Coming out of the Great Recession, there was a rush by real estate sponsors to raise “blind pool” capital to take advantage of displacement and distress in the real estate market. From 2009 through 2010, 30 new public real estate investment trusts (REITs) that included a blind pool component were launched. 15 of these were traditional listed IPOs, raising $3.7 billion in the aggregate, and 15 were non-traded REIT vehicles that filed registration statements to raise up to a further $26 billion.1 Of the IPOs for publicly listed REITs, nine were by mortgage REITs and six were by equity REITs, while all 15 of the new non-traded REITs were equity REITs.
Fast-forward to 2023, and sophisticated real estate sponsors are again looking to take advantage of displacement and distress in the commercial real estate market as a result of higher interest rates, tighter lending standards, changing working and shopping habits, and other factors. In addition to the numerous private investment funds that have and continue to be formed for this purpose, the blind pool public REIT vehicle is making a comeback. Moreover, more-recent U.S. Securities and Exchange Commission (SEC) rulemaking that was not available in 2009 and 2010 has now added a third avenue for raising public real estate capital — Reg A+.2
The processes and disclosures necessary to successfully launch a blind pool IPO are similar in many ways to those applicable to any REIT IPO, whether listed, non-traded, or pursuant to Reg A+.3 A blind pool IPO, however, also brings with it an additional overlay of disclosure requirements unique to the blind pool real estate vehicle. We discuss these requirements in the alert below.
1. Industry Guide 5
Historically, the SEC has considered an offering a “blind pool” offering when a material portion (approximately 25% or greater) of the offering proceeds have not been allocated to an identified use.
The SEC’s Industry Guide 5 — “Preparation of Registration Statements Relating to Interests in Real Estate Limited Partnerships” (“Guide 5”) — provides disclosure requirements for blind pool real estate offerings. While Guide 5 technically references only real estate limited partnerships, it is the SEC’s position that, where appropriate, Guide 5 also applies to publicly traded, non-traded, and Reg A+ real estate offerings. The Guide 5 requirements are in addition to (and in some cases overlap with) other requirements that apply to offerings by REITs and operating real estate companies in the SEC’s Form S 11 and related disclosure rules.
A. Prior Performance
Depending on the nature of the offering and management’s prior experience with real estate investment programs, Guide 5 may require (or prohibit) detailed tabular and narrative disclosure concerning the sponsor’s prior experience with public and nonpublic real estate investment programs, in some cases whether or not the prior programs targeted similar investments and had similar investment objectives as the current offering. The prior performance requirements, which are contained in a series of lengthy sections of Guide 5, are among the most significant differences between the disclosure requirements for blind pool offerings and real estate company IPOs with existing assets.
The staff of the SEC’s Division of Corporation Finance (the “Staff”) believes this disclosure is important because in a blind pool offering, investors are unable to consider the financial history of the company’s properties. Instead, the investor must look to the prior-performance or track-record information of the sponsor. The term “sponsor” is interpreted broadly in Guide 5 and therefore may pick up affiliates of the formal sponsor, as well. Detailed guidance is not provided in Guide 5 as to what constitutes a program with “similar investment objectives,” and therefore, a sponsor must evaluate all recent prior programs to determine which may require detailed disclosure.
In CF Disclosure Guidance: Topic No. 6 (“Topic No. 6”), the Staff notes that its views on prior performance disclosure reflects “an appropriate balance between the benefits of providing investors useful prior performance disclosure and the risk that voluminous and complex prior performance disclosure may obscure other material information about the registrant.” Although the guidance in Topic No. 6 was directed at non-traded REITs, it appears the prior performance guidance would equally apply to listed real estate companies and Reg A+ offerings in most instances.
Prior Performance Tables
The following is a brief summary of the required Guide 5 prior performance tables:
Table I: Experience in Raising and Investing Funds
Table I is designed to summarize the experience of the sponsor of the real estate company in raising and investing funds. The Staff states in Topic No. 6 that it would not object if a real estate company limits the Table I disclosure to the sponsor’s three most recent programs with investment objectives similar to those of the real estate company. If the sponsor has fewer than three programs with investment objectives similar to those of the real estate company, the Staff would not object to inclusion of some combination of all programs with similar investment objectives and the sponsor’s most recent additional programs, as long as the total number of programs included is three.
In addition, the Staff notes in Topic No. 6 that it would not object if the information included in Table I is limited to dollar amount offered, dollar amount raised, length of offering in months, and number of months taken to invest 90% of amount available for investment. This would allow real estate companies to exclude other items, such as offering expenses, reserves, acquisition costs, and percent leverage, from Guide 5’s Table I.
