Nontraded REIT cuts fee to adviser

$2.9 billion KBS REIT II won't pay compensation; other REITS taken same path

Oct 17, 2012 @ 1:06 pm

By Bruce Kelly

nontraded REIT, REIT
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Another large nontraded real estate investment trust plans to wave a heavily criticized fee tied to changes in the REIT's management.

KBS REIT II, which has $2.9 billion in total assets, in a statement on Tuesday said it would not pay an internalization fee or compensation to its adviser, KBS Capital Advisors LLC, should the REIT decide to make a transaction such as acquiring its adviser.

Over the past 10 years, REIT sponsors have consistently imposed the charge — commonly referred to as an internalization fee — when the contract between the REIT and its outside adviser expires, with the REIT then acquiring the outside adviser.

That charge, which has drawn criticism because it typically isn't fully disclosed in offering documents, has cost investors in several prominent REITs hundreds of millions of dollars.

“This announcement gives us the flexibility to choose the best liquidity event, and positions the REIT to take advantage of the changing markets and new opportunities that could maximize shareholder returns without the shareholders having to bear the burden of internalization fees,” Charles Schreiber, chief executive of KBS REIT II, said in a statement.

Other major REIT sponsors this year have said they are also forgoing such fees.

Wells Real Estate Funds Inc., one of the most prominent sponsors of nontraded REITs, said in June it was taking a pass on charging such an internalization fee for its $6.2 billion Wells REIT II.

Nicholas Schorsch, chairman and CEO of American Realty Capital, which currently sponsors five nontraded real estate securities, said recently that such internalization fees are on the wane and that American Realty Capital does not have such fees for its nontraded REITs.

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