All posts by laurie

An Introduction to Interval Funds

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An Introduction to Interval Funds

November 29, 2017 | Beth Glavosek | Blue Vault

Investment on Pocket Watch Face. Time Concept.

Closed-end interval funds are a relatively new way for investors to participate in alternative investments like real estate. But what are they, and how are they different from other real estate offerings?

Interval funds are SEC-registered closed-end funds that provide continuous offerings of their securities. They usually price and sell their shares daily, but do not list them on an exchange. What does this mean from a layperson’s perspective? In general, it means that investors can access the real estate and other alternative asset classes offered traditionally by closed-end funds without committing their money for an undetermined amount of time.

Interval funds are basically very similar to mutual funds, but with a few differences.

What’s in Common with Mutual Funds

Interval funds offer shareholders and financial professionals the transparency, valuations, and investor protection elements of the 1940 Act. Some of the common elements between mutual funds and closed-end interval funds are:

  • Continuous offering of shares. Interval funds are similar to mutual funds in that they continuously offer their shares at a price based on net asset value (NAV). Unlike closed-end funds and other unlisted securities, there is not a single IPO price, and there are not specific periods in which shares are offered for the public to buy.
  • Regular valuations. Interval funds offer daily pricing that is reflective of regular valuations going on behind the scenes, much like mutual funds.
  • Not traded on exchanges. Both are not traded on stock exchanges. That means that you can buy and sell shares directly from the mutual fund or interval fund company without having to go to a stock exchange (like the NYSE).

Differences from Mutual Funds

  • Allocations to illiquid holdings. Mutual funds are NOT allowed to hold more than 15% of their assets in investments that cannot be readily liquidated or sold. This measure is intended to maximize investors’ ability to get in and out of the fund. However, closed-end interval funds are allowed more latitude in this area and may allocate much more to assets that cannot be readily sold.
  • The ability to sell shares daily. While mutual fund holders can buy and sell their shares on a daily basis as much as they like, most interval funds restrict buying and selling to a quarterly basis (some only offer to repurchase semi-annually or annually), and there are limits to selling shares.

In upcoming posts, we’ll look at some other characteristics of closed-end interval funds and why they may make sense for some of today’s investors.

SEC Filings Part 2: A Closer Look at Some Key Issues

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SEC Filings Part 2: A Closer Look at Some Key Issues

November 15, 2017 | by Beth Glavosek | Blue Vault

Börsenkurse als Grafik und Tabelle mit Lupe und Taschenrechner im Panoramaformat

The Securities and Exchange Commission (SEC) aims to make it as easy as possible for investors to fully research companies before they invest in them. You can use the SEC’s EDGAR database to find answers to specific questions and concerns you may have. Here are just a few areas that investors may like to research.

Executive compensation

If you’re curious about how a company’s officers are compensated, the SEC’s Executive Compensation page describes the types of executive compensation and where disclosures are made in SEC filings. According to the SEC, the easiest place to look up information on executive pay is the annual proxy statement.

Insider trading

The SEC explains that insider trading can actually include both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. For more information about this type of insider trading and the reports insiders must file, the SEC has prepared an overview of Forms 3, 4 and 5.

Conflicts of interest

Conflicts of interest are required to be disclosed in company prospectuses or prospectus supplements.

Legal proceedings and lawsuits

If there are lawsuits that may materially affect an investment, the SEC requires companies to report such information on its Form 10-K in Item 3 – “Legal Proceedings.”

Bankruptcy

Companies must disclose bankruptcy filings via Form 8-K. Subsequent 8-Ks may disclose any reorganization plans and the date on which the company intends to emerge from bankruptcy. Investors should look at the reorganization plan for information about whether the common stock of the company may be canceled.

For additional guidance from the SEC on how to read company filings, check out their Beginner’s Guide to Financial Statements.

SEC Filings Part 1: What are All of Those Forms?

Nontraded REIT Industry Review – LifeStage™ Summary

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Nontraded REIT Industry Review – LifeStage™ Summary

January 12, 2017 | by Laurie Brescia | Blue Vault

Nontraded REIT Industry Review LifeStage Tables Q3 2016

In each quarter’s Nontraded REIT Industry Review you will find… a host of Nontraded REIT Industry data and charts preceding the individual REIT pages.

Some of the data is in the “LifeStage™ Summary”.

In the Q3 2016 Review:

  • Five REITs were Emerging
  • Eleven REITs were Growth
  • Two REITs were StabilizingLifeStages_Image
  • Thirty-seven REITs were Maturing
  • Ten REITs were Liquidating

In the review there is a table for each LifeStage listing each REIT in that LifeStage and the following facts:

  • Total Assets (in $ Millions)
  • Cash to Total Assets Ratio
  • Number of Properties/Investments
  • Current Distribution Yield
  • Debt to Total Assets Ratio
  • YTD FFO Payout Ratio
  • YTD MFFO Payout Ratio Blue Vault
  • YTD Interest Coverage Ratio

For each of these metrics Blue Vault also calculates the Median, Average, Minimum, and Maximum and lists them at the end of each table. 

See pages 20-26 of the Nontraded REIT Industry Review, Third Quarter 2016, for details such as this, as well as assets under management, average yield, number of funds that are currently raising capital, and more.

 

Nontraded BDCs Post Annualized Return of 14.7%

Nontraded BDCs Post Annualized Return of 14.7%

December 9, 2016 | Blue Vault

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Nontraded BDCs this year have produced a median annualized return of 14.7%. Through the end of September 2016, BDCs have performed exceptionally well despite the slowest capital raise in four years.

“Unfortunately, many investors are missing out on these returns because financial advisors have backed off of nontraded fund sales in the wake of recent regulations. Not only have BDCs been able to produce a consistent distribution income for investors, but most BDCs have seen significant increases in their net asset values,” says Jared Schneider, a Managing Partner at Blue Vault.

The unannualized median return for the nine months ended September 30, 2016 was 11.05%, and at Blue Vault we expect to see further gains through the end of the year. You can find out more about individual BDC performance in the Q3 2016 Nontraded BDC Industry Review, which will be released the week of December 12.

Click Here

All 3rd Quarter 2016 Nontraded BDC Review individual pages have been posted to Blue Vault’s website.

  • Business Development Corporation of America
  • Carey Credit Income Fund
  • CION Investment Corporation
  • Corporate Capital Trust II
  • Corporate Capital Trust, Inc.
  • FS Energy & Power Fund
  • FS Investment Corporation II
  • FS Investment Corporation III
  • FS Investment Corporation IV
  • HMS Income Fund, Inc.
  • NexPoint Capital, Inc.
  • Sierra Income Corporation
  • Terra Income Fund 6, Inc.

You may access these pages by logging on to the Blue Vault website and clicking on “Subscriber-Only Research,”Nontraded Business Development Companies”, then “BDC Individual Reports” links on the toolbar at the top of the home page. Scroll down to 2016, then 2016 Q3.

Blue Vault research is available to paid Subscribers only. If you do not have a current subscription, call Dawn McDaniel at 877-256-2304, Option 2, to see how you can get access today!

 

Understanding Asset Management Fees

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Understanding Asset Management Fees

December 1, 2016 | by Beth Glavosek | Blue Vault

Asset management fees (also known as Advisory Fees) are ongoing fees charged to investors in nontraded REIT programs. These fees accrue monthly or quarterly and are based on the sponsor’s definition of asset totals.

