REISA Addresses Non-Traded REIT "Ponzi" Scheme Allegations

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REISA Addresses Non-Traded REIT "Ponzi" Scheme Allegations

Post by REIT Wrecks » Tue Feb 09, 2010 3:28 pm

Following a recent name change, the Real Estate Investment Securities Association ("REISA") is continuing in the fine tradition of TICA, which had been the group's name until the TIC industry collapsed. On January 21st, REISA sponsored a webinar on Non-Traded REITs, primarily for broker/dealers, registered representatives and potential Non-Traded REIT sponsors. Unfortunately, REISA did not archive the webinar for posthumous public viewing, but they did publish an interesting recap of the Q&A that followed. I have attached a copy of the Q&A recap below.

Not surprisingly, many of the questions focused on the reliability of Non-Traded REIT dividends. Dividends are the life blood of Non-Traded REITs, since their primary selling points are safety, stability and reliable income. However, because Non-Traded REIT share prices do not fluctuate in response to earnings and market conditions, and the fact that dividends are often paid using lines of credit, proceeds from new shareholders and asset sales, it appears that not even brokers know what's going on when it comes to assessing the reliability of the sponsor, the program's cash flows and the quality of the underlying investments.

One of the first questions on dividends betrayed a surprisingly low level of understanding with respect to how dividends are paid, and the follow up questions indicate increasing concern with REISA's answers. The first question was: "Is it possible that the dividend is actually paid from the new equity being raised as opposed to the cash flow of the properties owned?" Unfortunately, the question implies that not even registered reps are aware that client money is being used to subsidize dividend payments, rather than used to buy income-producing real estate. To the extent that new equity is not directed toward productive, cash-flowing investments, overall returns will diminish, and using new equity to pay dividends is definitely not a productive, cash-flowing investment (for more on this, see [url=]Dividends Should NOT be Paid From Offering Proceeds![/url])

Later, another participant asked "if distributed funds don't come from operations, where do they come from?" The persistence of these questions betrays not only some confusion with regard to how these vehicles work, but also inadequate transparency as to whether there are any real dividends at all. REISA's surprisingly honest answer highlighted this fundamental problem: Distributed funds come from "reserves made up from the original equity raised, new debt taken on, and the sale of properties."

Whoa! Aren't dividends supposed to come from earnings and cash flow? If so, why did the REISA guys just say that Non-Traded REITs are using DEBT to pay distributions?? This is eating the seed corn, as they say, not saving for the proverbial rainy day. Taking on more debt means less equity (given the same amount of assets), and that means less left over for shareholders. Did they also say that dividends were being paid using equity?? This is even worse. No reputable company would pay dividends out of equity, and if they did, investors would immediately sell their shares. Moreover, cash from the sale of properties would never be distributed and treated as ordinary income. Any qualified accountant would always treat this income as (1) a return of capital and (2) a capital gain (to the extent there was a profit). This is basic, basic stuff. Who is driving this bus anyway?

The next question was probably the best, and it likely doomed this little webinar to be the last of its kind. It was also specific and very direct: "How is paying dividends from new equity being raised as opposed to cash flow not a Ponzi scheme?" :shock: The real answer, sadly, is that this is the very definition of a Ponzi scheme, and no broker or investor would knowingly participate in one if they knew the truth (unless, of course, that broker was being paid a 7% commission to peddle the scheme). REISA's answer? Bring on the double talk!

REISA did not even bother to dispute the question's premise; instead, they gamely explained that Ponzi schemes are bad, yes, but this one is alright because it's all disclosed in the prospectus... Following REISA's contorted logic through to its very dead end, not only is this OK because it's all disclosed, but Non-Traded REITs actually PROMISE to take your money and use it to pay someone else! Hmmmmn. I'm sorry, but I have one last question for Craig Porter Rollins: could you please point me to the paragraph in the prospectus that says (in bold type) YOU ARE INVESTING IN A PONZI SCHEME ? I don't believe I've ever seen that one before....just sayin'

Related Post:

[url=]Green Street Advisors: Non-Traded REITs Are "Flawed Product"[/url]

[url=]Cole REIT Has Dividend Problems[/url]
Non-Traded REIT Webinar Q&A
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Re: REISA Addresses Non-Traded REIT "Ponzi" Scheme Allegatio

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