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Wednesday, 09 June 2010

Non-Traded REIT Sponsors Revamp Payments for Management Transfers

By John Covaleski, Commercial Real Estate Direct Staff Writer

Two sponsors of non-traded REITs have revamped how they get compensated when their REITs decide to internalize their management.

The sector's established practice is for sponsors to receive pre-negotiated payments, which are often in the tens of millions of dollars or more, when their REITs bring in-house their external management teams.

In separate actions last week, American Realty Capital Advisors eliminated the potential so-called internalization payments by its American Realty Capital Trust, or ARCT, and Grubb & Ellis Equity Advisors eliminated the potential use of the payments by its Grubb & Ellis Healthcare REIT II and Grubb & Ellis Apartment REIT.

Instead, the sponsors will receive performance fees when their REITs bring their managements in-house.

Technically, the established practice does not entail a payment of fees, but rather pre-set dollar amounts of shares in the non-traded REITs that the sponsors and the REITs' boards agree to well in advance of internalizations.

In the new performance-based payment approaches, the Grubb REITs will pay their sponsor 15 percent of all profits after shareholders achieve an 8 percent return. ARCT will pay American Realty 15 percent of that REIT's profits after shareholders get a 6 percent return.

ARCT has made $500 million of investments since it was launched in 2007 with plans to raise $1.9 billion of equity. Meanwhile, Grubb's Apartment REIT has acquired $365 million of assets since it was launched in 2006. And its Healthcare REIT II last year registered to raise $3.2 billion of equity and has since purchased two properties for $13.7 million.

Grubb & Ellis Equity's parent, Grubb & Ellis Co., led the movement away from internalization payments last summer when its Healthcare Trust of America Inc. brought its management in-house.

Jeff Hanson, chief executive of Grubb & Ellis Equity, said the payment elimination would result in "potentially substantial investor savings," and called it a way for non-traded REITs to demonstrate their alignment with shareholder interests.

"This is a best practices issue for the non-traded REIT industry," said Nicholas S. Schorsch, chief executive of American Realty Capital Advisors. "A best practice is making sure that investors get their returns first."

He added that non-traded REITs should not be paying what could be relatively high payments to retain mangers and staff while "there are good people out there to be hired in today's market."

REITs typically internalize management operations to reduce costs.

Healthcare Trust, for example, has realized $10.8 million in gross cost savings and $3.8 million in net savings during the second half of last year by virtue of its internalization of acquisition and asset-management operations.

While Healthcare Trust continues to operate as a non-traded REIT, some other non-traded REITs have internalized management as preludes to listing their shares on public exchanges. Those include the former Wells REIT, which internalized in 2007, changed its name to Piedmont Office Realty Trust and earlier this year listed its shares on the New York Stock Exchange.

Non-traded REITs may also internalize in advance of being acquired outright by another company, such as Inland Retail Real Estate Trust, which was acquired by Developers Diversified Realty Corp. in a 2006 deal that valued Inland at $6.2 billion.

The dollar amounts paid for management teams have ranged from $68 million to $170 million for the six non-traded REITs that have internalized operations since 2000, according to Robert A. Stanger Co., a Shrewsbury, N.J., investment bank that specializes in REITs. The payments were all made in the form of shares in the REITs involved.


Fee Paid ($mln)

Year Internalized

Inland Realty Corp.



Inland Retail Real Estate Trust



CNL Hotels & Resorts



Dividend Capital Realty Trust



Wells REIT



Inland Western Retail Real Estate Trust



Source: Robert A. Stanger Co.

"There is nothing wrong with non-traded REITs...


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Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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