If you own shares in a non-traded REIT, you probably believed (with some help from your broker) that you were investing in a well-managed portfolio of real estate that would throw off an attractive dividend and appreciate in value. For a while, you did get the promised dividends. One day the dividend was cut because it was never supported by property income – it was paid from new capital raised by the fund and that capital had dried up. You hoped that at least you owned a portfolio of solid properties that had appreciated in value. Then the offering period ended, the sponsor was forced to report that the Net Asset Value (NAV) of the portfolio had dropped to a fraction of the initial offering price, and you realized that you had a real dud on your hands.
So, what should you do now? Sell and cut your losses, or hang in there and hope that you can ultimately recover more than the price you would receive today in the secondary market?
First, some disclosure is in order. CAPFUNDR manages a fund called CAPFUNDR REIT Value Fund I. The primary strategy of the fund is to purchase interests in non-traded REITs in the secondary market. Obviously, we think we can buy these shares at prices that will produce good returns for our investors. Through our detailed analysis of the underlying properties, we calculate our own proprietary “CAPFUNDR NAV”, which is often lower than the reported NAV. We only invest if we can buy shares for less than the CAPFUNDR NAV.
Does that mean you should never sell your shares? Not necessarily. It depends on your options and on your situation. Let’s go through the options.
1. Sponsor redemptions
If the Sponsor has not yet suspended redemptions for the REIT that you own, this is probably your best option. Most non-traded REITs will redeem shares at a price ranging from 90% to 100% of the purchase price during the offering period, depending on how long you have owned the shares. Once the REIT begins to report current share value, following the end of the offering, the repurchase price will typically be set at 95% of the reported share value. This repurchase price is generally significantly higher than the price that an investor would pay in the secondary market. Take advantage of the redemption program while it is still in effect. It probably won’t be there forever.
2. Tender offers
There are a few investors who make tender offers for shares of non-traded REITs. These tender offers are usually at a bargain basement price, which is lower than the price at which you can sell in the secondary market. Avoid these tender offers unless there are no other buyers for your shares and you absolutely need to get out.
3. Sale on the OTC market or through an auction site
Some non-traded REIT shares can be sold in the Over the Counter (OTC) market through a broker. There are also websites that hold eBay-type auctions for shares of non-traded REITs, limited partnership shares, and other illiquid investments. The most active of these sites is Central Trade and Transfer. The number of buyers is relatively small, but there is regular trading activity for some of the older non-traded REITs that have suspended their share repurchase programs.
Prices in these markets are usually below the reported NAV. The price may still be higher than the CAPFUNDR NAV, so this does not necessarily mean that selling is a bad deal. If you need to sell and sponsor redemption is not an option, the OTC market or an auction site is probably your best bet.