One of our goals at Fundrise is to continuously improve how we operate in order to deliver the best investing experience possible for our investors. One way we do that is by iterating on and adding to the ways in which you can manage your account and the different settings therein.
In support of that effort, we are writing to inform you that we have released a new account setting called NAV Reinvestment. This setting offers you the ability to control whether any potential NAV Distributions are reinvested or distributed to your bank account. This is slightly different than, but functions similarly to, dividend reinvestment.
Your first question might be, “What is a NAV Distribution?” A NAV Distribution is a one-off distribution made by a fund. This distribution could be made for a number of reasons, including to return excess cash to investors or to maintain compliance with REIT rules.
As a reminder, many of our funds are designated as REITs for tax purposes. Therefore the funds must meet certain requirements to qualify as a REIT, including distributing a minimum of 90% of their taxable income in a given year. In certain circumstances, when a fund sells an asset for a higher value than it originally purchased (which is a good thing from an investor return standpoint) the fund recognizes a taxable gain.
In order to maintain the tax benefits of qualifying as a REIT, the fund may choose to distribute this gain to investors through a larger, one-off distribution. This distribution will have the effect of reducing the fund’s NAV by the proportionate amount of the distribution (hence the name, “NAV Distribution”).
It should be noted that these 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 funds.
As this is a more advanced topic, we wanted to share what we anticipate are likely to be some of the most frequently asked questions and their answers:
Frequently asked questions
What is NAV?
Net Asset Value (NAV), often used as short-hand for NAV per share, represents the value of one share in a given fund.
What is a NAV Distribution?
A NAV Distribution is a one-off distribution made by a fund. This distribution could be made for a number of reasons, including to maintain regulatory REIT compliance in the event a taxable gain is incurred or to return excess cash in a fund. The NAV Distribution will reduce the fund’s NAV by a proportional amount.
Can I change my NAV Reinvestment setting?
Yes. You can change it at any time in your account settings.
Do NAV Distributions have any impact on pending redemption requests?
In practical terms, the answer is no. When it comes to the amount of money an investor with an outstanding redemption request takes home, the net effect is zero. However, as a function of ensuring that all investors (whether they’re redeeming or staying in the fund) are treated equitably, the transactions are organized slightly differently.
For more information, including a sample calculation for this scenario, please refer back to our recent update regarding the changes to our eREIT redemption policy.
Will this affect my taxes?
The tax classification of a REIT's distributions will largely depend on the REIT's operations throughout the year. For REITs with sales resulting in large taxable gains in the year, distributions may be classified as capital gains distributions which are generally taxed at a preferential rate. However, it is possible that portions may be classified differently. The final determination will be listed on any 1099 documents which will be sent to investors by the end of January.
As always, this should not be considered tax advice and we advise you to seek out a tax professional if you have any questions or concerns.