Table II: Compensation to Sponsor
Table II was originally designed to show the aggregate amounts that were paid to the sponsor and its affiliates in prior programs. Given the extensive disclosure the Staff requires regarding estimated and actual compensation to be paid to the sponsor in connection with an ongoing offering, the Staff states in Topic No. 6 that it does not believe that extensive disclosure regarding the compensation paid to the sponsor in prior programs is useful enough to investors in the current offering to warrant a separate table. As a result, the Staff will not object if a real estate company omits the information called for in Table II, as long as certain compensation information is provided in Table IV as discussed below.
Table III: Operating Results of Prior Programs
The objective of Table III is to provide an investor with a picture of the operations of the sponsor’s recent prior programs on an annual basis. If the sponsor does not have a “public track record” and does not have at least five prior programs with similar investment objectives, then Guide 5 calls for performance disclosure of all prior programs that have closed in the most recent five years.4 The Staff states in Topic No. 6 that it will not object if the real estate company includes only the most recent additional programs that have closed in the most recent five years, as long as the maximum number of programs presented in the table is five.
The Staff also notes that it will not object if Table III is limited to summary GAAP balance sheet, income statement, and cash flow from operations data; distribution data per $1,000 invested, including data on the relationship of cash flow from operations to total distributions paid; and estimated value per share (if disclosed to program investors). The tax related data called for by Table III in Guide 5 can be omitted.
Table IV: Results of Completed Programs
The objective of Table IV is to enable an investor to determine whether the prior programs syndicated by the sponsor achieved their investment objectives. The instructions to Table IV in Guide 5 call for data for programs that have completed operations in the most recent five years. “Completed operations” was defined in the Guide 5 proposing release as those programs that no longer hold properties. The Staff notes in Topic No. 6 that disclosing only five years of data may result in the omission of prior program data about large, public programs that can provide useful information to potential investors about a sponsor’s track record over a complete real estate cycle. Therefore, the Staff may request Table IV data for completed public programs with similar investment objectives that have completed operations in the most recent 10 years.
If the sponsor does not have a “public track record” and does not have at least five prior programs with similar investment objectives, then Guide 5 calls for performance disclosure of all prior programs completed in the last five years. However, for sponsors that do not have a “public track record” and do not have at least five prior programs with similar investment objectives completed in the last five years, the Staff states in Topic No. 6 that it will not object if the real estate company includes only the most recent additional programs completed in the last five years, as long as the total number of programs covered by the table is five.
The Staff also notes in Topic No. 6 that it will not object if the information in Table IV is limited to the annualized return on investment, date closed, duration in months, aggregate dollar amount raised, and median annual leverage. It should be noted that annualized return on investment is a new requirement that is not included in Guide 5’s Table IV. The Staff did not dictate how non-traded real estate companies should calculate the annualized return on investment, but the Staff does note that it would not object if return on investment is calculated as (i) the difference between the aggregate amounts distributed to investors and invested by investors, divided by (ii) the aggregate amount invested by investors multiplied by the number of years from the real estate company’s initial receipt of offering proceeds from a third-party investor through the liquidity event.
With respect to the amount raised from investors, any underwriting fees and commissions disclosed to investors and paid from the amount raised may be excluded from Table IV. Also, the Staff states in Topic No. 6 that the previously required tax-related disclosure and the source of distribution data in Table IV may be omitted.
Additionally, as noted above, the Staff states in Topic No. 6 that it will not object if the real estate company omits Table II so long as it includes compensation data in Table IV.
Table V: Sales or Disposals of Properties
Table V is designed to disclose to an investor the profit or loss upon the sale of properties and the positive or negative operating cash flows during the holding period. The Staff did not provide any changes in Topic No. 6 to past practices regarding Table V.
Table VI: Acquisition of Properties by Programs
Table VI calls for detailed information about individual property acquisitions, including mortgage financing, cash down payments, and capital expenditures. The Staff notes in Topic No. 6 that it does not believe that detailed information about the financing and expenses associated with individual property acquisitions made by the sponsor’s prior programs is likely to be material to an investment decision in the real estate company. As a result, the Staff generally will not object if a real estate company omits Table VI.
Prior Performance - Narrative Summary
The narrative summary of the performance of prior programs should include a description of the sponsor’s experience in the last 10 years with all real estate programs regardless of the investment objectives of the programs. Among other things, this summary should include (a) the number of programs sponsored, (b) the total amount of money raised from investors, (c) the total number of investors, (d) the number of properties purchased and location by region, (e) the aggregate dollar amount of property purchased, (f) the percentage (based on purchase prices rather than on number) of properties that are commercial (broken out by shopping centers, office buildings, and others) and residential, (g) the percentage (based on purchase prices) of new, used, or construction properties, and (h) the number of properties sold. The narrative summary should also include a discussion of those major adverse business developments or conditions experienced by any prior program.
