A case study on exiting a private REIT at 79 cents on stated NAV

This is a case worth walking through in full because the numbers make the lesson concrete. Take an investor with 60k into a private non-traded REIT, a 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. Those terms are known going in and are typically priced into the expected return. Three and a half years in, the repurchase plan gets suspended. Stated NAV has 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. The investor needs the cash for another deal and goes looking for a secondary buyer. Best bid comes in at 79 percent of stated NAV. On 60k in, stated value roughly 63,400, that is 50,100 gross, minus a 1.5 percent transfer processing fee to the sponsor, about 49,350 in hand. Distributions over the period were 11,200, with around 40 percent of that as return of capital. The net result is a small nominal gain over three and a half years and a real loss in economic terms. The step that went wrong was not the exit itself. It was the subscription agreement. The sponsor held consent rights over any transfer of shares, meaning the buyer had to be approved, approval took eleven weeks, and the pool of buyers willing to sit through that process is small enough to set the price on its own. The lesson: get the valuation policy in writing before wiring, including who performs it and how often anything is independently appraised. And read the transfer and consent provisions first, ahead of the projections, because those provisions are what the capital is actually locked behind.

devon_pierce SS4APRO 15

Answer

mikeoconnell7 SO3CPRO 12

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, that's the process, and a desktop review off last year's rent roll and a sponsor-selected cap rate can hold a number flat through a vacancy. Nobody outside is checking it. Bramble, the 21% discount is the useful artifact here and it decomposes fairly cleanly. Part of it is a suspended repurchase plan, because a buyer sees no visible exit for years of holding. Part of it is a lengthy 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 calling this an illiquidity discount and stopping there undersells it. A buyer looked at the same portfolio the sponsor valued higher and priced it lower, with real money. The diligence gap named above is right, and it can be sharpened. The transfer and consent language and the repurchase plan's suspension terms are one document read, doable in twenty minutes before wiring anything. Two questions to a sponsor get 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. A vague answer to either is itself the useful data point.

mikeoconnell7 SO3CPRO 12

5 replies

joe_delgado5ActivePRO

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.

joe_delgado5ActivePRO

bmoreno23ActivePRO

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.

bmoreno23ActivePRO

chriswalton8 CC1CPRO 17

Who typically buys these on the secondary market is worth understanding before assuming a discount reflects a bad negotiation. Are the buyers specialist funds that do nothing but purchase discounted private fund interests, or are they other accredited individuals? If it is the former, a price like 79 cents on stated NAV is not a haircut negotiated badly, it is a business model, and 79 is simply the price that business runs on.

chriswalton8 CC1CPRO 17

monica_tran3 SF2APRO 15

Timing is part of it. The same structure held five years and exited at par through an open repurchase window produces a very different number with identical exposure underneath. Where the cause belongs is somewhere else, though. The illiquidity was the visible part. The cause was a NAV no third party ever tested, which left no way to know whether 10.57 was conservative or fiction until a buyer said so. And a par exit is no more informative, because whoever gets one still cannot tell whether it was fair value or a sponsor being generous with an appraisal to keep the window open. Same blind spot, different outcome, and the good outcome earns nobody the right to feel smart about it.

monica_tran3 SF2APRO 15

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