United States: Blind Pool REIT IPOs: Real Estate Sponsors Are Getting Ready To Jump Back In – Goodwin Procter LLP

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

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

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

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

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

  • the risks resulting from the offering proceeds not being
    committed to specific properties (including investors’
    inability to evaluate [1] the manner in which the proceeds will be
    invested and [2] the economic merits of specific real estate

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

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.

E. Management

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

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

  • 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

G. Description of Real Estate

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

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

  • 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

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.

A. Compensation

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.

3. Distributions

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

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.

Next Steps

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. Please contact your regular Goodwin attorney or any of
the individuals listed below if we may be of assistance.


1. 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

2. 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.

3. 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

4. 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.”

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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