Not So Fast, Friend: 3 Myths About Net Asset Value

November 15, 2022

If you’re a college football fan, you probably saw that Lee Corso, the popular 87-year-old former coach, recently returned to the College Gameday set. He’s back with his spunk, famous mascot picks and one-liners that make people love him.  

A common Coach Corso quip is, “Not so fast, friend!” He says this when he thinks one of his College Gameday co-hosts gets it wrong about that week’s match-up.

Alternative investment funds and real estate investment trusts (REITs) may not have an obvious link to college football. But when it comes to understanding net asset value (NAV), what’s real and what’s a myth, Coach Corso’s proclamation applies.

NAV is the value of a fund less its liabilities, divided by the number of outstanding shares. Advisors often cite the NAV when trying to convince an investor of a fund’s performance. 

We talk with a lot of financial advisors and hear a few common myths about NAVs. These three, especially, have us saying, “Not so fast!” 

Myth 1: NAV is the same as market value.

The NAV represents the amount a third party estimates you’d receive if you sold all of a fund’s investments at the same time. Market value is the price for which something can be sold.

For example, let’s say you have a non-traded REIT in your portfolio with 125 properties across the country. To arrive at the NAV, you have to sell all 125 properties at the appraised price at the same time. It sounds good in theory but very unlikely. 

Or, say you own your home and a rental property. If you decide to sell them both today, would you get the exact appraised value? Again, probably not.

Understanding the value of your investments should be easy. After all, it’s right there in black and white on your quarterly financial statement. But the figure listed on your statement isn’t necessarily what someone would pay if you sold all your shares today. 

Remember: Net asset value doesn’t equal market value. 

Myth 2: There’s a standard for how NAV is calculated. 

Typically, companies with non-traded REITs hire a third-party to determine the appraised value of their shares. The independent party usually gives a price range from lowest to highest value. A fund’s board of directors then selects the value per share to use as the NAV.

We’ve seen a fund’s NAV span $7 to $15 per share. That’s quite a gap! In another instance, a non-traded REIT used three different valuation methods in the last four years. And in one year, different assets in the fund were valued in different ways. 

Plus, we reviewed filings from two popular and widely held non-traded REITs. The fund changed the valuation method each of the last few years and assets inside the portfolios were valued using different methodologies.

It’s hard to view the calculations made in these examples as methodical.

If everyone computed NAV the same way, there would be a specific price, rather than a range. As an investor, make sure you consult your financial advisor and research how NAV is calculated for your investment. 

Myth 3: NAV is calculated at regular intervals.

Along with there not being a standard way to calculate NAV, there isn’t a guideline for how often it should be computed. In fact, the frequency depends on the type of investment. 

For non-traded REITs, NAV can be calculated at the end of a trading day, on a monthly, quarterly or even annual basis. A fund trades on updated its NAV in August 2022. Prior to that, the NAV hadn’t been calculated since May 2021. 

Life cycle REITs are different. These funds, which undergo a “life cycle” of fundraising followed by a liquidity event, don’t have a standard timeframe for calculating NAV. Then there are the funds that stopped updating NAV during the pandemic and have yet to start doing so again. 

The bottom-line: There’s not an official reporting requirement for when NAV must be calculated for non-traded REITs. As an investor, make sure you know when a fund’s NAV was computed to ensure it’s a current figure.

The next time you look at your financial statement and see the NAV for your non-traded REITs, run a play from Coach Corso’s book and say, not so fast, friend! Then talk with your financial advisor about the performance of your funds and devise a game plan for how you can call your own play and liquidate investments. 

— Lee Corso's image by Phil Ellsworth / ESPN Images

LODAS Securities, LLC Member FINRA / SIPC - LODAS Securities, LLC is a wholly subsidiary of LODAS Markets, Inc.

The information provided herein does not constitute an offer to sell securities or the solicitation of an offer to buy securities, which can only be made by the applicable offering document filed and registered with the appropriate state and/or federal regulatory agencies and sold by broker dealers authorized to do so. There is no guarantee that a market will develop for some securities, and as a result, they may remain illiquid.

Subscribe to our newsletter.

Join our monthly newsletter to hear about new products, top trades in the LODAS marketplace, and even more ways we’re providing you with liquidity on demand.