Different Types of Fees and How They Impact Shareholders – Part 2
October 28, 2016 | by Beth Glavosek | Blue Vault
The following descriptions and definitions can help both financial advisors and investors alike to understand the various fees that impact shareholders in nontraded REITs, from the initial public offering of common shares until the full-liquidity event.
These fees can be classified in three categories: Upfront, Ongoing and/or Portfolio-Related, and Full-Cycle Related.
In this blog post, we’ll look at the Ongoing and/or Portfolio-Related fees that shareholders may experience depending on the product offering and share class purchased.
Annual Distribution/Shareholder Servicing Fee
These fees comprise the “trail” or that portion of the dealer manager fee that is paid over time rather than at the time the shares are sold in the public offering. For Class T shares, these are most commonly at the rate of 1.00% annually and will cease when the total underwriting expenses from all sources reaches 10.00%, upon a listing or merger, or within a specified time period following the issuance of the shares. For the 23 Class T offerings open as of September 2016, 19 had trailing shareholder servicing fees of 1.00%, two had rates of 0.80% annualized, and one each had rates of 0.85% and 1.125% annualized.
Acquisition and Origination Fees
A percentage of the cost of investments acquired or originated by the REIT, including in some cases the origination of loans, as well as significant capital expenditures for the development, construction or improvement of real estate property. For the effective REITs as of September 2016, these fees ranged from 0.00% to 4.50%, depending upon asset type and investment style of the REIT.
Development Services/Development Oversight Services Fees
Paid to the Advisor as a development management fee equal to 1.00% up to 5.00% of the cost to develop, construct or improve any real property assets. This fee is currently in the fee structure for 15 share classes among effective REITs as of September 2016.
Estimated Acquisition Expenses
Reimbursement of customary acquisition and origination expenses (including expenses relating to potential investments that the REIT does not close), such as legal fees and expenses (including fees of independent contractor in-house counsel that are not employees of the advisor), costs of due diligence (including, as necessary, updated appraisals, surveys and environmental site assessments), travel and communications expenses, accounting fees and expenses and other closing costs and miscellaneous expenses relating to the acquisition or origination of real estate properties and real estate-related investments. For the effective REITs as of September 2016, these fees ranged from 0.50% to 6.00%, with a median of 1.00%.
Financing Coordination Fees
A percentage of the amount made available by a loan or line of credit either directly or indirectly related to the acquisition of properties or other permitted investments. There were eight effective REIT programs as of September 2016 that had these fees, ranging from 0.25% to 1.00%. This can also apply to a refinancing of a loan.
Asset Management Fees
A monthly fee equal to one-twelfth of 0.50% to 1.60% of the cost of the REIT’s investments, less any debt secured by or attributable to its investments. The cost of real property investments is calculated as the amount paid or allocated to acquire the real property, plus capital improvements, construction or other improvements to the property, excluding acquisition fees paid to the advisor. All effective REITs as of September 2016 had asset management fees, with a median rate of 1.00% annually.
Property Management Fees
A monthly fee equal to a percentage of the rent, on a property by property basis, consistent with current market rates, payable and actually collected for the month, for those properties subject to a property management agreement with the sponsor or advisor. For 15 of the effective REIT share classes as of September 2016, these fees ranged from less than 2.00% to 6.00% per year.
Development Services and Construction Management Fees
There are 15 REITs that had development services and/or construction management fees, ranging from 4.00% to 6.00% of the total cost of the work done. These should be based upon the usual and customary fees for such services in the geographic area of the property.
Property Management Oversight Fees
Paid to the advisor for oversight of a 3rd party’s management of a property. Only six of the 30 effective REITs as of September 2016 had this fee in their prospectuses, and the rates are usually at 1.00% annually.
In upcoming blog posts, we’ll look at additional topics surrounding fees that affect the nontraded REIT and BDC industry.
Other posts in this series:
Blue Vault helps me to stay well informed on the financial status of both open and closed nontraded REITs and BDCs, so that I can help my clients better understand the product, before they make the decision to invest and after.