$700 of my 20k went to a commission I never saw

I've been researching for months and hadn't bought anything, so when an advisor walked me through a public non-traded REIT I was ready to move. Minimum was 2,500, I put in 20,000.

What I didn't understand: the shares came in a class with an upfront selling commission of 3.5%, plus an ongoing stockholder servicing fee charged every year after that. So on day one I owned about 19,300 of net asset value after paying 20,000. The same REIT had another class with no upfront commission, available through platforms that charge a flat advisory fee instead. I found that out a year later reading the prospectus fee table, which was in the document the whole time.

Second thing I got wrong. Distributions came in around 5.2% annualized and I counted all of it as earnings. When the tax form arrived, a meaningful chunk was labeled return of capital, which means part of what I got paid was my own money coming back and my cost basis dropped by that amount. How that's treated is a question for a CPA, and mine explained it in about ten minutes. I just wish I'd asked before instead of after.

I held two years and redeemed. Got back roughly 20,100 after the price moved a little in my favor, plus the distributions. So not a disaster, and I learned two things for about 700 dollars.

What I'd do differently: ask for the share class table in writing before signing anything, and ask straight out which class the person recommending it gets paid on.

Answer

1carlos_nunezActive

The mechanics, since it'll come up again for you. Non-traded REITs usually sell several share classes of the same underlying portfolio. They differ only in how the selling and servicing costs get charged, some upfront, some spread over years as an annual fee, some with neither if you're paying an advisor a flat fee separately. All of it is laid out in the fee table and the estimated use of proceeds section of the prospectus, and the fee table is the first thing to read.

On the return of capital piece, distributions from these vehicles frequently exceed taxable income, so part of what you receive reduces your basis rather than counting as income that year. That isn't automatically bad, it can mean depreciation is doing its job at the property level, and it can also mean the fund paid you partly out of new investor money or borrowings. You tell those apart by looking at cash flow from operations against total distributions paid, which is in the quarterly filings for a registered non-traded REIT. Your CPA handles the tax side.

The class question and the coverage question are the two you now know to ask, and asking them costs nothing.

4 replies

3angela_burkeServicePRO6

I nearly did the same thing two years ago. Sat down, got the pitch, liked the guy. What stopped me was asking him to email me the fee table with the class he was putting me in circled. Took him nine days to send it and by then I'd read the whole document. The delay told me more than the numbers did.

1omar_haddadActivePRO11

$700 to learn where the fees live is cheaper than most of my education. I've eaten worse on a single change order because I didn't read a scope line.

4raj_mehta14CapitalPRO6

quarry, when you say distributions exceeding operating cash flow, where in the filing does that live? I've been reading these documents for a month and I can find the fee tables now but the cash flow comparison always seems to be spread across three places.