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

July 13, 2016

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.

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I have been using Blue Vault Partners for the past five years.  I have found them to be a valuable, unbiased resource when it comes to evaluating and comparing non-traded REITs.  The reports help me analyze which sponsors are doing a responsible job of managing their offerings.  This allows me to limit my REIT recommendations to only the most competitive products, and then track those REITs throughout their life cycle.

Gil Armour, CFP SagePoint Financial, Inc. February 3, 2016