FAQ Real Estate Investment Trust Morrison Foerster | 16 received stockholder proposals or other pressure to permanently opt out of Subtitle 8 (i.e., agreeing that they will not opt into Subtitle 8 in the future without stockholder approval). In addition, REITs seeking to go public increasingly have been opting out of Subtitle 8. Are REITs considered “alternative investment funds” subject to the European Union’s Alternative Investment Fund Managers Directive? Any REIT, whether traded or non-traded, conducting a securities offering in the European Economic Area should evaluate whether it may be considered an alternative investment fund (“AIF”) subject to the European Union’s Alternative Investment Fund Managers Directive (“AIFMD”). Although the AIFMD was intended to regulate private funds, such as hedge funds, the AIFMD defines “alternative investment fund” quite broadly to include any number of collective investment vehicles with a defined investment strategy. There is no exemption for U.S. REITs or for SEC-registered securities. As a result, any REIT that would like to offer its securities in European jurisdictions should assess whether it is an AIF, in which case it would be subject to certain disclosure and compliance requirements, or an “operating company,” which is not an AIF. Mortgage REITs and externally managed REITs are more likely to be AIFs than equity REITs and internally managed REITs, but each REIT is different, and all facts and circumstances should be assessed in making the AIF determination. Non-Traded REITS What is a non-traded REIT? “Non-traded REITs” are REITs that have offered securities to the public pursuant to the Securities Act and are subject to the ongoing disclosure and other obligations of the Exchange Act, but their securities are not listed on a national securities exchange. Most non-traded REITs are externally managed. Non-traded REITs are generally characterized as “finite life” or “perpetual life.” Finite life REITs are REITs that plan to consider and execute a liquidity event (such as a listing, merger or liquidation) during a predetermined window. Many non-traded REITs that have adopted a finite life strategy disclose in the prospectus for their public offerings that they plan to consider a liquidity event within a certain number of years following their capital raise, and are bound by such liquidity event deadlines in their governing documents. Perpetual life REITs do not have a targeted liquidity date, raise capital through multiple continuous public offerings and provide liquidity to investors through their share repurchase programs. Many perpetual life REITs allocate a portion of their portfolios to listed REIT shares and other real estate-related securities in order to maintain liquidity to support their share repurchase programs. Non-traded REITs typically structure their public offerings as blind pool offerings (see “What is a blind pool REIT offering?” above). The public offerings are “best efforts” offerings, meaning that participating broker-dealers do not make a firm commitment to distribute any portion of the offering, but rather agree to use their best efforts to distribute the offering. In addition, the initial public offering of a non-traded REIT is structured as a minimum/maximum offering, meaning that the REIT establishes a maximum offering amount, and a minimum threshold amount must be subscribed for before the REIT can break escrow and close on the sales. Once the minimum is met and escrow has broken, a non-traded REIT is able to continuously raise and deploy capital (for up to three and a half years from the date the offering becomes effective with the SEC) and may raise additional capital in successive follow-on offerings. In the absence of a trading market, how is the value of non-traded shares determined? Although not subject to market pricing, most non-traded REITs have adopted the practice of determining the per share net asset value (“NAV”) of their shares on a regular basis (after selling shares at a price arbitrarily determined by the board of directors for some period following the commencement of the initial public offering). These NAV determinations provide investors with greater transparency regarding the value of their investment and may be made on a daily, monthly, quarterly or annual basis, typically with the assistance of an independent valuation firm and in accordance with the provisions of Practice Guideline 2013-01,
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