Börsenkurse mit Lupe und Taschenrechner

While Blue Vault’s recent Fee Study found that there are at least 12 different methods used by current nontraded REIT offerings to calculate their asset management fees, fees are typically calculated as a percentage of the following four general categories:

  1. Aggregate Net Asset Value (NAV)
  2. Gross Assets or Average Invested Assets
  3. Cost of Investments Less Debt
  4. Aggregate Market Value

In a few cases, there’s also a performance component. Once a target level of assets under management is reached, the fee becomes a higher percentage of the value of investments.

All effective REIT offerings as of September 2016 had asset management fees, with a median rate of 1.00% annually. Blue Vault found that these fees have the largest impact on average shareholder returns of any of the various fees paid by the REIT to its sponsor because they’re assessed each quarter for the life of the REIT program and can increase with the value of the REIT’s portfolio. When they are calculated on the basis of the REIT’s total assets, the effect on shareholder wealth is magnified as the REIT utilizes leverage.

For example, a 1.00% annual fee on the assets of a REIT that has financed the assets with 50% debt has an annual impact on shareholder equity of 2.00%, having a larger impact on shareholder returns than any other single type of fee or expense.

In short, asset management fees are the most important fees with regard to impact on average shareholder returns because they’re paid continually over the life of the REIT. These fees have much greater relative impact on shareholder returns than upfront fees, transaction fees, or fees paid at the liquidity event.


Other Blog Posts in this series:

The Future of Acquisition and Disposition Fees

Different Types of Fees and How They Impact Shareholders – Part 3

Different Types of Fees and How They Impact Shareholders – Part 2

Different Types of Fees and How They Impact Shareholders

What’s Up (or Down) with Fees?

From the Vault:

Which current nontraded REIT program recently eliminated acquisition, disposition and financing coordination fees?

How do asset management fee rates based upon gross asset values present a potential conflict of interest for nontraded REIT sponsors?

Which current nontraded REIT offerings have asset management fees which combine an annual fixed component rate plus an incentive rate based on annual performance?


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Introducing Blue Vault’s New Nontraded REIT Fee Study.
Learn more about this study and how you can access it here.

ICYMI

In Case You Missed It…

November 25, 2016

On November 9th, Blue Vault released it’s first Nontraded REIT Fee Study. In the weeks leading up to and during the time of release, Blogs were posted to compliment this new study as well some timely commentary on current events.

Here is a look at those posts:

Nontraded REIT Fees

Current Events

Look for future Blue Vault Blog posts in upcoming NewsWires. Blue Vault delivers the most relevant alternative investment industry news, including nontraded REIT, BDC, Closed-End Fund, and private offerings, right to your mailbox.

Curious about Secondary Markets?

Curious about Secondary Markets?

November 18, 2016 | by Beth Glavosek | Blue Vault

Law gavel with dollars on wooden table background, closeup

One of the aspects of nontraded investments that investors must understand is the issue of illiquidity. That is, the intention of most nontraded programs is that investors will commit their money to the long-term and be able to give up access to their funds temporarily in exchange for a potential pay-off when the investment goes full-cycle.

However, there certainly can be cases in which stockholders wish to sell their shares prior to the conclusion of an investment program. While most nontraded REITs have share redemption programs, these programs may have been suspended due to liquidity issues or restricted to redemption requests filed due to death, disability or other hardships. One alternative to share redemption programs is to sell shares on what’s known as the secondary market.

One outlet that has emerged to offer nontraded REIT shareholders a more competitive market for their shares before a full-cycle event is consummated is the “online auction” website. These sites provide a forum for matching buyers and sellers of nontraded REIT (NTR) shares. In an earlier Insights article, Blue Vault listed more details about this concept and contact information for several of these sites that are available to meet this need.

However, there are some points that advisors and investors may wish to understand before they embark down this path. Here are some common questions and answers.

Q: What should investors know about secondary markets for nontraded products? 

A: There are transaction costs involved, usually as a percentage of the transactions. Also, buyers have to qualify just like they would if they were buying NTR shares from a Broker-Dealer; therefore, minimum net worth, income requirements, and portfolio concentration limits apply.

Q: What is the downside of picking up shares on the secondary markets at a price below current offering price vs. buying the shares from the sponsor? 

A: One downside would be that the shares at the auction sites are offered in “lots” or a specific number of shares. That is, if an investor wants to invest $10,000 or $100,000 in a specific product, there may not be any transactions available because one lot could be for $25,000 worth of shares (approximately) and another is for $11,000 worth of shares, and none of the auctions available match the desired investment amount.

Another downside is the limited availability of NTR shares. Usually, even the most active auction sites have only five or six different NTR share lots available at a time from only five or six NTRs. Those that are most available can be REITs that either have had negative performance over time or are approaching liquidity events, so they are not going to be “long-term” investments. These aspects eliminate most investors from being interested and make these auction markets more open to speculation. Participants are hoping to capture a shorter-term gain by buying low and receiving a capital gain when the liquidity events hopefully materialize.

One of the reasons that more advisors don’t recommend secondary market shares for clients is that these markets do not meet the objectives of long-term investors looking for steady income.

For more information about secondary markets, check out Blue Vault’s Insight articles, exclusively for Subscribers.

The Future of Acquisition and Disposition Fees

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The Future of Acquisition and Disposition Fees

November 16, 2016 | by Beth Glavosek | Blue Vault

Equity Raised

Acquisition and disposition fees have long been a part of many nontraded REIT sponsors’ programs. The fees presumably cover costs related to acquisition and disposition activity. One sponsor, for example, states in its prospectus that it will pay its advisor a disposition fee if the advisor or its affiliates “provide a substantial amount of services in connection with the sale of properties.” In addition to compensating the advisor for services, the fee serves as a reimbursement for any real estate commissions incurred.

Perspectives differ among sponsors, some of whom charge these fees and some of whom have elected to lower or discontinue them. Inland Residential Properties Trust, Inc. announced earlier this year that it would completely eliminate acquisition, disposition, and coordination fees that cover financing activities. Such actions may put pressure on other sponsors to follow suit, but it’s not clear the actual impact that such fees have on shareholder returns.

Blue Vault’s Fee Study looked in-depth at sponsor fees and found that some sponsors may have lowered upfront fees in an effort to drive sales; however, they have raised or already have higher asset management fees, which have a much larger impact on shareholders because they are charged annually for the life of the program and are based in many cases on total assets rather than just shareholders’ equity. For example, a 1.00% annual fee on the assets of a REIT that has financed the assets with 50% debt has an annual impact on shareholder equity of 2.00%, reducing shareholder returns by much more over the life of the program than any other type of fee or expense.

The bottom line: Blue Vault believes that acquisition and other upfront fees can certainly raise the cost of the REIT program and possibly reduce net returns to shareholders over the life of the program. However, in our analysis, choosing asset investments that appreciate or generate higher net operating income over the life of the investment has much more of an impact than any upfront fees. Thinking this way, if a sponsor finds an investment for the REIT and purchases it for a good price, locking in a profitable opportunity, the 1.00% fee would be a very minor tradeoff.

More blog posts from this series:

 

 

What’s Next for the DOL Fiduciary Rule?

What’s Next for the DOL Fiduciary Rule?