B. Risk Factors
In addition to the risk factors that would be required for an IPO by an operating real estate company, Guide 5 specifically requires the prospectus to include risk factors related to:
- management’s lack of relevant experience (or, if applicable, lack of success) with other real estate investments
- the risks resulting from the offering proceeds not being committed to specific properties (including investors’ inability to evaluate  the manner in which the proceeds will be invested and  the economic merits of specific real estate projects)
C. Conflicts of Interest
In general, Guide 5 requires increased disclosure of potential conflicts associated with (a) the potential for competition for transaction flow and resources among multiple blind pools affiliated with a sponsor and (b) the process of sourcing, pursuing, and executing investments to deploy the offering proceeds. In practical terms, these issues are usually not dissimilar from those present in any externally-advised investment vehicle, including non-blind pool REITs and REITs with significant minority limited partners in the UPREIT subsidiary of a publicly-traded REIT. Again, this is more a question of degree and detail than of substantive differences from the disclosure requirements that would apply to a real estate company in the absence of a blind pool offering.
D. Fiduciary Responsibilities of the Sponsor
Guide 5 requires a description of the fiduciary obligations of the sponsor and/or real estate company management. Like many of the disclosures noted herein, the additional requirements of Guide 5 relative to the disclosure requirements for other real estate company offerings are principally a matter of the degree and detail of required disclosure.
The additional disclosure requirements concerning management of the real estate company under Guide 5 include:
- identification of the individuals who will make investment decisions, with appropriate background information
- disclosure concerning any nonaffiliate on whom the real estate company will rely to run its operations, as well as description of any relevant prior experience and any compensation or fees that are to be paid
F. Investment Objectives and Policies
Again, the disclosure requirements of Guide 5 are largely incremental additions to the requirements that apply to real estate company IPOs that are not blind pool offerings generally. Disclosure of investment policies would cover the range of relevant parameters, such as:
- nature of properties to be purchased (e.g., commercial, residential) and the criteria (e.g., method of depreciation, location) to be used in evaluating proposed investments
- strategy (core, value added, opportunistic)
- markets, submarkets, and related demand/supply drivers
- diversification objectives and limits to same in early stages
- leverage and related impact on risk and return relative to investment strategy selected
- time horizon for harvesting investments and policies on recycling capital versus growth with new capital
- effects of using joint ventures or other third party arrangements on selected strategies such as development, mixed use projects, and technically challenging asset classes
- regulatory issues (e.g., environmental, land use, REIT/tax, and ERISA)
G. Description of Real Estate Investments
The requirements of Guide 5 do not differ significantly from those that apply to real estate company IPOs that are not blind pool offerings. Guide 5 requirements include:
- a description of any risks associated with specific properties owned or proposed to be acquired, such as competitive factors, environmental regulation, rent control regulation, fuel or energy requirements, and regulatory issues
- a description of the property in an appropriate amendment or supplement to the prospectus (if a property is reasonably likely to be acquired)
H. Compensation and Fees to the Sponsor and Affiliates
In general, Guide 5 presumes that the compensation matrix for blind pools will differ from typical compensation for internally-managed real estate companies or externally-managed real estate companies where a portfolio of assets already exists. The additional disclosure required by Guide 5 is largely a matter of degree and detail. Guide 5 requires that the prospectus include:
- a summary table itemizing by category and specifying dollar amounts of all compensation, fees, profits, and other benefits (including reimbursement of out-of-pocket expenses) that the sponsor and its affiliates may earn or receive
- a description and tabular illustrations of any compensation arrangements that are based upon a formula or percentage; the description must include the assumptions underlying the dollar amounts shown, and the real estate company must provide detailed information concerning the calculations to the Staff
There are additional compensation disclosure requirements contained in Guide 5 that are not highlighted here because they are typically only associated with a non-traded REIT. See below for a discussion on the different compensation disclosure requirements for internally and externally managed real estate companies.
I. Non-Traded REIT–Specific Disclosure
There are also a number of requirements in Guide 5 that would only apply to non-traded REITs. These additional disclosure requirements include a discussion with respect to investor suitability standards, the plan of distribution for the securities and promotional and sales materials, as well as additional undertakings by the REIT.
