IPA Board of Directors Approves First Industry-Wide Valuation Guideline for Non-Listed REITs

Industry Moves to Enhance Transparency of Investments Holding More Than $93 Billion in Assets

Ellicott City, Maryland, UNITED STATES

ELLICOTT CITY, Md., April 29, 2013 (GLOBE NEWSWIRE) -- The Investment Program Association (IPA), a trade association for Non-Listed direct investment vehicles, today announced the unanimous adoption by its 24-person Board of Directors of an IPA Practice Guideline for the valuation of publicly registered, Non-Listed real estate investment trusts (REITs). This is the first set of industry-wide recommendations ever adopted for the valuation of Non-Listed REITs.

"Today's announcement is a landmark for the Investment Program Association and the direct investment industry," said Kevin M. Hogan, President and CEO of the IPA. "Initiated by the IPA and the product of two years of industry consultation, this Guideline was developed by a broad cross-section of sponsor firms, broker-dealers, due diligence professionals and expert legal, accounting and financial advisors to bring a higher level of uniformity, consistency and transparency to the financial reporting for Non-Listed REITs. 

"Today we speak with one voice about Non-Listed REIT valuation. This Guideline harmonizes different valuation approaches used by Non-Listed REIT sponsors across the industry so that investors, investment advisors, broker-dealers, and securities analysts can assess and compare more accurately Non-Listed REIT valuations and investment performance," continued Hogan.

"We also believe the improved transparency and standardized valuation reporting arising from this Guideline will give a more compelling picture of the capacity of Non-Listed REITs to deliver attractive investment results, which in turn will enhance public confidence in our industry," concluded Hogan. 

The impetus for development of the Guideline came in large part from the IPA's recognition of the need to provide the investing public with objective valuation information to confirm the benefits of publicly registered Non-Listed REITs and understand their proper role in a diversified investment portfolio.    Unlike their close cousins, traded REITs, Non-Listed REITs do not have a trading market value and instead must rely on other means to establish and report investment performance and estimated current value.

To meet this challenge the Guideline establishes recommended standards in a number of areas, including defining a uniform basis and methodology for the determination of share values, specifying protocols for management of the valuation process and the involvement of independent valuation experts, accelerating the introduction of valuations to earlier in the life-cycle of each Non-Listed REIT, and enhancing the quality of disclosures relating to valuations. The Guideline, which becomes effective as of May 1, 2013, is applicable to both new and existing publicly registered, Non-Listed REITs.

Conforming With Institutional Real Estate Valuation Standards

The Guideline establishes net asset value (NAV) as the basis of per share valuation reporting – a basis consistent with valuation reporting for institutional real estate funds, separate accounts and other private, non-traded real estate investment vehicles and used by the National Council of Real Estate Investment Fiduciaries and the Pension Real Estate Association. The IPA Guideline embraces the fair value standards of generally accepted accounting standards (GAAP) and recommends that net asset value be determined consistent with GAAP principles. In addition, the Guideline provides a step-by-step outline of the recommended valuation methodology to establish a per-share NAV.

Enhancing the Independence of the Valuation Process

One objective of the IPA was to eliminate the perception of any potential conflict of interest in the determination of valuations when the party performing the valuation is the REIT's external real estate advisor. To address this issue, the Guideline calls for the board of directors of each Non-Listed REIT to establish a committee comprised of independent directors of the REIT (a "Valuation Committee") to oversee the valuation process and recommend a final valuation, subject to approval by the Non-Listed REIT's board of directors.

The Guideline injects additional independence into the process by calling for the engagement of third-party valuation experts and appraisers to determine the value of the REIT's investments in the initial year of valuation and at least every other year thereafter. For any intervening years in which the REIT's advisor performs the valuation, a third-party valuation expert would be engaged to confirm the valuation determined by the REIT's advisor.