October 11, 2016 | by Beth Glavosek | Blue Vault

Featured News Image_0000_Rules_01

With the results of the U.S. election in, there’s already speculation about the future of the Department of Labor (DOL) fiduciary rule that was finalized last year. Some are defending the rule, while others are hoping it will be repealed or changed.

The rule, expected to take effect in April 2017, now stands in question. “It is extremely likely the DOL fiduciary rule will not go into effect as planned in April 2017,” says Edward Mills, a policy analyst at investment bank FBR Capital Markets. Mr. Mills said Mr. Trump would most likely delay or block the rule through legislation, “most likely through a rider to an appropriations bill.” (source: Wall Street Journal)

Investment News reports that some stakeholders, like the Financial Services Institute, are hopeful for change. “We stand ready to work with [Mr. Trump’s] administration in ensuring Main Street Americans have access to objective and affordable financial advice as they save for a dignified retirement, pay for their children’s education and help care for aging parents,” FSI president and chief executive Dale Brown said in a statement.

However, others have expressed caution. In a statement to Trust Advisor, Pamela Sandy, the 2016 president of the Financial Planning Association says, “A rule is much more difficult to undo than a piece of legislation, so for now nothing changes. While it’s too early to fully understand the intentions of President-Elect Trump and the incoming Congress with regard to the rule, our hope is he will continue the work of the current administration to safeguard the futures of millions of American retirees.”

Different Types of Fees and How They Impact Shareholders – Part 3

Different Types of Fees and How They Impact Shareholders – Part 3

November 3, 2016 | by Beth Glavosek | Blue Vault

The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.

Close-up Of Businessman Placing Coin Over Stack Of Coins At Desk

These fees can be classified in three categories: Upfront, Ongoing and/or Portfolio-Related, and Full-Cycle Related.

In this blog post, we’ll look at the Full-Cycle Related fees that shareholders may experience depending on the product offering and share class purchased.

Disposition Fees or Commissions

These are fees paid to the advisor for “substantial assistance in the sale of assets,” which may include sale of a single asset or a portfolio sale, merger, or business combination transaction. The fee is based upon the contract sales price of the assets sold, including mortgage-backed securities. The fees may be on a sliding scale, with a lower percentage for higher contract sales prices.

For every share class among the effective REITs as of September 2016, these fees ranged from 0.00% to 3.00%, with a median of 1.50%.

Subordinated Performance Fees

These fees are intended to give sponsors an incentive to maximize shareholder returns over the full life cycle of the nontraded REIT program. They are typically subject to a “hurdle rate” or minimum average shareholder return (from 5% to 8% for the effective REITs as of September 2016.)

A “preferred return” kicks in after common stockholders have received a noncompounded return on the gross investment amount above the hurdle rate. The noncompounded return can be delivered in any form of distributions, including a return of capital. Once the hurdle rate is achieved, the advisor is entitled to receive a percentage of the net cash flows from continuing operations, net sales proceeds, net financing proceeds or other. The percentage of the subordinated performance fee ranges from 10% to 25% for the effective REITs as of September 2016.

In order for this fee to apply, the REIT will be in the liquidation stage, selling some or all of its assets, or otherwise liquidating its portfolio via listing or merger, to give shareholders the noncompounded “preferred return.”

Subordinated Incentive Fee/Incentive Plan Compensation

One REIT program lists this fee, which is based upon the market value of common stock upon a listing or merger.  For this REIT, the advisor receives a subordinated incentive fee of 15% of the return over and above a cumulative, noncompounded return above 6.0% per year to shareholders. Four other REITs have incentive plans involving restricted common share awards.

Subordinated Distribution Due Upon Termination of Advisory Agreement

For seven offerings of effective REITs as of September 2016, the advisor is entitled to receive a similar incentive fee when the advisory agreement is terminated or not renewed of 15% of the amount over and above the preferred return rate as defined in the subordinated incentive fee/incentive plan compensation above.

Subordinated Incentive Listing Distribution

For 14 offerings of effective REITs as of September 2016, the advisor is entitled to receive a listing incentive fee of 15% if the REIT’s lists its common shares on a national exchange for an amount over and above the preferred return. This rate is defined as the noncompounded return to shareholders in excess of a hurdle rate based upon the market value of the listed shares plus distributions over the life of the REIT.

Subordinated Distribution Due Upon Extraordinary Transaction

Similar to the subordinated distribution due to listing, this fee is to be paid to the advisor upon a merger or liquidation and will be calculated as a percentage (15%) of the excess return to common shareholders above the preferred return. This subordinated distribution is in the prospectuses of five offerings among those effective REITs as of September 2016.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.


Previous Posts in this series on Nontraded REIT Fees

Different Types of Fees and How They Impact Shareholders – Part 2

Different Types of Fees and How They Impact Shareholders

Economies of Scale in Nontraded REIT Offerings and Effects of Fee Discounts

What’s Up (or Down) with Fees?


Different Types of Fees and How They Impact Shareholders – Part 2

Different Types of Fees and How They Impact Shareholders – Part 2

October 28, 2016 | by Beth Glavosek | Blue Vault

stack coins, rising curve, symbol photo for increasing profits and rising costs

The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.

These fees can be classified in three categories: Upfront, Ongoing and/or Portfolio-Related, and Full-Cycle Related.

In this blog post, we’ll look at the Ongoing and/or Portfolio-Related fees that shareholders may experience depending on the product offering and share class purchased.

Annual Distribution/Shareholder Servicing Fee

These fees comprise the “trail” or that portion of the dealer manager fee that is paid over time rather than at the time the shares are sold in the public offering. For Class T shares, these are most commonly at the rate of 1.00% annually and will cease when the total underwriting expenses from all sources reaches 10.00%, upon a listing or merger, or within a specified time period following the issuance of the shares. For the 23 Class T offerings open as of September 2016, 19 had trailing shareholder servicing fees of 1.00%, two had rates of 0.80% annualized, and one each had rates of 0.85% and 1.125% annualized.

Acquisition and Origination Fees

A percentage of the cost of investments acquired or originated by the REIT, including in some cases the origination of loans, as well as significant capital expenditures for the development, construction or improvement of real estate property. For the effective REITs as of September 2016, these fees ranged from 0.00% to 4.50%, depending upon asset type and investment style of the REIT.

Development Services/Development Oversight Services Fees

Paid to the Advisor as a development management fee equal to 1.00% up to 5.00% of the cost to develop, construct or improve any real property assets. This fee is currently in the fee structure for 15 share classes among effective REITs as of September 2016.

Estimated Acquisition Expenses

Reimbursement of customary acquisition and origination expenses (including expenses relating to potential investments that the REIT does not close), such as legal fees and expenses (including fees of independent contractor in-house counsel that are not employees of the advisor), costs of due diligence (including, as necessary, updated appraisals, surveys and environmental site assessments), travel and communications expenses, accounting fees and expenses and other closing costs and miscellaneous expenses relating to the acquisition or origination of real estate properties and real estate-related investments. For the effective REITs as of September 2016, these fees ranged from 0.50% to 6.00%, with a median of 1.00%.

Financing Coordination Fees

A percentage of the amount made available by a loan or line of credit either directly or indirectly related to the acquisition of properties or other permitted investments. There were eight effective REIT programs as of September 2016 that had these fees, ranging from 0.25% to 1.00%. This can also apply to a refinancing of a loan.

