Inland Announces Major Reduction in Fees
August 10, 2016 | by Beth Glavosek | Blue Vault
Inland Real Estate Investment Corporation announced yesterday that it would completely eliminate “below the line” real estate transaction fees in the interest of improving overall returns for investors and eliminating conflicts of interest on all currently offered and future nontraded REITs.
These transaction fees include acquisition, disposition, and coordination fees that cover financing activities. Inland’s new fee structure has been simplified to two components: a basic advisor management fee and a back-end performance incentive.
The company’s decision to reduce fees is only in part a response to FINRA’s 15-02 ruling that mandates clear disclosure of the impact of fees on investor statements. “The valuation requirement of FINRA 15-02 magnifies the effects of below the line transaction fees making the effect of these fees felt by the investor and financial advisor sooner.,” explains Rod Curtis, Senior Vice President of Research and Product Development for Inland. “It can take a while for a REIT to overcome these fees, and they represent money that’s not invested in properties earning a return for investors.”
Curtis says that Inland’s performance incentive will only kick in if certain conditions are met. “We will do well when the investor does well.” he states.
Blue Vault’s Stacy Chitty added that “this move by Inland is not only a step in the right direction, but a significant step in the right direction. Inland should be applauded for showing the leadership to make this change at this time, and I believe it will be positively reflected in their total returns to their investors.”
Curtis notes that acquisition fees average 2.25% in the industry, eliminating that fee alone could save investors millions of dollars, put more money into actual real estate, and improve returns. “Hypothetically, let’s say you have a $100 million real estate asset with 50% leverage. At that debt level, a 2.25% acquisition fee would cause a direct hit of 4.5% on equity. Our research indicates that eliminating transaction fees could add an extra 1.50% in returns each year due to the compounding nature of invested capital,” he says.
Curtis also notes that the nontraded REIT industry is experiencing significant shifts right now much like the mutual fund industry has faced fee changes over the past 20 years. “We think that is a real opportunity to shape the future of the industry. By providing a lean fee structure, we can bring an institutional-quality model to individual investors. And we hope to provide better-performing REITs with higher returns as a result.”
Blue Vault has prepared a study of all nontraded REIT fees which will be released in September. The “Fee Study” will be the most comprehensive reporting on fees ever produced in the industry. The study will be provided at no cost to Blue Vault subscribers as well as advisors of Blue Vault’s Broker Dealer Partners. To find out more about the exclusive Broker Dealer Partnership Program, contact Brooke Heffington, Director of Partnership Strategy at Brooke.Heffington@BlueVaultPartners.com.Go Back
Blue Vault is just what advisors need to size up the different offerings in the nontraded REIT market. Just as importantly, it’s what the industry needs to encourage best practices among REITs.