Letting Go of the Status Quo in REITs
September 22, 2016 | Michael Pagano | Financial Advisor IQ
Non-traded REIT companies are having a bad year. Sales of non-traded REIT investments began dropping steadily in 2014, first-time buyer purchases plateaued in 2015, and sales across the industry fell off a cliff in April 2016 when changes to Finra rules governing direct participation program statement valuations (explained in Regulatory Notice 15-02) came into effect.
Why have non-traded REIT companies seen such a dramatic decline? It’s simple. While many of these companies have repeated talking points that mention reduced fees, transparency and similar verbiage, they have failed to do the one thing that can keep regulators, plaintiffs’ attorneys and bad publicity at bay: they are failing to put investors first.
Instead, these companies are trying their hardest to maintain the status quo. Historically, the industry has feasted on fees (underwriting compensation) set at 10%, right at the upper limit Finra allows. Typically, the fees comprise a 7% selling commission and a 3% dealer manager fee. The 7% selling commission goes to the brokerage firm that sells the product to the investor, while the dealer manager fee is split between the primary distributing broker-dealer and the retail brokerage firm.