2. Externally Managed vs Internally Managed
The offering disclosure for a new blind pool offering will vary if the company is to be internally or externally managed. Typically, non-traded REITs, Reg A+ issuers, and publicly listed mortgage REITs are externally managed, while publicly listed equity REITs are internally managed.
The compensation disclosure for a real estate company to be externally managed is generally focused on the management/advisory agreement and the economics the manager will receive pursuant to that agreement. To the extent that executive officers of an externally managed real estate company will also receive direct compensation from the real estate company (including equity grants), that would also need to be disclosed. Conversely, any compensation to be received by the executive from the external manager would not be disclosed.
The compensation disclosure for a new internally managed blind pool company will focus on the compensation to be paid to the executives of the real estate company and any compensation agreements and arrangements with such executives.
B. Risk Factors
The risks to a real estate company will vary in part on whether the company is internally or externally managed. For externally managed real estate companies, the risks include dependence on the manager, the manager’s failure to allocate sufficient resources to the real estate company, termination or expiration of the management agreement, and conflicts of interest in managing other programs. For internally managed real estate companies, the risks include dependence on key executives and the ability to attract and retain executives and other valuable employees.
Dating back to the early 1990s, the Staff has asked real estate companies that have no history of paying dividends and that disclose estimated first year dividends in their IPO registration statement to also disclose how they will have sufficient funds to pay the dividend based on the assets that the real estate company has identified. Real estate companies have complied with this request by including in the registration statement what is commonly referred to as the “distribution table” or “magic page.” The table begins with pro forma net income (loss) for the most recent year end. Income (loss) for the most recent interim period is added and the income (loss) for the corresponding interim period of the prior year is subtracted to arrive at the net income (loss) for the twelve-month period ending with the date of the most recent balance sheet included in the registration statement. Adjustments, such as net increases or decreases in contractual rent and provisions for recurring capital expenditures, are then made to arrive at estimated cash flow for the twelve-month period following the date of the last balance sheet included in the registration statement.
Given that blind pool real estate companies have not yet identified the specific assets they will acquire with the proceeds from the offering (in whole or in part), they are unable to produce a distribution table to support any proposed estimated distribution. As a result, prior to the time of the acquisition of operating assets, the Staff typically objects to blind pool real estate companies disclosing an estimated or target distribution yield because the Staff does not believe there is a reasonable basis for the estimate.
For those sponsors that are currently contemplating launching a blind pool real estate company IPO, they should begin considering the public offering disclosure they will be required to include and ensure they are able and willing to provide the required disclosure.
 For the purposes of this alert, when we refer to a non-traded REIT, we are referring to a REIT that registers its offering under the Securities Act of 1933 (the “Securities Act”) on Form S-11, files reports with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”), and is not listed on any securities exchange or other trading platform. Non-traded REITs will register a maximum offering amount with the SEC and offer their shares on a “best-efforts” basis, which means that the dealer manager for the offering will use its best efforts to sell shares but is not obligated to purchase or sell any specific amount of shares in the offering. This is in contrast to publicly listed offerings in which the offerings are firm commitment underwritten offerings, which means that the underwriters commit to buy all of the shares in the offering.
 In March 2015, subsequent to the great recession, the SEC adopted amendments to Regulation A, which expanded the Regulation A exemption from the Securities Act registration for public offerings up to $50 million in any 12-month period (also known as Regulation A+ or Reg A+), as mandated by Title IV of the Jumpstart Our Business Startups Act. The Reg A+ offering limit was raised by the SEC to $75 million in any 12-month period in November 2020. Offerings under Reg A+ are also subject to reduced disclosure requirements and less onerous ongoing reporting requirements as compared to the full Exchange Act requirements. In addition, unlike non-traded REITs, a Reg A+ issuer need not be listed on a national exchange to be exempt from state registration requirements and review of the offering (although states may require a filing fee). Reg A+ was adopted to facilitate capital raising by smaller companies while still providing investor protection. The offerings are typically conducted as best-efforts offerings and in many cases sold directly by the issuer to the public without the use of a traditional underwriter.
 See the following Goodwin Alerts for more information — Top Ten Practice Points by Experts: REIT IPOS, The Past, Present and Future of the Non-Traded NAV REIT Structure, and SEC Expands ‘Regulation A’ Eligibility to Reporting Companies.
 Item 8 of Guide 5 defines sponsors with a public track record as those which have sponsored “at least three programs with investment objectives similar to those of the registrant that filed reports under Section 13(a) or Section 15(d) of the Exchange Act and at least two public programs with investment objectives similar to those of the registrant that had three years of operations after investments of 90% of the amount available for investment. In addition, at least two of the public offerings for programs with investment objectives to those of the registrant must have closed in the previous three years.”