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Wednesday, July 11, 2012

Wells' Real Estate Nixes REIT Fee

News summary by MFWire's editors

Wells Real Estate Trust, a prominent sponsor of nontraded REITs, will forgo charging a controversial fee to its REIT investors, InvestmentNews reported. [SEC filing]

Charging an "internalization fee" -- a fee for the REIT to acquire its advisor after the advisor's contract expires, thereby making the REIT self-managed -- has been the industry standard for a decade. But this fee is typically not fully disclosed in trusts' offering documents, and there have been notorious examples of REITs paying high internalization fees that angered investors and, in some cases, have resulted in lawsuits.

In 2007, Inland Western REIT paid $375 million for its advisor, later reduced to $285 million after a lawsuit.

That same year, Wells Real Estate Trust paid about $175 million for its advisor, according to InvestmentNews.

The article quotes the blunt assessment of Nicholas Schorsch, chairman and CEO of American Realty Capital: "This [fee] made no economic sense to investors. There's no logical reason they would pay."

The SEC filing for Wells' $6.2 billion Wells REIT II said that there would be no payment to acquire its advisor. And this shift by Wells, which manages $11 billion in total, may suggest a change in practice across the REIT industry.

"Wells was forced to go this route because of competitive pressure," Daniel Wildermuth, CEO of Kalos Capital, told InvestmentNews.

"If Wells had done anything else, they would have opened themselves up to a lot of criticism." 

Edited by: Chris Cumming


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