The North American Securities Administrators Association (NASAA), a non-governmental organization that recommends securities regulations for state adoption, has published proposed rules that would limit the ability of individuals to invest in unlisted real estate investment trusts, or REITs. A REIT is a company that owns, operates or finances income-producing real estate. The new NASAA rules are aimed at REITs that are not listed for trading on a national exchange and, as a result, for which there is limited liquidity. However, the proposal goes well beyond non-traded REITs.
REIT Guidelines
Broadly speaking, the revised REIT guidelines would make changes in four areas:
- Update the suitability standards that brokers selling or recommending REIT shares must consider, including new SEC Regulation Best Interest. This proposal doesn’t really change the investment landscape significantly and is relatively uncontroversial.
- Adjust minimum net worth and income standards for non-traded REIT investors for inflation from standards adopted in 2007. The net worth threshold would increase from $250,000 to $340,000, and net income from $70,000 to $95,000.
- Prohibit non-traded REITs from using capital raised as a source of distributions back to investors, which, according to NASAA, creates “phantom yield” (in essence, a Ponzi scheme). Although this restriction has not garnered a lot of attention, it is reasonable to ask why REITs, and not other investment vehicles, would be…
