Non-Traded REITs Face More Scrutiny from Broker-Dealers
October 8, 2012
“There are more non-traded REITs today than there has ever been, and as a broker-dealer, you have to make tougher choices,” says Steph M. Laflamme, managing director of the financial services group for First Allied Securities Inc. He notes that most broker-dealers have reduced the number of non-traded REITs on their platform to allow for greater oversight and to mitigate sector duplication.
Broker-dealers
are increasingly being selective about the non-traded REITs they include on
their investment platforms today, and they’re subjecting those investments to
greater scrutiny, including those for commercial real estate in San Diego.
“There are more non-traded REITs today than there has ever been, and as a broker-dealer, you have to make tougher choices,” says Steph M. Laflamme, managing director of the financial services group for First Allied Securities Inc. He notes that most broker-dealers have reduced the number of non-traded REITs on their platform to allow for greater oversight and to mitigate sector duplication.
“We want to offer a
robust set of options, but at the same time we want to make sure we’re focusing
on the best sponsors and the best investments,” Laflamme adds. “We can be very
choosy.”
At First Allied
Securities, the due diligence process has expanded to include a robust
checklist of items, as well as a multi-person investment committee rather than
a handful of decision makers, Laflamme says. “It’s not as relationship-driven
as it was years ago,” he notes. “The decisions are more a matter of the merits
of the sponsor and the REIT’s ability to satisfy advisors and investors. We
certainly don’t let relationships drive the decision.”
Ongoing due diligence
Industry experts contend
that there isn’t one overarching reason why broker-dealers have changed the way
they approach non-traded REITs. “There were a series of things that occurred to
put pressure on the firms and force them to rethink the way they review these
programs,” says Keith Allaire, managing director with Robert A. Stanger &
Co., a Shrewsbury, N.J.-based investment banking firm that focuses on real
estate, including commercial real estate in San Diego.
The entire non-traded
REIT industry has experienced heightened attention from regulators. Moreover,
recent litigation has specifically called out both non-traded REITs and
their broker-dealers. The biggest wakeup call, however, was the resetting of
values in commercial real estate in San Diego.
“As a result of the
market downturn, broker-dealers have become more careful about the products
they’re putting up,” Allaire says. “There has been a greater focus on the
quality of the investments. That’s not to say there wasn’t a substantial focus
before, but it’s definitely increased. The bar is set much higher.”
Michael Schwartz, CEO of
Strategic Self Storage Trust Inc., a non-traded REIT that specializes in self-storage
assets, says he’s definitely noticed a difference in the way broker-dealer
approach the due diligence process in commercial real estate in San Diego. While a certain level of analysis and scrutiny
was expected when a broker-dealer was considering the addition of a new
non-traded REIT to its platform, the amount of ongoing due diligence was
limited.
“Ten years ago, broker
dealers would maybe do a refresher every year,” Schwartz says. “Today, most
firms are mandating quarterly monitoring through outside due diligence firms.
And some will even give you a call or drop by to go over those results.”
Schwartz is quick to say
that he’s not complaining about the more frequent due diligence. “The
additional level of scrutiny is a positive thing for the space,” he says. In
fact, he likens the process to weight lifting. “Every time we go through the
due diligence process, we get stronger because it substantiates that we’re
doing exactly what we’re obligated to do.”
Difficult for new
non-traded REITs
Broker-dealers’
increased scrutiny and leaner investment platforms mean that new sponsors and
new non-traded REITs are finding it difficult to enter the market, experts
note.
“In a rising market, it
was a lot easier for a non-traded REIT to get on a broker-dealer platform,”
Allaire notes, adding that many programs are left out in the cold. “Today, if
you’re a new sponsor, it’s chilly. And it’s not very warm for those who’ve lost
their place on a platform either.”
Indeed, if a
broker-dealer is satisfied with the non-traded REITs it has on its platform—if
it feels comfortable with the sponsors and the REITs cover a broad spectrum of
property types—those REITs are likely going to maintain their position, leaving
no room for new entrants, Schwartz points out.
Yet industry experts
contend that broker-dealers’ decision to pare their non-traded REIT offerings
translates into better oversight and less risk for investors, despite the fact
that it also means that investors in commercial real estate in San Diego have fewer choices.“As an investor, wouldn’t
you rather have access to five quality investments rather than 10 mediocre
investments?” queries one broker-dealer executive.
Source: nreionline.com
DISCLAIMER: This blog has
been curated from an alternate source and is designed for informational
purposes to highlight the commercial real estate market. It solely represents
the opinion of the specific blogger and does not necessarily represent the
opinion of Pacific Coast Commercial.
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