Quarterly repurchase capped at 5% of NAV. Is that normal?

I have 18k sitting from a settlement and the first rental doesn't close for another five months, so I've been reading about public non-traded REITs as a place to put part of it instead of leaving it all in savings.

The one I've been reading has a $2,500 minimum, distributions monthly, and share price set from a NAV the sponsor publishes each month rather than anything that trades. That part I follow. Where I got stuck is the share repurchase plan. It says repurchases are limited to 5% of NAV per quarter at the board's discretion and the board can suspend the plan entirely.

So if I put in 10k and I want out in year two, what actually happens? Do I get in line? Is 5% a big number or a small one? And the phrase "at the board's discretion" reads to me like the answer could just be no.

I don't need this money back on a schedule, which is why I'm even looking. But I'd like to understand what I'm agreeing to before I agree to it, and I can't tell if I'm being paranoid about a standard clause or if this is the actual point everyone glosses over.

Answer

4ryanmck27SC2C

Take the question in two pieces, because the answer to the first one changes the second.

Piece one, how does the mechanism work. You submit a repurchase request by the deadline in the plan, usually some weeks before quarter end. If total requests across all shareholders are under the cap, you're filled at the applicable NAV. Over the cap, everyone is prorated by the same percentage. Some plans also have a holding-period deduction, meaning shares held under a year or two get repurchased at less than full NAV. Check whether yours has one, it's a separate paragraph from the cap and it's easy to skim past.

Piece two, does it matter for you. You said you don't need this money on a schedule. If that's true through a five year window and not just through next spring, the cap is a background risk. If there's any chance the 18k gets pulled into the rental closing or into a repair after it, then this isn't the parking spot. Money that has a job in the next 24 months shouldn't be in a vehicle where getting out is discretionary.

The thing I'd add to parcel's point: illiquidity isn't a defect here, it's the trade. You're accepting that you can't sell in exchange for not being marked to public market sentiment every day. Public REITs give you the mirror image. Decide which side you actually want before you decide which sponsor.

And read the fee section with the same attention you gave the repurchase plan. The load and the ongoing costs will affect your outcome more often than the cap will.

4 replies

1kevin_lombardPG1BPRO5

I read the same kind of language last month and had to look up NAV three times before it stuck, so I'll say what I worked out and someone can correct me.

NAV is net asset value, what the sponsor says the properties are worth minus what's owed, divided by shares. It isn't a market price because there's no market. An appraiser and the sponsor's process produce it. So the number you buy at and the number you'd be repurchased at both come from the same house.

The 5% cap I understood as a ceiling on the whole fund, not on you personally. If everyone wants out at once, everyone gets a slice. Which does mean the clause matters most exactly when you'd want to use it.

1nicole_adeyemiPassivePRO5

juniper has the fund-level part right. The 5% is of aggregate NAV per quarter, so in a calm quarter almost nobody is asking and you get filled. In a bad quarter the requests exceed the cap and you get prorated, meaning you submit for 10k and receive some fraction, then resubmit next quarter behind everyone else who also got cut.

The suspension language is separate and it is real. Boards have used it. Read what triggers it in your document, sometimes it's tied to the sponsor's ability to value the assets.

You're not being paranoid. That clause is the price of the thing. The whole reason your account statement doesn't drop 20% in a week is that nobody is allowed to sell into a panic.

3karen_whitfieldPG4APRO7

halyard's split is the right one. I'd only push on the timeline.

Five months to your closing is not a long time and first rentals surprise people. Mine needed a water heater and a sewer scope finding within the first ninety days. If the 18k is your cushion, it's not investable money yet, it's the cushion.

None of which means don't look at non-traded REITs. Look at them with money you've already decided is a long hold. That's the shape they fit.