Nontraded REITs still facing fundamental questions according to the latest SNL Real Estate report

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Even as nontraded REITs talk of reform, fundamental problems persist. During an industry conference in New York, hosted by Information Management Network, on June 21 and 22, there was significant doubt on whether reform was truly imminent, or even on the horizon. Dividend coverage remained a hot topic, and there was speculation that a new product type heralded as an industry savior, the daily NAV, could come up short.

According to the latest SNL Real Estate report, nontraded REITs have been hammered in recent years amid a litany of lawsuits and negative press.

Daily NAV products have been touted as the new industry standard that will address issues with fees and transparency. However, it became clear at the conference that there is little confidence the products will accomplish those goals.

During the event, Timothy MicKey, managing director of Monument Wealth Management, posed among the most pressing questions related to daily NAVs: If these products are superior to previous nontraded REITs, why is no one buying them?

So far, daily NAVs have raised just $17.5 million. Year-to-date, the top 10 nontraded REITs have raised $3.22 billion, according to data presented at the conference by Kevin Gannon, managing director at Robert A. Stanger & Co.

Andrew Christos, executive vice president of Realty Capital Securities, fielded the question, arguing it was mostly a question of education.

"This is a drastic change, so you have to go through the process of getting the broker/dealers comfortable with it," he said.

Some conference attendees did not buy the argument, telling SNL Financial that broker/dealers were still hawking the old-school products simply because they paid higher commissions.

Those lucrative payouts have a limited lifespan. FINRA has issued a notice that it will require nontraded REITs to report "net pricing" — meaning that sales commissions will be broken out from the per-unit price, thus making fees more transparent to the investor. At that point, conference attendees said, the daily NAV products with little upfront load will become industry standard; until then, broker/dealers will favor products with higher fees.

The industry has been pushing for a July 1, 2014, implementation date for net pricing. Paul Mathews, director of corporate finance for FINRA, said he thought the regulator was "amenable" to that start date.

And there was some doubt among advisers that the daily NAV product even carried lower fees than the traditional product. The daily NAV model also includes increased liquidity, allowing investors to redeem some or all their shares before a liquidity event.

"It's got to be an incredible amount of work to create a daily NAV," MicKey told SNL. "And how much money do they have to spend to create that? And also to be able to create that liquidity? What really wasn't touched on was they have to keep a certain percentage of their assets in liquid assets."

Daily NAV skepticism was not limited to the supposedly lower fees. There were also concerns about the claim that the products offer true transparency.

Click here for the full report from SNL Real Estate: http://www.snl.com/InteractiveX/Article.aspx?cdid=A-15173580-12847

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Christina Twomey
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