called for by Item 8.A(1) and the investment data in Table I, we do not object if a registrant omits the summary of acquisitions called for by Item 8.A(4).

Prior Performance Tables

Table I: Experience in Raising and Investing Funds

  • Table I is designed to summarize the sponsor’s experience in raising and investing funds.  Although Guide 5 limits Table I to information about programs that have closed in the most recent three years, for some sponsors this may include a large number of prior programs.  Based on our reviews of non-traded REIT registration statements, we believe the volume of disclosure currently provided in some cases may exceed what is necessary to adequately reflect the sponsor’s track record in raising capital and investing funds, particularly when the prior programs have investment objectives different from the registrant’s.  We are concerned that the volume of information may obscure other, more important disclosure about the registrant.  Therefore, we do not object if a registrant limits the Table I disclosure to the sponsor’s three most recent programs with investment objectives similar to those of the registrant.  If the sponsor has fewer than three programs with investment objectives similar to those of the registrant, we would not object to inclusion of all programs with similar investment objectives and the sponsor’s most recent additional programs, such that the total number of programs included is three.  Registrants should continue to apply the three-year period limitation described in Instruction 1 to Table I.
     
  • In addition, we generally do not object if the information included in Table I is limited to dollar amount offered, dollar amount raised, length of offering (months) and months to invest 90% of amount available for investment, as these are the metrics that most clearly reflect the sponsor’s experience.

Table II: Compensation to Sponsor

  • Given the extensive and detailed disclosure we request regarding estimated and actual compensation to be paid to the sponsor in the current offering, as discussed above, we do not believe that extensive disclosure regarding the compensation paid to the sponsor in prior programs is useful enough to investors in the current offering to warrant a separate table.  Therefore, we generally do not object if a registrant omits the information called for in Table II, as long as certain compensation information is provided in Table IV, as discussed below.

Table III: Operating Results of Prior Programs

  • If the sponsor does not have a “public track record” and does not have at least five prior programs with similar investment objectives, then Guide 5 calls for performance disclosure of all prior programs that have closed in the most recent five years.  Based on our reviews of non-traded REIT registration statements, we do not believe voluminous disclosure about non-public prior programs with different investment objectives is useful to investors in the current offering and we believe it may obscure other more important disclosure.  Therefore, in these cases, we do not object if the registrant includes only the most recent additional programs that have closed in the most recent five years such that the maximum number of programs presented in the table is five.
     
  • We do not object if Table III is limited to summary GAAP balance sheet, income statement and cash flow from operation data, distribution data per $1,000 invested, including data on the relationship of cash flow from operations to total distributions paid, and estimated value per share if disclosed to program investors.  We believe this information adequately summarizes the size, leverage, profitability and distribution-paying abilities of prior programs.  We also believe that the tax-related data in Table III, while material to investors in real estate limited partnerships given the pass-through tax treatment of partnerships, is not material to investors in non-traded REITs as REITs are not pass-through vehicles for tax purposes.

Table IV: Results of Completed Programs

  • Consistent with the terms of Guide 5, we have traditionally requested that non-traded REITs provide Table IV data for programs that have completed operations (i.e., no longer hold properties) in the most recent five years.  In our reviews of non-traded REIT registration statements, we have observed that disclosing only five years of data may result in the omission of prior program data about large, public programs that can provide useful information to potential investors about a sponsor’s track record over a complete real estate cycle.  Therefore, we may request Table IV data for completed public programs with similar investment objectives that have completed operations in the most recent ten years.
     
  • If the sponsor does not have a “public track record” and does not have at least five prior programs with similar investment objectives, then Guide 5 calls for performance disclosure of all prior programs completed in the last five years.  In our reviews of non-traded REIT registration statements, we have observed that the Guide 5 standards often result in voluminous disclosure about non-public prior programs with different investment objectives, which may not be useful to investors in the current offering and may obscure other, more important disclosure.  Therefore, for sponsors that do not have a “public track record” and do not have at least five prior programs with similar investment objectives completed in the last five years, we do not object if the registrant includes only the most recent additional programs completed in the last five years such that the total number of programs covered by the table is five.
     