Asset Management Fees

A monthly fee equal to one-twelfth of 0.50% to 1.60% of the cost of the REIT’s investments, less any debt secured by or attributable to its investments. The cost of real property investments is calculated as the amount paid or allocated to acquire the real property, plus capital improvements, construction or other improvements to the property, excluding acquisition fees paid to the advisor. All effective REITs as of September 2016 had asset management fees, with a median rate of 1.00% annually.

Property Management Fees

A monthly fee equal to a percentage of the rent, on a property by property basis, consistent with current market rates, payable and actually collected for the month, for those properties subject to a property management agreement with the sponsor or advisor. For 15 of the effective REIT share classes as of September 2016, these fees ranged from less than 2.00% to 6.00% per year.

Development Services and Construction Management Fees

There are 15 REITs that had development services and/or construction management fees, ranging from 4.00% to 6.00% of the total cost of the work done. These should be based upon the usual and customary fees for such services in the geographic area of the property.

Property Management Oversight Fees

Paid to the advisor for oversight of a 3rd party’s management of a property. Only six of the 30 effective REITs as of September 2016 had this fee in their prospectuses, and the rates are usually at 1.00% annually.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

Other posts in this series:

Different Types of Fees and How They Impact Shareholders

Different Types of Fees and How They Impact Shareholders

October 20, 2016 | by Beth Glavosek | Blue Vault

Money, finance, business concept abstract background

The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.

These fees can be classified in three categories: Upfront, Portfolio-Related, and Full-Cycle Related.

In this blog post, we’ll look at the Upfront Fees that shareholders may experience depending on the product offering and share class purchased.

Key Term: Total Front Load

The sum of selling commissions, dealer manager fees and organization and other offering expenses. For the open nontraded REIT offerings as of September 2016, the total front loads ranged from 0.60% to 15.0%, depending upon the share class and the total proceeds raised in the offering. 

Selling Commissions – The portion of the offering price paid to Broker Dealers who sell shares in the public offering. The selling commission can range from as low as 0.00% to as high as 7.0%. In the prospectus for each offering, look for the section that describes “Use of Proceeds,” which will typically estimate the percentage of both the minimum offering and the maximum offering that will be paid in selling commissions.

Dealer Manager Fees – Fees paid to the dealer manager from the offering proceeds. The dealer manager may “reallow” a portion of these fees to participating broker dealers based upon their sales volume and other factors. These fees, which range from 0.00% to 3.00%, will not apply to shares sold via the REIT’s Dividend Reinvestment Plan (DRIP).  For the 30 nontraded REIT open offerings as of September 30, 2016, dealer manager fees ranged from 0.00% to 5.00%, with a median for all share classes of 2.00%.

Offerings that include Class T shares will also pay a “trailing” Annual Distribution/Shareholder Servicing Fee to the dealer manager, typically at the rate of 1.0% per year, for up to four to six years, bringing the total dealer manager fees paid for Class T shares over that time period to 7.0% or 7.5%. The trailing fees are discontinued when the total selling compensation and expenses reaches 10% of gross offering proceeds.

Organization & Other Offering Expenses – Reimbursed organization and other offering expenses paid by the REIT to its advisor and dealer manager. The most common estimate for these fees is 1.0% of the offering proceeds, but the actual amounts will vary depending upon the success of the offering.

In no cases will the sum of selling commissions, dealer manager fees, and other organization and offering expenses incurred exceed 15% of the aggregate gross proceeds from the primary offering and its DRIP.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

Other blogs in this series:

What’s Up (or Down) with Fees?


Blue Vault will publish its first ever Nontraded REIT Fee Study at the end of October. 

The first Blue Vault Nontraded REIT Fees Study provides in-depth analysis of all fees associated with nontraded REIT investments currently offered, including definitions of the fees, how the fees impact shareholder returns, and a complete data set with each of the REIT’s share class fees as well as ranges, averages, and medians for the industry. 

This study is the first of its kind to be a comprehensive view of the fee structures of nontraded REIT offerings, and the first to analyze the impacts of those fees on eventual shareholder returns. As the industry evolves with new share classes and class-specific expense allocations, such as the shareholder servicing fees assessed to Class T shares, it is more important than ever to understand how fees are calculated, assessed and will impact shareholders. The study provides both a glossary of terms as well as extensive tables and appendices with specific examples from the prospectuses of nontraded REITs. It also examines historical trends from closed offerings to identify how current offerings compare to those of the past.

 

What’s Up (or Down) with Fees?

What’s Up (or Down) with Fees?

October 12, 2016 | by Beth Glavosek | Blue Vault

The introduction of Class T shares has had an interesting impact on the nontraded REIT industry from a sales perspective and distribution yield perspective.

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As we’ve discussed previously, the T share was introduced in response to investor concerns about upfront fees. It reduces the upfront load traditionally paid on nontraded REIT Class A shares and instead pays a trailing commission (sometimes called a shareholder servicing fee) over time. This structure is thought to put more investor money “in the ground” upfront, while the trailing commissions are paid from returns generated by the REITs’ performance.

Blue Vault’s newest Fee Study¹ looked at data from the 30 effective nontraded REITs raising funds as of September 30, 2016. Of those, all but one offered common shares classified as Class A shares or had only one class of common shares. Four offered “perpetual” offerings that have a daily NAV feature. Three of those daily NAV REITs had share-class specific expenses or fees that reduced the effective distribution yields for their Class A shares by 0.50% annualized.

The Fee Study also revealed some key findings about T shares:

  • The impact of Class T shares on effective nontraded REIT offerings has been dramatic, as 22 of the 30 open offerings now include Class T shares.
  • This class of shares has trailing shareholder servicing fees ranging from a low of 0.80% annualized to as high as 1.125% annualized, which effectively reduces the distribution yields for Class T shares by that amount relative to the same REIT’s Class A distribution yields.
  • These trailing commissions or fees are expected to continue for up to four or five years after the Class T shares are sold, depending upon when total underwriting compensation for an offering reaches 10% of gross offering proceeds. At that point, the trailing fees will be eliminated.
  • The trailing commissions or shareholder servicing fees are based upon the initial offering prices or daily NAVs of shares (once reported.) After the limit on total underwriting compensation is reached and the shareholder servicing fees are eliminated, the Class T shares will be equivalent to Class A shares with regard to distributions per share.

The initial offering prices of Class T shares in most effective offerings are set such that, after selling commissions, dealer manager fees, and other offering expenses are deducted, the net proceeds to the REIT are the same for Class A and Class T shares. Still, the lower upfront fees for Class T shares results in a higher percentage of the Class T offering proceeds being available for investment.

In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.

¹Blue Vault will publish its first ever Nontraded REIT Fee Study at the end of October. 

The first Blue Vault Nontraded REIT Fees Study provides in-depth analysis of all fees associated with nontraded REIT investments currently offered, including definitions of the fees, how the fees impact shareholder returns, and a complete data set with each of the REIT’s share class fees as well as ranges, averages, and medians for the industry. 

This study is the first of its kind to be a comprehensive view of the fee structures of nontraded REIT offerings, and the first to analyze the impacts of those fees on eventual shareholder returns. As the industry evolves with new share classes and class-specific expense allocations, such as the shareholder servicing fees assessed to Class T shares, it is more important than ever to understand how fees are calculated, assessed and will impact shareholders. The study provides both a glossary of terms as well as extensive tables and appendices with specific examples from the prospectuses of nontraded REITs. It also examines historical trends from closed offerings to identify how current offerings compare to those of the past.

