Blue Vault Fee Study: Executive Summary
October 19, 2022 | Blue Vault
• There were 16 effective Open Nontraded REIT offerings as of June 30, 2022. Of those, 14 were perpetual-life REITs, one was a continuous offering, selling daily or monthly NAV products, and one was life-cycle REIT. Ares Industrial Real Estate Income Trust positions itself as a continuous offering, planning to have a full-cycle event at some point in the future.
• None of the effective REITs offered a single common share class. Open REITs had a total of 11 different share classes including 5 Class A, 12 Class D, 14 Class I, 2 Class M, 11 Class S, 15 Class T, 3 Class E share, and 2 Class M-I share categories. Class A-I, Class T2, and Class W were offered by one REIT. Many of the different share classes differed from REIT to REIT in name only or very slightly in other ways such as minimum investments and qualified investor types.
• Continuous offerings of multiple share classes are now the typical nontraded REIT offering, more common now than the life cycle REITs that have a fixed offering closing date. Distribution channels for the largest continuous offerings now include wirehouses, which have raised the majority of new capital in the nontraded REIT sector since Blackstone REIT broke escrow in 2017 year.
• One important change in nontraded REIT offerings since 2014 has been the introduction of Class T shares with trailing dealer manager fees, with upfront selling commissions down from 7% to 3%, and trailing shareholder service fees ranging from 0.25% to 1.0% paid from shareholder distributions annually over four or more years until total underwriting expenses reach 10% of gross offering proceeds.
• Only two REITs from the current sample pay acquisition fees to their Advisors (Hartman vREIT XXI, Inc. and Strategic Storage Trust VI, Inc.).
• There were just three REITs that paid disposition fees as of the end of the second quarter of 2022 whereas eight REITs were paying disposition fees at the end of 2019.
• While front loads (selling commissions plus dealer manager fees) have decreased for many share classes, resulting in greater percentages of offering proceeds available immediately for investment, net proceeds after expenses which include deductions for Other Organization & Offering Expenses will depend on both the mix of different share classes sold in the offerings and the success of the offering in raising the authorized total proceeds.
• The most important fees in their impact on average shareholder returns from the nontraded REIT program are Asset Management Fees or Advisory Fees that are 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 a liquidity event.
• Many types of fees that are listed in an offering prospectus will have uncertain impacts on shareholders because:
— fees such as property management, development services, construction management will depend on the way the REIT develops and manages its properties, either internally or via third-party contracts.
— fees such as disposition fees will depend upon the nature of the REIT’s liquidity-producing events, whether through property sales, listings or mergers.
— market-based fees cannot be predicted and may vary by each transaction.
— performance-based fees will only be paid if the non-compounded returns to shareholders exceed a specified hurdle rate at the time of a full-cycle event, or for daily and monthly NAV products, quarterly or annually based upon calculated shareholder returns each period.
— A prospectus may give a range for a particular fee or an upper limit for the fee that depends upon the specifics of a given transaction or property.
— Discounts for volume purchases of shares are available in most programs, resulting in slightly lower average upfront fees as a percentage of the offering proceeds.
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