Who’s Who in Alternative Investment Offerings?
August 16, 2017 | Beth Glavosek | Blue Vault
Investors looking at prospectuses for nontraded REITs (NTRs), Business Development Companies (BDCs), and other alternative investments might see a diagram, organization chart, or other explanation of the entities involved in the offering. But, how can the reader make sense of their roles, especially if some of those entities have the same name or are the same company?
Blue Vault looked at a sampling of organization charts from five NTR offerings, noting that the Sponsor, Advisor, Property Manager and Dealer Managers are in almost all cases (4 of 5) totally owned by the Sponsor. In other words, the same people who run the Sponsor are also running the Advisor, Property Manager and Dealer Manager in those cases.
We wondered if the definitions of these roles are uniform across the industry, so we asked the Head of Due Diligence for a major NTR sponsor for some basic descriptions. The following is a “cheat sheet” of terms that he identified that might help untangle some of these legal relationships.
Sponsor: The sponsor is essentially the owner of an NTR’s External Advisor, Property Manager, and Dealer Manager. “In our case, the sponsor is a trade name (not a legal entity itself) to identify a group of affiliated companies that are involved with different activities related to our NTRs. The companies within this umbrella are all separate legal entities,” he says. He notes that most sponsors are private companies owned by individual stakeholders.
Advisor: Unless an internalization transaction has occurred, the NTR itself does not have any employees and is managed by an “external” advisor. Here are some important points to remember about the advisor:
- It’s a separate legal entity responsible for managing the NTR’s day-to-day affairs. It’s owned by the sponsor and not by the NTR itself.
- Its officers and key personnel are typically employees of the sponsor.
- It’s connected to the NTR through an advisory agreement, which can usually be terminated by either party under certain conditions.
- The fees earned by the advisor for managing the NTR (i.e., advisory, acquisition, financing, property management, leasing, disposition, performance, etc.) roll up to the sponsor since it owns the advisor.
Property Manager: NTRs acquire real estate properties that require some degree of management in order to properly maintain them. Most, if not all, NTRs have a separate legal entity responsible for managing the NTR’s properties. Some NTRs pay a separate property management fee for these services, while others receive property management services under the advisory agreement. In addition, the affiliated property manager for a few sponsors’ NTRs may contract out property management responsibilities to an unaffiliated third-party, but the affiliated manager still charges an “oversight fee” for overseeing the activities of the unaffiliated manager. The NTR compensates the unaffiliated manager for its services, as well as the affiliated property manager for its oversight.
Dealer Manager: Raising capital for an NTR requires selling registered securities through FINRA-licensed salespeople who are associated with a FINRA-registered broker/dealer. The FINRA-registered broker/dealer is referred to as the dealer manager. The dealer manager employs the people in the organization whose job requires them to discuss NTR programs (i.e., internal/external sales, National Accounts, Due Diligence, etc.) and holds their requisite securities licenses. “Most sponsors own their own broker/dealer, but some sponsors contract with an unaffiliated dealer manager for those services,” our due diligence expert notes. “In those cases, the salespeople are not in any way employees of the sponsor’s dealer manager, but are compensated by the sponsor for raising capital through the NTR’s dealer manager fee.”
Taxable REIT Subsidiary (TRS): A TRS is sometimes used to manage properties or contract out the management of properties. If the IRS deems some of its activities taxable, the NTR can create a subsidiary to carry out those activities. Through a TRS, the NTR may enter into management agreements with third-party management companies in order to maintain REIT qualification status
The Blue Vault Summit could not have been more perfectly timed. This gathering of the Broker Dealer and Sponsor communities provided insightful and open discussion from several vantage points. These conversations are paramount, especially in a time of significant regulatory change.