Accelerating the Availability of Valuation Information to Investors

Under existing regulatory requirements, public Non-Listed REITs are not required to provide valuations until eighteen months after the closing of the REIT's offering, which can result in valuations of the REIT's investments not being provided until four and one half or more years after investors begin purchasing shares. The new IPA Valuation Guideline accelerates the provision of valuations, cutting approximately in half the time before investors are provided with this information. 

The Guideline also recommends that valuations be determined as of December 31st of each year and be disclosed as soon as possible after year end, thereby addressing the need of ERISA plans and IRA custodians to provide year-end valuations for regulatory and tax reporting purposes. The Guideline also addresses information relevant to prospective investors in a Non-Listed REIT's subsequent securities offerings by calling for the determination and disclosure of independent valuations prior to the commencement of any follow-on offering by a Non-Listed REIT.

Enhancing the Quality of Valuation Disclosures to the Investing Public

As publicly registered investment products, Non-Listed REITs already provide extensive financial reporting to investors via periodic filings with the Securities and Exchange Commission and in annual reports sent to investors. However, the IPA Guideline includes extensive recommendations for valuation disclosures which go well beyond what is currently required in regulatory reporting. The new IPA Guideline includes extensive recommendations for valuation disclosures. Its 17-point list of disclosure items expands the information customarily found in reports and seeks to better inform the public concerning the process of valuations, the assumptions and methodologies used, the role of third-party valuation experts, valuation sensitivity, and the various components of net asset value and changes in those components, and therefore the value of the REIT's investment portfolio, from year to year. The Guideline also calls for expanded disclosure in prospectuses and offering materials filed with the SEC of the valuation procedures which the Non-Listed REIT will implement and the anticipated role of third-party experts in those procedures. The IPA also provides guidance intended to facilitate the ability of broker-dealers to review valuations and access non-public information in connection with their product due diligence and tracking.

Guideline Development Process

"Over the past two years, dozens of dedicated executives from firms across our industry helped craft this Guideline," said Frank A. McCarthy, Chairman of the Board of the IPA. "They were all instrumental in what you see here today, and on behalf of the industry, let me extend our gratitude."

The new Guideline was developed over a two-year period by the Financial Standards Subcommittee of the IPA REIT Committee (the "FSS"), which is comprised of 14 leading industry sponsor CFOs. This committee acted in consultation with the Due Diligence Committee, Legal and Regulatory Committee and the Broker-Dealer Advocacy Committee of the IPA, and after consideration of comments received from the IPA membership. The FSS also engaged with accounting and valuation experts, other real estate industry organizations, and regulators in an effort to produce standards reflective of multiple perspectives and a broad consensus of recommended best practices.     

"This truly represents a collaborative effort across the financial services industry," concluded Kevin Hogan.

The IPA committees contributing to the process of guideline development represent a broad cross-section of the industry.  Members of the Due Diligence Committee represent or provide independent due diligence services to over 200 broker-dealer organizations involved in the sale and monitoring of Non-Listed REIT investments. Members of the Legal and Regulatory Committee include many of the most active, nationally recognized legal practitioners in the real estate securities industry. Members of the Broker-Dealer Advocacy Committee represent broker-dealer organizations engaged in the sale and monitoring of Non-Listed REIT securities and account for over 90% of all funds raised for Non-Listed REIT investments.

About The Investment Program Association

The Investment Program Association (IPA) was formed in 1985 to provide effective national leadership for the Direct Investment industry, including Non-Listed REITs (NLREITs), Business Development Companies (BDCs), Oil and Gas, and Equipment Leasing Programs. For the last 28 years, the IPA has successfully championed the growth of such products, which have increased in popularity with financial professionals and investors alike. It is estimated that by year end 2012, direct investments accounted for more than $100 billion in assets under management in the accounts of more than 1.5 million investors. Some $93 billion in assets under management are estimated to have been invested in Non-Listed REITs. The mission of the IPA is advocating direct investments through education. Request your free copies of the Guide to Understanding Direct Investments and take the free IPA e-learning course today, or visit the IPA online for more information about becoming a member.

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