The public, non-traded REIT business is competitive. I am not sure how many sponsors are fighting for broker / dealer shelf space and investor dollars, but it must be several dozen, with, I am sure, more programs in registration. Competition is generally good for consumers, but this has not always been the case in the non-traded REIT business when it comes to fees. The fees across the various REITs are remarkably similar. This may be starting to change.
Grubb & Ellis has eliminated internalization fees on its two public, non-traded REITs. Another REIT sponsor quickly followed suit. In conversations with more REIT sponsors, the elimination of the fee is being watched. If Grubb & Ellis can grab market share, you can bet most non-traded REIT sponsors will ditch this fee.
This is a fee that is hard to quantify when a REIT is raising capital, because in all likelihood it won't be paid for years and the amount of the fee cannot be determined until the REIT decides to prepare for listing or liquidation. These fees are huge, despite the inability to calculate them during the early stages of a REIT. Some REITs don't even disclose potential internalization costs in their prospectus' fee section, instead disclosing it with amorphous language in the business plan or risk sections.
Most REITs are advised by an affiliated company. When a REIT's board of directors decides to list the REIT on an exchange it must acquire its advisor, a process known as internalization. Therefore, a value must be placed on this advisor, and then the REIT, typically using its shares, acquires this advisor. The valuations are determined by the advisor, and many REITs will get a rubber-stamp third party confirmation of the valuation. On large REITs, the advisor can get a windfall of hundreds of millions of dollars while investors get their equity diluted. Some past internalizations have paid REIT advisors up to $300 million. It's not hard to see who's the beneficiary in an internalization transaction.
If Grubb & Ellis' move starts a fee war, this is good for investors. Hopefully other sponsors will follow suit and start lowering or eliminating more immediately tangible fees and expenses, like offering costs, acquisition fees, property management and asset management fees and compensation to brokers selling the REITs. Lower fees put less pressure on the portfolio to meet dividend coverage ratios and should allow the REITs to acquire better properties.