 

Blue Vault’s Second Quarter Report – What’s New?

Blue Vault’s Second Quarter Report – What’s New?

File Aug 30, 10 57 50 AMBlue Vault has released its Second Quarter 2016 Nontraded REIT Industry Review. Here are some key findings from our research:

  • Sales by nontraded REITs totaled an estimated $1.09 billion, down from the $2.35 billion recorded in Q1 2016. This number is more than 57% below the average quarterly totals for 2015 of $2.54 billion.
  • At the current pace of capital-raising, the industry may not exceed $5 billion in sales in 2016.
  • There were 25 nontraded REITs raising capital during Q2 2016. There were no new full-cycle events consummated in the second quarter.
  • As the industry continues to evolve, 27 nontraded REITs offered multiple share classes compared to just six REITs as recently as 2014.

New in the Second Quarter: We began posting individual REIT reports from the Quarterly Review to our website as soon as possible after the REITs’ SEC filings, well before all of the data was compiled. This helped to shorten the time that subscribers waited to receive our analyses. Blue Vault continues to work to improve our processes to shorten the release dates and publishing cycle as much as possible for the benefit of our subscribers.Blue Vault remains committed to providing continuing performance data, standardized analysis, and complete transparency on every nontraded REIT. Additionally, we’re committed to expanding our information services to include detailed educational content on nontraded REITs, nontraded BDCs, closed-end funds, and private placements.

Current Subscribers can click here to go directly to the Second Quarter 2016 Nontraded REIT Review, just click on the plus next to 2016.

Read more about what is contained in this quarter’s report, read our cover letter and view the table of contents by clicking below.

         

 

Essential Documents in the Due Diligence Process

Essential Documents in the Due Diligence Process

September 23, 2016 | by Beth Glavosek and Alan Royalty | Blue Vault and Blue Vault Due Diligence

businessman is analyzing through magnifying glass contract and

In the world of investments, due diligence describes the duty of care and review to be exercised in connection with evaluating public offerings of securities.[1]

With regard to alternative investments, it’s incumbent upon Independent Broker Dealers to thoroughly evaluate alternative investment offerings before making them available to financial advisors for their clients. In fact, the Financial Industry Regulatory Authority (FINRA) states that, “A Broker Dealer has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends.”

Collecting key documents is an important part of the due diligence process. The following is a list of common documents requested and reviewed:

  • Corporate documents, such as certificates of incorporation or bylaws
  • Financial statements
  • Market studies/reports on the sponsor’s product
  • Key tangibles, such as mortgages or title documents
  • Contracts, leases, agreements, and details on employee benefits plans and pensions
  • Insurance policies
  • Key information from sponsor management, such as financial and ownership information and litigation matters

Other key pieces of information will need to be gathered from outside sources, such as credit or background checks, title and lien searches, and certificates of good standing.

This list is by no means exhaustive. Any document that contributes to Broker Dealers being able to make complete, informed, and responsible decisions about the sponsor’s alternative investment offering should be collected and reviewed – ideally by a third party due diligence firm that will prepare an independent investment research report.

[1] Stanley Foster Reed and Alexandra Reed Lajoux. The Art of M&A, A Merger Acquisition Buyout Guide (Third Edition).

Recent blog posts in this series:

Getting Started with the Due Diligence Process

Getting Started with the Due Diligence Process

September 16, 2016 | by Beth Glavosek, in collaboration with Alan Royalty and Scott Brown | Blue Vault and Blue Vault Due Diligence Services

businessman is analyzing through magnifying glass contract and

In a previous blog post, we highlighted the importance of using due diligence to make informed decisions. For Independent Broker Dealers in particular, due diligence is a critical function in the investment selection process.

So, let’s say that there’s a new alternative investment product offering from a product sponsor. How do Broker Dealers get started with the due diligence process of evaluating the offering, and what are the first steps?

  1. Broker Dealers initiate the process. When Broker Dealers are interested in considering a particular alternative investment product offering, they require the product sponsor to utilize a third-party due diligence firm like Blue Vault Due Diligence Services as a tool to assist them in evaluating the sponsored investment product. In some cases, the Broker Dealers engage the third-party due diligence firm directly, while in other cases, a product sponsor engages the firm to perform due diligence for the benefit of Broker Dealers.
  2. The process usually kicks off with an introductory conference call. During this call, a Broker Dealer and/or a third-party due diligence firm may review a list of documents or information requested from the sponsor’s due diligence team. This call usually takes place a few weeks before the Broker Dealer and/or third-party due diligence firm is planning to make an on-site visit to the sponsor. At this time, a third-party firm can provide valuable assistance in determining what information to ask for and collecting the data requested.
  3. The on-site visit will then be scheduled. It’s critical to make sure that the sponsor’s executives and key personnel will be available and accessible during this visit.
  4. After the on-site visit is complete, it’s time for the third-party firm to prepare a due diligence report for the Broker Dealers. Blue Vault Due Diligence Services performs this function for its Broker Dealer clients. There will, undoubtedly, be follow-up questions and additional information requests for the sponsor as the report is drafted, and the third-party due diligence firm streamlines this process.
  5. The last step is issuing the completed due diligence report. Blue Vault Due Diligence Services typically schedules a conference call with the sponsor’s due diligence team once the report is ready to be finalized. The call reviews the report’s executive summary, strengths and weaknesses, and particular points with the sponsor’s due diligence team in order to ensure factual accuracy.

Once this call has been completed, any necessary resulting changes or edits are made to the due diligence report, and it is ready for issuance to Broker Dealer clients.

In future posts, we’ll discuss other aspects of the due diligence process and best practices that are mutually beneficial to the Broker Dealer, product sponsor, and third-party due diligence relationship.


Other blog posts in this series:

Due Diligence Basics, posted on September 9, 2016

 

Due Diligence Basics


Due Diligence Basics

The first in a series of blog posts and other educational content produced as a collaboration with Blue Vault Staff writer, Beth Glavosek, and Blue Vault Due Diligence partners, Alan Royalty and Scott Brown.

Due Diligence on Ring Binder. Blured, Toned Image.

September 9, 2016 | By Beth Glavosek | Blue Vault

According to Merriam-Webster, the term ‘due diligence’ has been used since at least the 15th century to mean putting forth a requisite effort to gather information in a prudent fashion. “Doing your due diligence” means that you’ve put reasonable care into avoiding harm when making an important decision.

Through the years, due diligence has taken on special significance in legal and business contexts, as the term applies to research one might perform before engaging in a financial transaction or making a purchase.

In the world of investments, due diligence is particularly necessary in order to gain confidence in the stability and integrity of a product sponsor and its offerings. In securities law, due diligence describes the duty of care and review to be exercised in connection with evaluating public offerings of securities.[1] For example, the officers, directors, underwriters, and other leadership of Independent Broker Dealers perform due diligence on product offerings they’re considering making available to investors.

Authors Stanley Foster Reed and Alexandra Reed Lajoux offer a rather poetic description of the importance of due diligence:

“Due diligence – the search to discover hidden defects and risks – restrains the desire to see the best in each other…and it should. To ensure a lasting union, due diligence must arrive on the scene early and linger long, getting behind the reflected surface of things, looking for signs of trouble, asking always ‘What if?’ Without such deep, dark searching, there can be no true light or clarity that can help all parties move forward with mutual confidence from idea to reality.”

