In a move that could save investors millions of dollars, Inland Real Estate Investment Corp. said on Tuesday it was eliminating all real estate-related transaction fees for its current and future nontraded real estate investment trusts.
Acquisition fees are a separate layer of fees from the typical 12% load of the standard, full-commission nontraded REIT. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.
“We are seeing the continued evolution of this business model, so it does not surprise me that Inland is continuing to be one of the most innovative sponsors in terms of aligning theirs with shareholder interests,” said Brad Thomas, editor of Forbes Real Estate Investor, a newsletter. “Inland has a long track record of creating value in the private REIT world, and this news is a positive step in the right direction.”
One of the most prominent sponsors in the nontraded REIT industry, Inland's decision to cut real estate transaction fees comes at a time when nontraded REIT sales have fallen off a cliff. Investment bank Robert A. Stanger & Co. Inc. estimates $5 billion to $6 billion in nontraded REIT sales this year, or close to half of last year's sales of close to $10 billion.
Sales have been dampened by two key factors, according to industry executives.
First, a new rule by the Financial Industry Regulatory Authority Inc., known as 15-02, has made REIT prices more transparent to investors and thus more difficult for brokers to sell. And the coming fiduciary standard for brokers working with client retirement accounts — formally introduced in April by the Department of Labor — is also a key factor in depressing sales.
Under pressure from Finra, many nontraded REIT sponsors have begun offering a variety of share classes that reduce the upfront 7% sales commission to advisers, putting more investor cash directly into real estate and increasing the likelihood of enhancing overall returns.
According to Mitchell Sabshon, president and CEO of Inland, the firm is the first nontraded REIT sponsor to eliminate real estate transaction fees.
If a nontraded REIT eliminates acquisitions fees, which on average run more than 2% of the price of real estate the REIT purchases, the savings to a REIT with $1 billion in real estate could exceed $20 million in fees, Mr. Sabshon said.
“If that equity, instead of being paid out in fees, was levered 50%, the REIT would be able to purchase approximately $40 million in additional properties working for investors,” Mr. Sabshon said. “We think that can have a potentially significant impact on performance.”
“Eliminating these transaction-based fees, and limiting compensation to a basic business management fee and a performance-based fee earned only when a REIT's return exceeds the performance target, creates a business model that leads the nonlisted REIT industry into the future,” he said.
Inland currently has one nontraded REIT raising equity, Inland Residential Properties Trust Inc.