  • Table IV provides information about returns on investment in completed prior programs and puts those returns in context by disclosing the size, leverage, duration and aggregate compensation paid to the sponsor of the completed prior programs.  Table IV also calls for data regarding federal income tax results and sources of distributions.  Because non-traded REITs are not pass-through vehicles for tax purposes, we do not believe that the tax-related disclosure in Table IV is material to investors in non-traded REITs.  In addition, while we believe source of distribution data is important to evaluating the quality and sustainability of distributions in an ongoing program, we do not think this data is relevant to evaluating the returns of a closed program where sustainability is no longer in question.  Therefore, we do not object if the information in Table IV is limited to the date closed, duration (months), aggregate dollar amount raised, annualized return on investment,10 and median annual leverage.
     
  • In addition, information about the aggregate compensation paid or reimbursed to the sponsor or its affiliates may be useful to investors in Table IV, where they can see total compensation amounts in comparison to total returns to investors.  Therefore, we do not object to the omission of Table II so long as the registrant includes compensation data in Table IV. 11

Table V: Sales or Disposals of Properties

  • Table V is designed to disclose to an investor the profit or loss upon the sale of properties, and the positive or negative operating cash flows during the holding period.  We frequently remind registrants that the “total” column should reflect the total investment in the property, including closing costs.  Therefore, the total column will be the sum of “original mortgage financing” and “total acquisition cost, capital improvement, closing and soft costs.”  The last column reflects the cumulative net property operating cash receipts less expenses over the holding period.  The table will therefore enable an investor to calculate the profit or loss upon the sale of the property, and will disclose the positive or negative operating cash flows during the holding period.

Table VI: Acquisition of Properties by Programs

  • Table VI calls for detailed information about individual property acquisitions, including mortgage financing, cash down payments and capital expenditures.  Guide 5 directs registrants to provide Table VI in Part II of the registration statement rather than in the prospectus provided to investors.  Item 8.A(1) of Guide 5, however, is designed to provide a summary of Table VI information in the prospectus, including the number and location of properties acquired, the dollar amount invested, and the property types acquired.  Based on our reviews of non-traded REIT registration statements and periodic reports, and considering the extensive disclosure provided in the prospectus regarding probable and actual properties acquired by the registrant, including narrative disclosure, operating data, and in some cases financial statements prepared in accordance with Rule 3-14 of Regulation S-X, and further considering the summary acquisition experience disclosure provided in the prospectus in accordance with Item 8.A(1) of Guide 5, we do not believe that detailed information about the financing and expenses associated with individual property acquisitions made by the sponsor’s prior programs is likely to be material to an investment decision in the registrant.  Therefore, we generally do not object if a registrant omits the information called for in Table VI.12

Undertakings

Non-traded REITs conducting registered continuous offerings must regularly update their prospectuses to comply with the Securities Act.  The undertakings in Item 20 of Guide 5 facilitate this process and non-traded REITs typically include these undertakings in Securities Act registration statements.  We do not object if a non-traded REIT omits the Item 20.A undertaking of Guide 5 as the substance of that undertaking is now addressed in Rule 401 of the Securities Act and Item 512(a) of Regulation S-K. 

Item 20.D provides the undertakings that non-traded REITs should include in blind pool offerings.  These undertakings describe sticker supplements, post-effective amendments, and 8-K filings that the registrant should make to reflect the acquisition of properties with the offering proceeds. 

Because we believe the information provided to investors regarding property acquisitions may be limited to significant acquisitions, we do not object if a non-traded REIT slightly modifies13 the first paragraph of the Item 20.D undertaking as follows:14

The registrant undertakes to file a sticker supplement pursuant to Rule 424(c) under the Act during the distribution period describing each significant property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing limited partners or shareholders. Each sticker supplement should disclose all compensation and fees received by the Sponsor(s) and its affiliates in connection with any such acquisition. The post-effective amendment shall include or incorporate by reference audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X that have been filed or should have been filed on Form 8-K for all significant properties acquired during the distribution period.

The second paragraph of the Item 20.D undertaking relates to commitments to purchase properties that are made after the end of the distribution period.  Under this paragraph, registrants undertake to file a Form 8-K containing the financial information required by Rule 3-14 of Regulation S-X to reflect each purchase commitment involving the use of 10% or more of net offering proceeds. 