However, with the proliferation of today’s investment choices, it can be daunting to perform in-depth analysis of the industry. Independent Broker Dealers often utilize a third-party due diligence firm as a tool to assist them in evaluating product sponsors of alternative investment offerings,” says Alan Royalty, a Managing Partner for Blue Vault Due Diligence Services (BVDDS). “An unbiased investment research report produced by a third-party due diligence firm like BVDDS is an invaluable, time-saving resource that can provide great peace of mind as these busy firms are gathering information on many different products.”

In upcoming blog posts, we’ll take a closer look at which documents should be requested and examined during due diligence for a product sponsor, as well as best practices and processes.

[1] Stanley Foster Reed and Alexandra Reed Lajoux. The Art of M&A, A Merger Acquisition Buyout Guide (Third Edition).

A Closer Look at Today’s 1031 Exchanges – Part 2

A Closer Look at Today’s 1031 Exchanges – Part 2

August 24th, 2016 | by Beth Glavosek | Blue Vault

hand pushing share button with global networking concept

 

In last week’s post, we discussed how 1031 exchanges can benefit investors looking to defer a sizable tax burden on appreciated investment property. 1031s allow taxes on gains to be deferred when the proceeds from the original property are used to purchase “like-kind” property.

So, let’s dive deeper into investor suitability for a 1031 exchange and what the pros and cons may be.

First, 1031s are not limited to wealthy investors, and net worth is not necessarily a contributing factor to one’s ability to participate in a 1031 exchange. “Non-accredited investors can participate in 1031 exchanges, but they are limited to fee-simple (i.e., direct) alternatives,” says Jean-Louis Guinchard, a Senior Managing Principal with San Diego-based Silver Portal Capital. “Accredited investors, however, can acquire beneficial interests in one or more Delaware Statutory Trusts (DSTs) that qualify as replacement property for a 1031 exchange.”

There are several benefits to investing in a single DST or multiple DSTs. First, one can defer potential gains from the sale of a single property and diversify into multiple investment properties with multiple tenants and in different geographies. For example, you could deploy money received from the sale of an investment property into a DST that holds multifamily, retail, office, or industrial assets. Guinchard says that “Like-Kind” does not mean replacing the original property with one from the same asset class (i.e., retail for retail).

Second, one can diversify any gains from the initial property among different DSTs. “Assuming that you have a $1 million gain from your original property, you can reinvest the gross proceeds in one DST, or you could place $250,000 in four different DSTs and still get the same tax benefits,” Guinchard says.

Third, strong sponsors of DSTs can obtain better lease financing terms than individuals can get on their own, and they can asset and property manage these assets more efficiently as well.

Lastly, the investment returns will likely generate a higher yield than other investment alternatives in today’s market, especially comparable high quality fixed income products like corporate bonds.

Investors must use a Qualified Intermediary to comply with legal requirements regarding the exchange of properties. “Those seeking to effect a 1031 exchange must identify replacement property in 45 days and close on the purchase of replacement property in 180 days,” explains Guinchard. “One should definitely plan ahead if he or she knows that they are going to sell a property with sizable investment gains because they only have a limited time to identify and deploy the proceeds and must follow three very specific rules if one is going to take advantage of the tax benefits of a 1031 exchange.” Guinchard notes that many people may find it easy to identify replacement property within 45 days, but closing on one or all of those properties within the 180 day time frame is easier said than done, particularly in a heated real estate market.

As far as drawbacks to DSTs, Guinchard says, “There is currently no active secondary market for beneficial interests, so liquidity may be a concern for a few individuals. Most individuals should be prepared to hold these assets for 7 to 10 years.” Some people also have the impression that the fees associated with DSTs are relatively high. Guinchard encourages individuals to compare the costs of fee simple alternatives on an apples-to-apples basis with those of DSTs, which he believes will dispel much of this myth.

In all, 1031s can be an attractive option for those looking to defer taxes on a sizable gain in real estate holdings, those who could benefit from monthly cash distributions, and those looking for a competent manager to oversee and manage all of the day-to-day issues associated with these properties. Guinchard strongly recommends that individuals enlist the advice of qualified financial professionals, tax consultants, accountants, and attorneys to weigh the pros and cons of each potential solution.

Silver Portal Capital is a leading placement firm in the field of 1031 exchanges and replacement property alternatives. Its clientele includes several of the nation’s leading RIA and accounting firms, tax professionals, qualified intermediaries and attorneys who work with real estate and accredited investors.


August Blog Series on Private Placements

 

 

 

A Closer Look at Today’s 1031 Exchanges – Part 1

A Closer Look at Today’s 1031 Exchanges – Part 1

August 19, 2016 | by Beth Glavosek | Blue Vault

Editor’s note: Last week, we reported that most 1031s are structured as a Tenants-in-Common (TIC) arrangement. TICs were popular at one time; however, the Delaware Statutory Trust (DST) is a more favored structure today.

As we discussed in a previous blog post, 1031 exchanges can be helpful when selling an investment property in order to avoid a sizable tax burden. 1031s allow taxes on gains to be deferred when the proceeds from the original property are used to purchase “like-kind” property.

There’s reason to believe that the 1031 is growing in popularity. According to Jean-Louis Guinchard, a Senior Managing Principal with San Diego-based Silver Portal Capital, several demographic trends are contributing to renewed interest in 1031s.

“Americans are aging and living longer, and an investment that can provide stable, predictable income can be very attractive,” he explains. “Quite a few people, particularly those in gateway cities such as New York, Los Angeles, San Francisco and Boston, face significant real estate appreciation on properties they purchased long ago. The cost basis in these properties is likely relatively low and the capital gains could be very high. Unless they are willing to pay a substantial tax bill, an option they should consider includes entering into a 1031 exchange, then reinvesting the proceeds from the sale in a Delaware Statutory Trust or DST.”

Guinchard notes that by using a 1031 exchange and reinvesting the proceeds in a DST, these investors could receive certain benefits including, among others: 1) a beneficial interest in a professionally managed and typically a higher quality property than most individuals could acquire on their own; 2) the tax benefit derived from depreciation and other non-cash operating expenses on the improvements; 3) tax deferral on state and federal capital gains and depreciation recapture; 4) geographic, asset class and tenant diversification; 5) monthly or quarterly cash distributions; and 6) the potential for meaningful tax-equivalent yields. Distributions are, essentially, paid to the holders of beneficial interests from the building’s rent after operating expenses and debt repayment and principal amortization are deducted.

The pitfalls of the legacy TIC structure contributed to a dip in 1031s’ popularity. Guinchard maintains that the more investor-friendly structure of a DST from a legitimate and experienced sponsor merits serious consideration for those looking to effectively defer real estate gains.

“TICs had several factors working against them,” he says. “First, many TICs were syndicated to investors by unscrupulous and poorly capitalized sponsors who went out of business or disappeared when the cycle rolled. Secondly, TICs allow for up to 35 investors to participate in the ownership of a property. In order for any material decisions to be made, all 35 owners have to agree unanimously, which poses significant challenges. Lastly, debt placed on most properties was typically fully recourse to the investors, meaning that they were individually responsible for the repayment of their respective interest in the underlying property or properties. This adversely affected investors during the downturn, especially amid falling property values.”

