Bringing REIT commissions to light

It’s amazing what a little bit of sunshine will do. Now that a new rule is to take effect that will make nontraded REIT investor charges more transparent, real estate investment trust sponsors are changing their commission structure.

As outlined by Chad LaFauci, director of real assets at Commonwealth Financial Network, an independent broker-dealer that sells nontraded REITs, sponsors are considering cutting the upfront commissions they pay advisers who sell their products and creating an annual trailing commission to make up the difference. Mr. LaFauci made his comments in an InvestmentNews story in last week’s issue.

Right now, advisers can make 6% to 7% upfront on nontraded REITs they sell. Other fees can add another 5% to that, meaning an investor who puts down $50,000 is starting off $5,500 to $6,000 in the hole. The problem with this is that the investor likely doesn’t know it, because the initial cost is not reflected on a client’s account statement. A new rule adopted by the Financial Industry Regulatory Authority Inc. will correct this, giving investors a truer picture of what it costs to buy shares of a nontraded REIT.

The fact that REIT sponsors are now reducing the upfront charges on their products seems to be a clear admission that something was wrong with the way they were doing business in the past. It is one thing to charge an investor a high commission; it is another to hide it and not be transparent about your charges. That’s just plain wrong.

2% PLUS TRAIL

Of course, advisers who continue selling nontraded REITs could earn the same commissions over the life of the investments. Mr. LaFauci said the upfront commissions to advisers will be reduced from 6% or 7% to 2% and a new annual trail of 1% will be instituted that will be capped after a certain number of years.

Some might call this a shell game, but as long as investors understand what the fees are and how and when they are paying them, it has got to be a better system than what we have now.