FAQ Real Estate Investment Trust Morrison Foerster | 13 on behalf of a prospective investor unless the prospective investor is informed about the liquidity and marketability of the investment. In addition, if the sponsor has offered prior programs or nontraded REITs with respect to which a date or time period at which the program or REIT might be liquidated was disclosed in the offering materials, then the prospectus for the current non-traded REIT offering must include information about whether the prior program(s) or REIT(s) in fact liquidated on or around that date or during that time period. Under Rule 2310, the total amount of underwriting compensation (as defined and determined under FINRA rules) shall not exceed 10% of the gross proceeds of the offering (not including proceeds from the sale of shares pursuant to a distribution reinvestment plan), and the total organization and offering expenses, including all expenses in connection with the offering, shall not exceed 15% of the gross proceeds of the offering. Rule 2310 also identifies, and imposes limitations and restrictions with respect to, non-cash compensation. Rule 2310 and FINRA Rule 2340 prohibit members from participating in a public offering by a non-traded REIT unless the REIT agrees to disclose a per share estimated value in its periodic reports. FINRA permits a “net investment” value to be used until up to 150 days after the second anniversary of breaking escrow in the initial public offering. The “net investment” value is the offering price less upfront selling commissions and fees as well as issuer organization and offering expenses. FINRA permits an “appraised value” to be used at any time and requires it to be used when the net investment value is no longer permitted. The “appraised value” is a value determined at least annually by or with the material assistance of an independent valuation firm and derived from a methodology that conforms to standard industry practice. Rule 2340 also requires members to include certain disclosure on customer account statements, including disclosure concerning the illiquidity of an investment in a non-traded REIT. As with the SEC and exchange rules, FINRA Rule 2310 also contains detailed rules on compliance in connection with limited partnership roll-up transactions. All REIT offerings are excluded from FINRA Rule 5121, which restricts member firms’ participation in an entity’s public offering when the member has a conflict of interest. What are common examples of non-GAAP financial measures used by REITs? Common examples of non-GAAP financial measures used by REITs include: ▪ Funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts, the leading industry trade group for REITs (“Nareit”), and variations of FFO, such as adjusted FFO (“AFFO”), core FFO and normalized FFO; ▪ Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and variations of EBITDA, such as EBITDAre, adjusted EBITDA and core EBITDA; ▪ Net operating income (“NOI”), cash NOI and same-store NOI; ▪ Core earnings or adjusted earnings (for mortgage REITs); ▪ Cash or funds available for distribution (“CAD” or “FAD,” respectively); and ▪ Net debt or core debt. In addition, many REITs use one or more non-GAAP financial measures in certain ratios, including to show their leverage (e.g., net debt to adjusted EBITDA), ability to cover interest expense (e.g., adjusted EBITDA divided by cash interest expense) and ability to cover fixed charges (e.g., adjusted EBITDA divided by fixed charges). Are there industry standards applicable to non-GAAP financial measures used by REITs? FFO In 1991, Nareit published a white paper on FFO in order to promote a uniform, widely accepted standard measure of REIT operating performance. The FFO white paper was supplemented over the years and, in December 2018, was restated to consolidate Nareit’s prior guidance (see the 2018 restatement of Nareit’s FFO white paper). The primary reason that Nareit developed FFO as a supplemental performance measure was “to address the artificial nature of historical cost
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