I received an email from Walton Elm Creel describing a transaction that is taking place. Basically, a Real Estate Investment Trust is being formed as a subsidiary of Walton Elm Creek Ranch Development LP, the units of the Elm creek Ranch project offering that were designed for qualified fund investors. The REIT is being formed in order to shield the qualified investors from Unrelated Business Taxable Income (UBTI). All of this was a part of the original business plan, and outlined in the PPM. Most importantly, investors do not need to take any action.
Qualifying as a REIT requires a minimum number (100) of shareholders. The partnership is to be the sole common shareholder, so the REIT is distributing one preferred share to each of the largest investors in the development partnership. The preferred share has a par value of $500 and carries a cumulative, non-compounded preferred dividend of 6%. The investors that are receiving the preferred shares will have their capital accounts in the partnership reduced by $500. The remainder of theses investors' capital, as well as the capital of those investors that are not receiving preferred shares, will continue to accrue their 10.5% preferred return. Thus, while the investors receiving preferred shares will acquire an advantage in terms of preference in return of capital, that capital is but a small portion of the total capital invested (<1%), and the preferred return is 450 basis points less than the preferred return on the remaining capital.
Walton has prepared a letter to investors which was attached to the email. While pretty readable, it still has some thick language plus it includes a copy of the partnership agreement. Advisors can count on those clients who are invested in the development fund to call for support. As I see it the two biggest points to make are 1) This is all a part of the business plan, and is taking place to safeguard the tax advantages of qualified plan investing, and 2) no action by investors is necessary.
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