Principal R/E Fund Makes Another Distribution

Just 30 days after its last distribution to holders of its frozen real estate fund, the Principal has made another payment.

According to an announcement to participant/holders of the fund, on Friday, June 18, 2010, available payments were announced to partially satisfy approximately 29% of the value of transaction requests subject to the fund’s withdrawal limitation, which was imposed on September 26, 2008.   

According to a participant Q&A document, the most recent payment was made available for two primary reasons: first, the successful closing of sale transactions and second, the availability of liquidity with which to make an additional distribution.  In the announcement, Principal notes that as of Tuesday, June 15, $379 million of assets were sold in the second quarter of 2010. After transaction costs and repayment of debt, cash available from the sales totalled approximately $179 million.

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Limitation Origins

On September 26, 2008, Principal imposed a withdrawal freeze, closing the Property Account to withdrawals.  Market turmoil, compounded by an already challenging real estate market, resulted in a marked slowdown in the sale of commercial real estate assets, and while the Principal noted that “transaction volume in the broader commercial real estate market has improved in recent months, it is still well below historical levels”.  Principal also noted that this is the only time in the 28-year history of the Separate Account that a contractual Withdrawal Limitation has been applied. 

The Principal U.S. Property Separate Account, managed by Principal Real Estate Investors, LLC, is unlike most other retirement plan investment options because it invests primarily in owned real estate rather than securities; holdings that generally include developed commercial properties such as warehouses, office buildings, apartments, and retail properties.  “Unlike public securities sold on an exchange, real estate assets are sold in private transactions,” according to a Principal Q&A document, which goes on to note that, “Due to the nature of these transactions, the Separate Account may be subject to adverse market conditions, most notably the purchaser’s ability to secure financing, which may delay or prevent the sale”.

For its part, Principal has described the move to “apply a contractual limitation which delays the payment of withdrawal requests and provides for payment of such requests on a pro rata basis (a “Queue”) as cash becomes available for distribution, as determined by Principal Life,” as being in the best interests of fund shareholders. 

Current Distribution

As with previous distributions, this payment was made on a pro-rata basis, based on unit values at the time of payment, and was applied to pending transaction requests (generally transfers and non-hardship distributions) made prior to 3 p.m. CT on Thursday, June 17, 2010.  Among the transaction requests not subject to the withdrawal limitation are payments requested due to death, disability, or retirement (though some conditions apply), ADP/ACP refunds, minimum required distributions, life insurance premiums, full plan terminations, and hardship withdrawals (for both active and terminated participants, depending on plan provisions).

Explaining the process, the Principal notice said that “The net proceeds of second quarter dispositions through June 15, 2010, were combined with other sources of cash flow and utilized to fund Separate Account obligations during the quarter including operational requirements of the properties and forward commitment obligations. After funding those obligations, the Separate Account had remaining cash and access to relatively inexpensive borrowing on its line of credit. Both the return generated from cash and the borrowing rate on the line of credit are lower than the expected return generated by the properties in the portfolio. Therefore, in the best interest of all investors, the Separate Account made another payment available to those investors whose withdrawal requests are subject to the Limitation.”

As has been the case with prior distributions, certain de minimis amounts, generally those valued less than $300 on Thursday, June 17, 2010, were satisfied in full. 

Previous distributions were made on May 14, 2010 (approximately 18% of the value of transaction requests paid - see Principal Real Estate Fund Makes Another Payment), and January 29, 2010 (payments made to partially satisfy approximately 13% of the value of transaction requests).  In what it described as “the best interest of all Separate Account participants”, Principal noted that distributions were generally made on a pro-rata basis, and that there was no distribution on a first-in first-out basis.

Schwab Offers Help with Cost Basis Reporting Changes

As part of a rollout of tools and resources to help advisers transition to new cost basis reporting requirements, Charles Schwab announced a new report to help advisers plan for the change.

Schwab noted in a press release that the Emergency Economic Stabilization Act of 2008 mandates for the first time that custodians and broker-dealers must report the adjusted cost basis of sold securities to advisers’ clients and to the Internal Revenue Service on Form 1099-B. The requirements will be phased in over three years, beginning on January 1, 2011, with equities acquired and sold on or after this date.  

The Schwab Market Knowledge Tools report, “Preparing for the New Cost Basis Legislation,” reviews the changes in the reporting of adjusted cost basis of sold securities, highlighting the key changes that begin in 2011.   

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According to the press release the report recommends steps advisers can take now to improve clients’ experience:

  • Create a communications plan. Fallout from any investor confusion around the legislation may land with advisory firms. Actively reaching out to clients and offering guidance can reduce anxiety that may arise. Schwab will also be communicating directly with investors later in 2010 about the upcoming changes.
  • Anticipate client needs. Certain clients may want to access cost basis information for all securities, regardless of whether they are covered by the legislation or not, while others may want access to the information periodically. Firms that understand how Schwab and other custodians are reporting stand to create a smoother experience for their clients.
  • Evaluate the impact on their back office. Advisers should evaluate their portfolio management systems and ensure they are in synch with the custodian’s data. Advisers should also stay up to date on Schwab’s plans for complying with the legislation, including technology upgrades that may impact workflow.

On June 22, 2010, Schwab Advisor Services will host the latest in a series of Webcasts to help advisers understand the cost basis legislation and what it means for their firms titled “An Advisor’s Perspective on Cost Basis Legislation.” Beginning at 1 p.m. PT / 4 p.m. ET, Schwab’s Brian Keil will lead an hour-long presentation with two advisers and conclude with an interactive question-and-answer session with industry experts and Schwab representatives.   

Advisers who want to attend the June 22 Webcast or to access earlier Webcasts in the series should visit the cost basis resource section of Schwab Advisor Center, Schwab’s website for its RIA clients.   

Additionally, Schwab Advisor Services will offer a special session, “Cost Basis Legislation and its Impact on Your Firm,” at its upcoming SOLUTIONS workshops across the country this July and August. The session will detail Schwab’s tools and offer practical guidance on dealing with workflow changes that may be necessary to align with Schwab’s cost basis data reporting system.  

Schwab Advisor Services said it is planning to introduce technology enhancements to enable advisers to more easily stay in synch with Schwab’s cost basis data, including the ability to download and import Schwab’s cost basis data into their portfolio management system and online functionality to provide cost basis instructions on equity trades via Schwab’s online trading platform.

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