FINRA Considering Rule Proposal to Shorten Valuation Time Frame for Nontraded REITs

FINRA may soon release a rule proposal that would potentially shorten the grace period for untraded REIT valuations.

As reported in a Sept. 20 InvestmentNews article, REITs currently have an 18-month grace period in which to value an REIT at par before an estimated market value is established. The grace period begins once the initial offering is closed to new investors, which typically occurs after about two years.

That means that an untraded REIT could show a $10 per share value (the typical par value for an untraded REIT) on client account statements for a period of three and a half years, regardless of the actual market value. Sponsors also typically find ways to extend the initial offering period in order to increase the amount of time before they have to establish a market value.

FINRA officials are concerned that such a long time frame for market valuation misleads investors, which is what the SRO alleged in a complaint filed against David Lerner Associates Inc. in May for activities related to the company's closed Apple REITs. In the complaint, FINRA said the REITs were "unreasonably a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage."

At least 122,000 people - the estimated number of investors in the Apple REITs since 1992 - were affected by the alleged unreasonable valuations. FINRA hopes that the potential rule change could protect investors by shortening and defining the length of time non-traded REITs like the Apple REIT Ten would have to record an estimated valuation.

Brokers and the public will be able to comment on the proposed rule before implementation. A publication date has not yet been set.


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