Guinchard maintains that the concept of shared economy – pooling funds to own larger and higher quality properties – is still valid. “A DST eliminates many of the weaknesses of TIC structure. First and foremost, a competent and experienced trustee makes all decisions instead of the holders of the beneficial interests, and unanimous consent among all investors is no longer required. Second, debt is recourse to the DST, not the individual investors,” he says. “Third, restrictions are placed on sponsors to ensure that the beneficial interests of a DST are treated as qualified property for purposes of Internal Revenue Code Section 1031 and a DST. By definition, the trustee may not have the power to accept contributions from other investors after the offering is closed, enter into new leases or renegotiate the current lease, renegotiate the terms of existing loans or borrow any new funds, nor sell the properties and use the proceeds to acquire other properties. Equally as important, the trustee must distribute all cash on a current basis and invest cash held between distributions in high quality instruments. All of this inures to the benefit of the investors.”

In next week’s post, we’ll talk about 1031 suitability, its pros and cons, and the potential benefits to a certain class of investors.

Silver Portal Capital is a leading placement firm in the field of 1031 exchanges. Its clientele includes 1031 product sponsors, accounting firms, tax professionals, and attorneys who work with accredited investors.


August Blog Series on Private Placements

1031 Exchanges – What are They and How Do They Work?

1031 Exchanges – What are They and How Do They Work?

Part two in a series on private placements.

August 09, 2016 | by Beth Glavosek | Blue Vault

Businessman touching financial dashboard with key performance in

1031 exchanges can be helpful for people selling a piece of business or investment property. If they expect to sell the property for more than they paid (their cost basis), they will face capital gains taxes on their gains. 1031s allow these taxes to be deferred when the original property is exchanged for a property of “like-kind” value.

A bit of history: 1031 exchanges are named after Internal Revenue Code Section 1031 and are also known as ‘like-kind exchanges.’ Created as a provision of the Revenue Act of 1921, the like-kind exchange resulted from Congress’s decisions about how to treat capital gains taxes. According to the U.S. Department of the Treasury, Congress recognized that the dramatic increase in tax rates on capital gains during the first World War hampered the ability to purchase a replacement property. Since that time, Congress has allowed these exchanges in order to defer capital gains and has only made modest changes in the rules through the years.

Over time, the definition of eligible exchanges has been expanded, and like-kind exchanges of real estate have grown to involve third-party qualified intermediaries. However, both the original property and the replacement property must be used for business or for investment. 1031s cannot be executed for personal property like primary residences or second homes.

Most 1031s are structured as a Tenants in Common (TIC) arrangement. With Tenants in Common, each owner owns a share of the property – these shares can be of unequal size and can be freely sold to other owners. TICs are often sponsored and administered by professional real estate companies, which gives individual investors the opportunity to pool their funds, qualify for a higher level of financing, buy larger-scale properties than they could on their own, and take advantage of professional property management.

These investors not only can defer what could be a significant tax bill; they also can potentially receive stable cash flow from the replacement property.

According to the IRS, it’s important to note that when the investor’s interests in the replacement property are ultimately sold (not as part of another exchange), the original deferred gains plus any additional gains from the replacement property are subject to tax.

In future posts, we’ll look at why 1031s have been popular at times with investors, while falling out of favor at other times.


August Blog Series on Private Placements

Brushing Up on Private Placements

Brushing Up on Private Placements

August 3, 2016 | by Beth Glavosek | Blue Vault

File photo of the U.S. Securities and Exchange Commission logo hangs on a wall at the SEC headquarters in WashingtonAlthough private investments into companies have existed for hundreds of years, the Securities Act of 1933 set the rules for modern-day private placements. Depending on net worth and risk tolerance, private placements can be a good choice for investors seeking capital growth and tax advantages.

According to the Securities & Exchange Commission (SEC), private placements are securities offerings exempt from registration with the SEC. Generally speaking, private placements are not subject to the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private placements are intended to raise funds from investors with a relatively high net worth.

You will often hear of private placements, especially in the broker/dealer world, referred to as Reg D offerings. Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.

Reg D offerings may be sold to an unlimited number of accredited investors. An individual will be considered an accredited investor if he or she:

  • – Has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year,  OR
  • – Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence).

Non-accredited investors may also participate in the offering if they are financially sophisticated and have sufficient knowledge and experience in financial and business matters to evaluate the investment.

Reg A and Reg A+ are other types of private placements that allow smaller companies to raise capital from qualified individual investors. They provide exemption from registration for smaller issuers of securities.

Not surprisingly, FINRA and the SEC caution investors to tread carefully into private placement territory. However, certain investors wanting to take advantage of tax benefits may consider such offerings. Product sponsor Inland offers an overview of why private placements can make sense for certain investors.

Are private placements making a comeback? We’ll look into them further in future blog posts.


August Blog Series on Private Placements

Sales of T Shares May be Bright Spot in Nontraded REIT Market

Sales of T Shares May be Bright Spot in Nontraded REIT Market

Share Classes Blog Series – Part Four

July 27, 2016 | By Beth Glavosek | Blue Vault

It’s no secret that nontraded REIT sales have slowly tapered off since hitting a high of $6.5 billion in the third quarter of 2013. In the first quarter of this year, $1.4 billion in investor proceeds was raised – a 39% decrease from the last quarter of 2015 in which $2.3 billion was raised.

 

Data from Laurie's tabs raw JS Rev. 2

 

While June’s sales at approximately $340 million were better than May’s at nearly $300 million[1], the industry will need to explore new avenues for reaching investors in today’s highly charged regulatory environment.

As we’ve discussed previously, the T share will play a significant role in how nontraded products are sold to new investors. T shares reduce the upfront load traditionally paid on nontraded REIT A shares and instead pay a trailing commission over time. One advantage to the T share commission structure is that more of the investor’s funds are available to the REIT to put “in the ground” in the form of real estate investments, and the trailing portion of commissions may be funded by the REIT’s operating cash flows.

According to Blue Vault research, this idea is gaining traction. In September 2015, for example, sales of nontraded REIT A shares were approximately $466 million, while T shares were only $26 million. In the nine months since, T shares have taken on a greater proportion of total sales. In April, A share sales were around $255 million, while T shares were $136 million. By June, A share sales had declined to $133 million, but T shares held relatively steady at $125 million.

The T share is just one example of how the industry continues to evolve and adapt to changing regulatory and investor needs.

[1] Source: Blue Vault Partners Research

Transparency & Liquidity in the Nontraded Space: What’s Hot, What’s Not

 

 


Transparency & Liquidity in the Nontraded Space:
What’s Hot, What’s Not

Part three in our month-long blog series on REIT Share Classes.

July 20, 2016 | by Beth Glavosek | Blue Vault

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In last week’s post, we talked about how nontraded REIT and BDC sponsors have introduced the T share in response to regulators’ requirements.

The T share addresses the past concern that clients’ account statements only reflected the share price paid, not any costs taken off the top. In addition to a better understanding of the impact of fees, T shares are expected to offer greater visibility into actual share values through more frequent valuations.

However, two other nontraded variants – the Daily NAV REIT and the interval fund – were also introduced over the past decade in an effort to address liquidity concerns.  Where are they now?

As of December 31, 2015, Blue Vault noted that there were five nontraded REITs that provided daily valuations and enhanced liquidity features. These five Daily NAV REITs had raised an estimated $973 million since their inception – only 1.5% of equity raised from all active nontraded REITs as of December 31, 2015. Of the five, one announced its intention to liquidate.

So, in an era of investors asking for more visibility and transparency into share values, why haven’t these Daily NAV REITs raised more money?