The significance standard imposed by Item 20.D for acquisitions in the post-distribution period is different from our interpretation of significance during the distribution period.15  In addition, while Item 20.D directs a registrant to undertake to file a Form 8-K containing the financial information required by Rule 3-14 of Regulation S-X at the time of any significant purchase commitment made during the post-distribution period, during the distribution period a Form 8-K with Rule 3-14 financial information is not required until the time of acquisition.16  Based on our observations of post-distribution period acquisitions by non-traded REITs, we believe the Item 20.D post-distribution period significance measure and Form 8-K filing trigger do not benefit investors and result in unnecessary regulatory complexity.  Therefore we do not object if a non-traded REIT modifies the second paragraph of the Item 20.D undertaking as follows:

The registrant also undertakes to file after the distribution period a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, for each significant property acquired and to provide the information contained in such report to the Limited Partners or shareholders at least once each quarter after the distribution period of the offering has ended.

Under our current interpretation, the three-month period for filing the first 20.D post-effective amendment starts to run from the acquisition closing date of the initial significant property, rather than the date that the first sticker supplement pursuant to Rule 424(c) is filed.  Additional post-effective amendments are due every three months after the filing of the preceding post-effective amendment.   If no significant properties have been acquired for any three-month period following the filing of a post-effective amendment, we would not expect the registrant to file an Item 20.D post-effective amendment.17  This is true even if a sticker supplement for a probable acquisition was filed during the three-month period.  When a registrant has not filed an Item 20.D post-effective amendment for a three-month period, then the next three-month period starts to run from the acquisition closing date of the next significant property. 

Registrants may continue offers and sales after filing a 20.D post-effective amendment, as specified in the Note to Item 20.D of Guide 5.  In addition, as highlighted in Section 2325.2 of the Division of Corporation Finance’s Financial Reporting Manual, post-effective amendments that consolidate supplements are not considered new filings for purposes of updating the registrant’s financial statements if the duty to file a post-effective amendment is triggered solely by Item 20.D of Guide 5.

Updating Disclosure and Readability

The continuous nature of non-traded REIT offerings creates an obligation under the Securities Act for non-traded REITs to update their prospectuses on a frequent basis.  Item 20.D of Guide 5 facilitates the updating process by permitting registrants to file supplements to describe property acquisitions that become probable and to consolidate all such supplements into a post-effective amendment at least once every three months.  Non-traded REITs frequently update other information in the prospectus using supplements. 

When a non-traded REIT accompanies the base prospectus with numerous supplements, investors may be required to refer to multiple documents in order to understand the complete disclosure on a particular topic, such as the current property portfolio, the material risks of the offering or the plan of distribution.  We believe this is inconsistent with the principles in Securities Act Rule 421, and we often ask registrants to consolidate their supplements quarterly into one or two supplements to enhance readability of the disclosure.  We also frequently request that non-traded REITs update the base prospectus annually to include information from the prospectus supplements.

The disclosure and liability provisions of the Securities Act require registrants in continuous offerings to regularly update the prospectus.  The duty to update the prospectus is particularly important for non-traded REITs given the frequent changes to the property portfolio during the term of the offering.  We often ask registrants to update the following information in quarterly updates to the prospectus:

  • portfolio operating information, including the number of properties, significant tenants, occupancy rates, and lease expirations;
     
  • offering information, including amount of proceeds raised to date, proceeds in good faith expected to be raised in next 12 months, and anticipated offering termination date;
     
  • diversification of the portfolio by geographic region and property type, such as office, apartment, industrial and shopping centers;
     
  • discussion of acquisition activity, including property information, total costs and occupancy;
     
  • summary selected financial information;
     
  • the amount of securities sold to date in connection with the offering, the amount remaining to be offered, whether the registrant has broken escrow and the offering termination date; and
     
  • updated disclosure regarding distributions, redemptions and sponsor compensation.

1 See generally Investor Bulletin: Real Estate Investment Trusts (Dec. 9, 2011), which is available on our Investor.gov website.

