We are writing to notify you of an upcoming change to the eREIT redemption policy that we are making in an effort to maintain tax efficiency while also creating a more equitable impact from certain large, one-time distributions that may result from the sale of assets held within eREITs.
What is changing?
The redemption policy of all currently operational eREITs1 will be updated such that in the event of a “NAV Distribution” as determined by the manager, investors who have requested a redemption out of that fund will have the amount of their redemption reduced by the proportionate amount of the NAV Distribution which they receive.
Note: For investors requesting redemption from an eREIT, the total aggregate value of their redemption plus the NAV distribution will end up being equal to the full amount of their shares based upon NAV at the time of their request. In addition, investors requesting redemption will continue to receive any standard dividend earned.
Example scenario:
Investor X owns 10 shares of eREIT Y at a NAV value of $10 per share, or a total value of $100.
At some point during the fourth quarter of 2022, Investor X requests a redemption of 100% of their shares, for a total redemption value of $100.
On December 31, 2022 (the last day of the quarter), eREIT Y declares a one-time NAV distribution of $2 per share, bringing the NAV per share of eREIT Y down to $8.
Investor X’s redemption amount is reduced by $20 (the value of the NAV distribution), so Investor X receives a redemption in the amount of $80. When distributions are paid out (typically about two weeks after the end of the quarter), Investor X receives the NAV distribution of $20.
The net effect to the amount of money they walk away with is zero: Investor X still receives $100, which is equal to the value of their shares on the date they submitted the redemption request.
Why is it changing?
As you are aware, our eREITs elect to be taxed as REITs in order to receive the tax benefits of paying no taxes at the corporate level and thereby maintaining tax efficiency and returns for our investors. In order to qualify as a REIT, our eREITs must meet certain REIT requirements, including distributing a minimum of 90% of their taxable income. In certain circumstances, when an eREIT sells an asset for a higher value than it originally purchased (which is a good thing from an investor return standpoint) it incurs a taxable gain.
In order to maintain tax efficiency, the eREIT may choose to distribute this gain to investors through a large, one-time distribution. This distribution has the effect of reducing NAV by the proportionate amount of the distribution and is defined therefore as a “NAV distribution”. (In the above example, the NAV of eREIT Y would be reduced by $2 to $8 per share, but investors would still have the same effective value of $10 per share, just split between a new NAV of $8 per share and $2 in cash distribution.)
Under the current redemption policy, in the event that an eREIT pays a NAV distribution during a certain quarter, the limited number of investors redeeming during that quarter would end up receiving the full value of their shares ($10 per share in the above example) AND the NAV distribution ($2 per share in the above example), effectively double counting the NAV distribution and increasing the value of the redemption they receive ($12 per share in total in the above example). At the same time, the large majority of shareholders who are choosing to remain invested for the long-term would end up seeing a potentially slight decrease in the effective value of their shares beyond just the NAV distribution amount (due to those redeeming receiving excess dollars).
We believe this change more fairly and equitably distributes the taxable gain NAV distribution between both those investors redeeming and those investors choosing to stay invested over the long-term. (It’s worth noting that in most quarters we do not expect the eREITs to sell many assets and, as a result, in most quarters there may be no “NAV distribution”).
Another important note: NAV distributions are not expected to have any impact on standard dividend declarations based on the actual operating cash-flow of the assets owned by the eREITs.
When is this happening?
This change will go into effect October 1, 2022 and apply to all redemption requests submitted on or after that date.
As always, if you have any questions regarding this change, please don’t hesitate to reach out to our Investor Relations team at investments@fundrise.com or reply directly to this email.