Stacy Chitty, Managing Partner for Blue Vault, says, “It’s a complicated question with a multifaceted answer. Most advisors would rather continue to use the traditional IndustryWordsArtboard 1real estate play with less liquidity, if they still have that choice. To them, real estate investing is a 100% diversification strategy, and liquidity falls low on the priority spectrum because of that strategy. One can’t have both. In contrast, shares being valued every day and a structure that provides more liquidity has the opposite effect. There are advantages and disadvantages to both. And sometimes, it just takes time for people to learn and become comfortable with any new way of buying and selling.”

Interval funds have also been touted as a means of providing liquidity in nontraded investments. These funds provide a mix of institutional-quality real estate assets with public real estate securities. Investors have the option of redeeming a percentage of their shares at the end of each quarter, which provides some measure of liquidity.

Earlier this year, Kevin Gannon of industry research firm Robert A. Stanger & Co. predicted a renewed interest in Daily NAV and interval funds, in addition to T shares. He believes that, “Interval funds are here to stay.” In an in-depth look at interval funds, the Alternative & Direct Investment Securities Association (ADISA) also cited Stanger research in its Spring Alternative Investments Quarterly publication, concluding that with 22 active interval funds on the market and 13 in new registration, interval funds seem to only be gaining in popularity.

Product sponsor Resource Real Estate seems to agree. In a white paper on interval funds, the company supports the conclusion that they are leading to new ways for advisors and their clients to access alternative investments. By replicating the benefits of institutional real estate and offering a structure that allows adaptation to an evolving regulatory landscape, interval funds can open up alternatives to a wider audience of investors than ever before.

In conclusion, Jared Schneider, Managing Partner for Blue Vault, states, “It is certainly difficult to invest in illiquid assets like real estate, private credit, and private equity, and yet maintain liquidity for investors. I believe there will be a bifurcation in the market going forward. For one, a significant number of advisors and their clients will value liquidity over returns, and that is why Daily NAV and interval funds will flourish. On the other hand, some advisors and clients will appreciate the returns that come with sacrificing liquidity. The less liquid funds could come in the form of a similar structure to today’s nontraded REITs and BDCs or in the form of private placements.”

Dot Your I’s and Cross Your T’s – Get Ready for the Next Generation of Share Classes

Dot Your I’s and Cross Your T’s – Get Ready for the Next Generation of Share Classes

201607_ABC-[Converted] July 13, 2016 – Part Two in a month long series of Share Class blog posts.

This week, we’re taking a closer look at some of the more specialized share classes available through alternative investments.

June’s sales data revealed that sales of nontraded REIT T shares are catching up to A share sales. A shares clocked in at approximately $132.6 million for the month, while T shares weren’t far behind at $125.3 million.

But, just what are T shares, and how do they compete with A shares? By definition, A shares charge a load or sales charge upfront. With nontraded REITs, this means that less money is invested initially “in the ground” than the client may think due to sales charges. In the past, nontraded REITs were criticized because the client only saw the stable share price they paid into the REIT reflected on their statements. This price didn’t necessarily reflect the amount actually invested on behalf of clients into properties.

Once FINRA began requiring that REIT sponsors show how much of an effect the upfront load can have, REIT sponsors introduced the T share. The T share replaces the front-end load with trailing commissions. Clients pay a lower share price upfront, but their distributions going forward will be subject to ongoing distribution fees. The T share is intended to give the client more visibility into how much he or she has invested “in the ground” so that performance can be better measured going forward.

Critics say that T shares are simply spreading the upfront fee out over the course of the investment. Proponents say that the new shares are better for investors over the long haul by making sure more of their money goes into the investment initially, while commissions are taken gradually.

It’s worth noting that FINRA limits dealer manager and distribution fees charged on an ongoing basis to 10% of the gross proceeds of a primary offering. However, share class-specific expenses will still be applied to distributions.

I shares are low-cost institutional shares available to investors who can invest higher upfront capital. They’re available to institutional clients like pension plans, bank trusts, retirement plans, foundations, endowments, and certain financial intermediaries. I shares are also structured so that advisors affiliated with registered investment adviser firms (RIAs) can offer them as a fee-only service. I shares may be an attractive option for individual investors who can take advantage of their availability through their RIA advisor.

In upcoming blog posts, we’ll look at some other share class options and examine their popularity and success among investors.

Understanding the World of Share Classes

Understanding the World of Share Classes

Part One in a Four-Part Series on Share Classes

201607_ABC-[Converted]From ABC to Z, the variety of share classes in the investment world seems to have proliferated across the entire alphabet.

The differences in share classes really boil down to one thing: fees and expenses that provide compensation for those involved in sponsoring and selling investment products.

Despite a nearly universal desire among investors to minimize fees and avoid costs as much as possible, it’s entirely reasonable for those involved in selling investments to make money. It’s a business, after all, and even regulators understand the need for advisors to be compensated for what they do.

The suitable share class choice for an investor will depend upon his or her time horizon, the amount of the investment, and possibly whether the investor needs investment advice or not. For example, a “do-it-yourself” type of investor may not wish to pay fees intended to cover advisor guidance.

The following is an overview of many of the share class types found in the marketplace.

A shares

A front-end load (sales charge) is taken upfront, and it reduces the initial amount invested in a fund. However, over the long-term, A shares are generally regarded as most cost-effective. This share class offers the opportunity for discounts at breakpoints, and 12b-1 fees[1] are lower.

B shares

A back-end load (sales charge) is applied when shares are sold. Even though the investor doesn’t pay sales charges upfront, he or she may be subject to higher expense ratios each year.

C shares

Also known as a “level” load class of shares, there’s no front-end sales charge; however, penalties may apply if shares are sold before holding them for one year, and yearly expense ratios may be significantly higher – a feature that’s unattractive to long-term investors because of the higher potential expenses over time.

D shares

These are no-load shares often sold through large mutual fund houses that sell directly to the public. While these shares may feature no loads and lower expenses, transaction charges may apply.

Other types

F shares are sold exclusively through financial professionals. Fees are asset-based, and some carry no 12b-1 fees.

I shares are low-cost institutional shares available to investors who can invest higher upfront capital. They’re typically sold through fee-only advisors.

M shares are similar to C shares.

R shares are created exclusively for retirement plans offered through employers and 401(k)s. Costs vary, but there’s typically no load, and some carry 12b-1 fees.

S shares are no-load share classes, but there may be higher ongoing distribution fees. They may be converted to A shares after a certain holding period.

T shares are offered as an opportunity for investors to take advantage of a lower share price upfront due to lower upfront fees and expenses; however, their distributions going forward will be lower than A class shares due to higher ongoing distribution fees.

Y shares are institutional shares sold directly from a sponsor to an institution.

Z shares are similar to S shares in that they are no-load; however, these are typically older shares that are closed to new investors.

As you can see, the world of investments is growing more complex as fund sponsors create offerings that respond to investor and regulator needs and expectations. Check back soon for a closer look at some of the more specialized share classes available through alternative investments.

Sources and further reading:

Christine Benz, “Making Sense of Share-Class Alphabet Soup,” Morningstar.

Jack Hough, “Beware Fund Share-Class Fees,” The Wall Street Journal.

Introduction and Overview of 40 Act Liquid Alternative Funds,” Citi Prime Finance.

 

[1] 12b-1 fees are charged to cover a fund’s marketing and distribution expenses.