2 Industry Guide 5 (originally Guide 60) was initially approved for publication in 1976 and amended in 1982.  See Securities Act Release No. 33-5692 (March 17, 1976) and Securities Act Release No. 33-6405 (June 3, 1982).  Guide 5 is not a rule of the Commission, nor is it published as bearing the Commission’s official approval.  Guide 5 represents the policies and practices then followed by the Division of Corporation Finance in the administration of the registration requirements of the Securities Act with respect to offerings of real estate limited partnerships.  Guide 5 was intended to assist issuers, accountants, attorneys and others in the preparation of such filings and to minimize delays in the review process.

3 Securities Act Release No. 33-6900 (June 25, 1991). 

4 See FINRA Rule 2340 and Regulatory Notice 09-09. 

5 To the extent a valuation figure is attributed to the opinion of a third party valuation expert, the registrant should file the expert consent in accordance with Securities Act Section 7 and Securities Act Rule 436.  Refer to Securities Act Sections Compliance and Disclosure Interpretation 141.02.  When a valuation figure is not expertized, we often ask the registrant to revise disclosure regarding the manner in which the figure was determined to avoid any characterization that the figure is in fact calculated by third party experts. 

6 For example, some non-traded REITs offer shares at a price based on net asset value per share.  Some update the price daily, quarterly or less frequently.  This guidance does not address all disclosure issues that may arise in offerings priced at net asset value per share.

7 We interpret this to include acquisition expenses but not asset management fees.

8 Most non-traded REITs include a maximum leverage amount in the charter.  The maximum amount of aggregate borrowings permitted under North American Securities Administrators Association (NASAA) Guidelines (currently 300% of net assets) is the maximum amount typically adopted by non-traded REITs.  See Statement of Policy Regarding Real Estate Investment Trusts, as revised and adopted by the NASAA membership on May 7, 2007. 

9 Item 8.A states:  “A sponsor would be considered to have a ‘public track record’ if it has sponsored at least three programs with investment objectives similar to those of the registrant that file reports under Section 13(a) or Section 15(d) of the Exchange Act and at least two public programs with investment objectives similar to those of the registrant that had three years of operations after investments of 90% of the amount available for investment.  In addition, at least two of the public offerings for programs with investment objectives [similar] to those of the registrant must have closed in the previous three years.”  In addition, Item 8.A defines “public” programs to include all offerings registered under the Securities Act of 1933, all programs required to report under Section 15(d) of the Exchange Act, all programs with a class of equity securities registered pursuant to Section 12(g) of the Exchange Act, and all other programs with at least 300 security holders of record that initially raised at least $1 million. 

10 For purposes of Table IV, we do not object if return on investment is calculated as (a) the difference between the aggregate amounts distributed to investors and invested by investors, divided by (b) the aggregate amount invested by investors multiplied by the number of years from the registrant’s initial receipt of offering proceeds from a third-party investor to the liquidity event.  The registrant may exclude from the amount raised from investors any underwriting fees and commissions disclosed to investors and paid from the amount raised. 

11 Aggregate compensation should include all compensation traditionally disclosed in Table II of Guide 5, including amounts paid in connection with a REIT’s conversion from external management to an internal management structure.  To the extent additional consideration related to the program may be paid to the sponsor in the future, footnote disclosure to this effect should be included.

12 If a registrant omits Table VI, the registrant need not provide the reference and undertaking related to Table VI that are called for by Item 8.A(4) of Guide 5.

13 In addition to modifications that limit the undertakings to significant acquisitions, we do not object when registrants update the undertaking language to reflect that the registrant is an entity other than a limited partnership and to acknowledge the possibility of incorporating financial information by reference to other filings, as applicable. 

14 Section 2325 of the Division’s Financial Reporting Manual clarifies our current views regarding Item 20.D undertakings in blind pool offerings.  Section 2325 also includes guidance on how to measure significance in blind pool offerings.    

15 See Sections 2325.3 and 2325.5 of the Division’s Financial Reporting Manual.

16 Id.

17 Even if a quarterly post-effective amendment is not required pursuant to the undertaking, registrants are advised to consider the need under the Securities Act to update the prospectus.  See updating discussion below.

 

http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic6.htm


Modified: 07/16/2013