Different Types of Fees and How They Impact Shareholders
October 20, 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.
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.
Blue Vault has been an important partner to Geneos in providing us and our advisors pertinent information about non-traded products and the industry as a whole. The annual BD Summit is a valuable due diligence experience for any broker dealer."