The secondary bid on my Reg D REIT came in at 79 cents on stated NAV

Finished this one out last quarter and it's the most expensive lesson on my list so far.

60k into a private non-traded REIT, Reg D offering through an accredited platform, industrial and grocery-anchored retail, sponsor-determined NAV with an annual desktop valuation review. No SEC registration, no quarterly filings, an annual report and a quarterly letter. I knew all of that going in and thought I was being paid for it.

Three and a half years in the repurchase plan was suspended. Stated NAV had gone from 10.00 to 10.57 per share across that whole period, never down, not even in a quarter when two anchor tenants went dark according to the sponsor's own letter. I needed the cash for a deal, so I went looking for a secondary buyer.

Best bid was 79% of stated NAV. I took it. 60k in, stated value roughly 63,400, received 50,100 gross, minus a 1.5% transfer processing fee to the sponsor, so about 49,350 in hand. Distributions over the period were 11,200, and around 40% of that was return of capital per my accountant. Call it a small nominal gain over three and a half years and a real loss.

The step where it went wrong wasn't the exit. It was the subscription agreement. The sponsor held consent rights over any transfer of shares, which meant the buyer had to be approved, the approval took eleven weeks, and the number of buyers willing to sit through that is small enough to set the price. I read that clause for the first time when I was trying to sell.

What I'd do differently. I'd get the valuation policy in writing before wiring, including who performs it and how often anything is independently appraised. And I'd read the transfer and consent provisions first, ahead of the projections, because those provisions are what your money is actually locked behind.

Answer

1mikeoconnell7SP2APRO6

ember, it's allowed because in a Reg D vehicle with no registration requirement, the valuation policy is whatever the offering documents say it is. If the documents say the sponsor determines NAV annually with a desktop review, then that's the process, and a desktop review off last year's rent roll and a cap rate the sponsor selects can absolutely hold a number flat through a vacancy. Nobody outside is checking it.

bramble, the 21% discount is the useful artifact here and it decomposes pretty cleanly. Part of it is the suspended repurchase plan, because a buyer with no visible exit prices in years of holding. Part of it is the eleven week consent process and the small pool of buyers who can survive it. And part of it is the buyer's own view of the assets, which is the only mark-to-market that number ever received. That last piece is why I'd resist calling this an illiquidity discount and stopping there. A buyer looked at the same portfolio the sponsor valued at 10.57 and priced it lower, with real money.

The diligence gap you named is right and I'd sharpen it. The transfer and consent language and the repurchase plan's suspension terms are one document read, and you can do it in twenty minutes before you wire. Two questions to the sponsor get you most of the rest: who performed the last independent appraisal and on what date, and has the repurchase plan ever been suspended or prorated in the sponsor's history. If either answer is vague, that vagueness is the product.

5 replies

1joe_delgado5AP4CPRO6

Sold an LP interest in a syndication at 82 of stated value two years ago for the same reason, needed the money and had one buyer. What stung was realizing the buyer knew exactly how few options I had, because the transfer clause is public to anyone who's seen a few of these. You're negotiating from inside a room with one door.

2bmoreno23AB1B

I'm early and following along. If the NAV never went down while tenants were going dark, is that allowed? I don't understand how a value can hold flat through that.

0chriswalton8CC1CPRO8

Who buys these on the secondary? I've been trying to understand where that capital sits. Are they specialist funds that do nothing but buy discounted private fund interests, or is it other accredited individuals? Because if it's the former, the 79 wasn't a haircut you negotiated badly, it's a business model and 79 was the price of the business.

1monica_tran3SF4CPRO6

I held a similar one for five years and got out at par through a repurchase window, so partly you had bad timing. But I'd push back on where you're putting the cause. The illiquidity was the visible part. The cause was a NAV that no third party ever tested, which meant you had no way to know whether 10.57 was conservative or fiction until a buyer told you. Five years in mine I still don't know if my par exit was fair value or the sponsor being generous with an appraisal to keep the window open. Same blind spot, different outcome, and I don't get to feel smart about it.