The case that a non-traded REIT investor mostly owns the paperwork

Question

There is a line some accountants use on LP clients, that what they really own is the paperwork rather than the real estate. It is meant as a criticism, and it is hard to disagree with entirely, though it is also not the whole picture. Take an investor who has been in four non-traded REITs since 2019, two of them NAV-based. What that investor tends to notice is that K-1 complexity scales faster than the return does. Say the 2022 K-1 from an industrial-weighted position carries seven supplemental schedules. The annualized return that year is 5.8 percent. The CPA charges $340 just to process that one form. Net that against a $47k position and the accountant's point starts to hold. The paperwork is closer to being the investment than most people admit, at least in the sense that understanding what you own requires actually processing all of it. An LP who reads every K-1 before handing it over will catch things. A 2021 form with an error that affects basis. A 2023 form with a foreign tax credit sitting in the wrong box. Neither is huge and both matter. What is less clear is whether most LPs in these vehicles do any of that, or whether they hand the envelope to someone and trust that the number comes out right. It is worth thinking about more than most people do.

nataliehsu · Answer

Most people absolutely hand the envelope over and never look.

sonia_alvarez · Answer

The 2023 foreign tax credit misplacement is exactly the kind of error that compounds when you are filing in multiple states with throwback rules.

hugo_martel · Answer

The disclosure language around tax reporting complexity in offering memoranda is almost always buried in the risk factors section under something like investment in the partnership may result in complex tax consequences, one sentence, page 47, nobody reads it. A useful habit before committing to any private vehicle is asking the sponsor directly how many supplemental schedules their average K-1 ran last year, because that number says something real about the underlying structure that the pitch deck will not. Your $340 on a $47k position is 72 basis points of silent drag before management fees even enter the picture, and it compounds if the position grows or the structure gets messier. The thing worth knowing here: did you model that CPA cost as a recurring line item before entering, or did it only become real money when the first bill arrived?

The case that a non-traded REIT investor mostly owns the paperwork

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