FINRA, the Financial Industry Regulatory Authority, is the largest independent securities regulator in the U.S. Recently, FINRA turned its attention toward publicly registered, non-exchange traded REITs. Rosemarie Thurston, partner with Alston and Bird, LLC, and head of the firm's REITs and real estate funds team, recently spoke with about FINRA's notice. FINRA recently issued a notice impacting non-traded REITs and how they value their securities. Could you please fill us in on what the new guidance requires?

Thurston:  FINRA Regulatory Notice 09-09 requires that 18 months following the conclusion of a non-listed REIT's offering, the REIT must publish a per-share value based on an appraisal of the REIT's assets and operations so that broker-dealers can include this value on their customers' account statements.  How will this notice affect sponsors of existing non-traded REITs and the sale of new non-traded REITs?

Thurston:  The notice impacts existing non-listed REITs because it requires them to value their securities and publish a per share price not later than 18 months following the conclusion of their offering, whereas issues had historically used the $10 per share offering price for three years after the offering ended.

In this economy and with real estate values down up to 40 percent from the peak in 2007, some issuers would have preferred to wait to publish a per-share value based on an appraisal. Most non-listed REITs that have published a per-share price since the notice was effective have reported a value significantly lower than the price at which the shares were sold to the public during the offering.  What are some of the best practices that non-traded REITs can adopt to meet the new qualifications for non-traded REITs and answer some of the questions arising from the new FINRA guidance?

Thurston:   FINRA has not issued guidance on how non-listed REITs should value their securities. We are telling our clients that the market will expect that they have an appropriate level of independence in the valuations – the process should not be run solely by the REIT's external advisor. As a result, they should consider disclosing that the value will be based on independent appraisals or that the board of directors will engage a third party to confirm that the per-share value is fair.  Might we see the non-traded REITs that are not finished selling their securities providing updated per-share values?

Thurston:   We may see the industry evolve to faster transparency as to per-share values than FINRA's stated 18 months following the conclusion of an offering. While non-listed REITs are traditionally blind pools, and the offering period plus 18 months allows a new REIT time to build and manage a portfolio while completing its fundraising, it would be good for investors and the industry if non-listed REITs can expedite the time they publish a meaningful per-share value.  Overall, what do you think is the major policy or regulatory issue facing the non-traded REIT industry today?

Thurston:   The process to get offerings approved by state regulators is long, unpredictable and costly. While the SEC review process [for non-listed REITs] is thorough yet efficient, most states have no timetable within which they commit to review filings, and some can wait as long as six months before providing initial comments. Further, comments from one state often conflict with another. This process can deter quality real estate firms from entering the industry and the costs of this long and difficult process are ultimately borne by the REIT's stockholders.