Disruption in the non-traded REIT industry is spurring sweeping change and creating new investment opportunities for investors in the crowdfunding marketplace.
Non-traded or non-listed public REITs have traditionally been a thriving part of the alternative investment market. At its peak in 2013, the sector was raising nearly $20 billion in annual equity. Non-traded REITs offer investors the benefits of a real estate investment vehicle without the stock market price volatility that comes with buying into publicly-traded REITs. Yet fundraising has taken a sharp drop to less than $10 billion due in part to new regulatory reforms.
Non-traded REITs have come under fire recently for their high fee structures with front-end loads that often exceed double-digit percentages. Earlier this year, FINRA posted an investor alert on its website to advise investors to, “be prepared to ask questions about the benefits, risks, features and fees” when contemplating an investment into a non-traded REIT. High front end loads often translate into scenarios in which for every $1 that an investor puts into certain non-traded REITs, as much as $.15 – $.18 is paid out right from the start for fees and commissions. Any time an investment requires a 20+% return just to break even it becomes challenging to meet, let alone exceed, the performance of lower fee alternative investments. Therefore, it is no wonder that the industry has been under intense pressure to reduce fees and improve transparency. That pressure has culminated in regulatory reforms, including FINRA 15-02 that went into effect in April 2016. The new requirements change the way net asset value is reported on statements and puts fees front and center for investors to see.
Sponsors that want to survive and grow in this niche are responding by restructuring investment products to be more appealing to investors. One such company is Everest Medical Core Properties. The company recently launched its Medical Core Income REIT I, which is a next-generation private offering for healthcare real estate properties. The investment strategy is to assemble a portfolio of stable, high-quality medical office properties with an initial capital fundraising target of $125 million – including $5 million to $10 million that it hopes to raise through the CrowdStreet Marketplace.
Case Study: Medical Core Income REIT I
Medical Core Income REIT I is a new Reg D 506(b) private REIT that provides a sharp contrast to traditional non-traded REITs in that it has a significantly lower fee structure. Specifically, its front-end load drastically reduces commissions and marketing fees. It includes a 1% distribution fee; a 1% service fee and a 0.5% organizational & offering fee – allowing 97.5 cents of every dollar to be put to work immediately.
One of the keys to lowering that front-end load is utilizing alternative distribution channels. In the past, non-traded REITs have relied heavily on broker-dealer platforms, such as Ameriprise and LPL Financial, that involved layering on fees and commissions paid out to sell shares to investors. The Everest Medical team, veterans from industry leader Cole Capital, recognized both the need to adapt as well as the opportunity to create a lower fee structure product that would be more appealing to investors.
Rather than pay the high commissions required of traditional broker-dealers, Medical Core Income REIT is utilizing lower-cost distribution channels that include independent Registered Investment Advisors (RIAs), as well as the direct-to-investor CrowdStreet marketplace. “We feel like most investors of the next generation are going to be working with independent RIAs or doing it themselves online. So, we wanted to be at the forefront in working through those channels and provide investors with a next-generation diversified investment product,” says Zane Doyle, executive vice president and head of operations at Everest Medical.
Benefits of non-traded REITs
Non-traded REIT offerings can be a good entry point for both beginner and experienced real estate investors for the following reasons:
Diversification: One of the big selling points is that it offers asset and geographic diversification that is offered through a large portfolio of real estate. Diversification helps to improve the probability of hitting targeted return metrics and it smoothes the volatility swings associated with single asset investments, both of which are advisable for investors that are relatively new to commercial real estate investing.
Simplified tax reporting: Particularly for first time commercial real estate investors, this aspect can be significant. A REIT structure uses a 1099 for ordinary income reporting rather than a Schedule K-1. This means that investors can easily incorporate a REIT investment in their annual tax filings without the added cost and complexity of filing a K-1.
Low beta to equity markets: One reason to invest in a non-traded REIT instead of a publicly-traded REIT is to diversify away from exposure to equity markets. While publicly-traded REITs have lower correlation to the S&P 500 than other equities (e.g. cyclicals or technology stocks) as a listed equity, they still tend to move somewhat in the general direction of the market. Since a common goal of investing in real estate is to diversify away from the volatility swings of equity markets, the non-traded REIT is one vehicle that allows an investor to achieve such a goal.
Enhanced liquidity: REITs also typically structure prescribed liquidity options where investors can sell REIT shares back to the issuer during the holding period. In contrast, a standard single LLC partnership interest investment has no prescribed liquidity options and, as such, investors are generally advised to be prepared to hold the investment for the entire holding period and assume that little to no liquidity options exist during the hold period.
CrowdStreet is once again at the center of a transformative change occurring within the real estate investment industry that is making investment opportunities more accessible to investors. The new generation of non-traded REITs resonates with CrowdStreet for a number of reasons. It speaks to the importance of transparency, portfolio diversification and greater access to real estate investments. It also recognizes the net gains to investors that can be achieved by utilizing the efficiencies offered by online direct-to-investor platforms. The CrowdStreet Marketplace makes a point to include a variety of different types of equity and debt offerings across its platform, now including non-traded REITs. To register for a free investor account JOIN NOW.