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What are Some ‘Cons’ to Owning Nontraded REITs?

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What are Some ‘Cons’ to Owning Nontraded REITs?

May 19, 2017 | by Beth Glavosek | Blue Vault

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We’ve been looking at the merits of nontraded REITs for individual investors, including the opportunity for potentially higher yields, dividend distributions, diversification, a potential inflation hedge, and owning high quality, commercial grade, professionally managed properties.

However, as with any investment, there are risks and suitability concerns. Nontraded REITs may not be for everyone. Let’s look at some considerations that investors should be aware of before buying shares of a nontraded REIT.

Illiquidity

This is perhaps one of the top concerns expressed by investors. Their money is likely to be committed to the REIT for at least seven years – the average time that it takes for a REIT to mature and consider its exit strategy. While there typically are provisions for share redemption in the event of shareholder death or disability, the expectation is that the investor will leave the money alone as the REIT builds its portfolio.

As we’ve said before, illiquidity doesn’t have to be a negative. Knowing that money in the investment is not readily available for a period of time may mitigate the impulse to trade in and out of the market when market emotions are running high. However, investors should know what they’re getting into and be prepared to leave the investment untouched for a period of time.

Market risk

Nontraded REITs can be affected by factors such as market ups and downs, supply and demand, adverse economic climates, and regulatory changes. There is the chance that when shares are eventually sold, they may be worth more or less than what was paid for them.

Fees and expenses

Nontraded REITs have come under criticism because their fee structures are more costly than less expensive investment products like no-load mutual funds. The sales load paid upfront through the purchase of A shares, for example, is used to compensate the advisor and other entities associated with the investment offering. As a result, a $10 A share may result in $8.50 or so going “in the ground” in actual real estate. It’s uncertain when the REIT will overcome this load and bring share value back to (or above) the price paid.

The fairly recent introduction of nontraded REITs with lower fees and multiple share classes that don’t charge as high of an upfront fee has somewhat mitigated these concerns.

Transparency

Unlike publicly traded REITs, nontraded REITs have historically not offered a great deal of visibility into portfolio or share value, unless the REIT has opted for a third party appraisal or valuation. However, as with the changes in fees, nontraded REITs are evolving to provide more frequent valuations, especially for those known as Daily NAV/Interval Funds. FINRA now mandates third-party appraisals of a REIT’s share net asset values within 29 months following the breaking of escrow of the public offering.

In upcoming posts, we will continue to look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.

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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.

 

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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:

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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.

 

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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.

 

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