Landmark Links December 12th – Schadenfreude


Lead Story…. If I were asked to create the ideal commercial real estate investment vehicle for the general public, it would be transparently priced, have a strong liquidity profile and a low fee structure.  The non-traded REIT, which is basically everything that I wrote in the preceding sentence, just the opposite is possibly the worst vehicle in which to make a real estate investment.  Per Investopedia, a non-traded REIT is (emphasis mine):

A form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate. A non-traded REIT does not trade on a securities exchange, and because of this it is quite illiquid for long periods of time. Front-end fees can be as much as 15%, much higher than a traded REIT due to its limited secondary market.

By now, the reason that I have so much disdain this particular product should be obvious: who in their right mind pays a 15% upfront fee for a highly illiquid product that can be easily substituted for a low-cost publicly traded REIT?  Also, how is it even possible to make money when up to 15% of your investment is eaten up by front-end fees?  The answers respectively are: ‘anyone who gets bamboozled by a fee-hungry financial advisor’; and ‘not unless the market is really good.’  For years, advisors who sold this garbage have fallen back on the following pitch: real estate as an asset class yields a consistent income stream of 6% – 7% per annum and is largely uncorrelated to the stock market and non-traded REITS are a great way to generate yield in a low interest environment.  They also are not subject to the daily value fluctuations that publicly traded REITS are because they do not trade widely in a secondary market.  In other words, they do not offer anything close to real time pricing.  The problem with such a claim is that it’s a Schrodinger’s Cat argument: you don’t really know the value of the shares until you go to sell them in a thin secondary market.

The non-traded REIT business had been on quite a roll for years with sponsors raising billions of dollars and advisors making hundreds of millions in fees on the backs of unsuspecting marks….I mean clients.  Then something remarkable happened recently that changed everything: The Department of Labor’s Fiduciary Rule began to roll out which led to a dramatic reduction in commissions and subsequently caused sales of the product to collapse. From Bruce Kelly of Investment News (emphasis mine):

…Conditions haven’t changed dramatically, but nontraded REIT sales have tanked regardless.

InvestmentNews​ reported last month that Robert A. Stanger & Co. expects nontraded REIT sales this year to reach just $4.4 billion, about $100 million less than last year and the lowest levels since 2002.

If the “income, diversify and interest rate” pitch was accurate back in 2012 and 2013, when REIT sales were booming, why isn’t it working today? There is little change in the narrative.

Interest rates have risen only marginally, and with the stock market roaring, wouldn’t it make sense for a broker to peel off some clients’ gains and invest in commercial real estate, a hard asset not correlated to stocks?

With brokers no longer getting juicy commissions for REIT sales, they simply don’t appear interested in selling the product.

Most brokers who still sell nontraded REITs no longer earn the eye-popping 7% commission, the standard rate paid to brokers who sold the product back in 2013, when REIT sales hit their all-time high and brokers sold $19.6 billion of the product.

Well, well, well turns out that sales of this product had nothing to do with the income, diversify and interest rate pitch after all.  Cue my shocked face.  The fact that brokers stopped pushing this rubbish at the very moment when the DOL instituted the fiduciary rule tells you all that you need to know about what financial advisors really thought of it.  Non-traded REITs were little more than a way for advisors to earn astronomical commissions and sponsors to charge above market fees.  The music has now stopped and the game is up.  Good riddance.


Sloppy: The AMT, possibly the most despised tax in America has made it back into the tax reform proposal despite a lot of bloviating from politicians about it’s elimination.  See Also: How the poorly crafted Senate tax bill could result in marginal rates above 100% for some.  And: The complicated stock sale provision that could cost small investors big time when they sell.

Disincentive: How occupational licensing acts as a barrier to interstate migration and hurts economic mobility.


Discount Rack: How Dollar General became rural America’s store of choice.

Slowdown: The number of apartment projects in the planning stage of development in major markets are falling substantially, an indication that construction activity is likely to ease over the next year.


Great News: The FHA is going to increase loan limits in nearly every area of the US for 2018 including a healthy boost for the Inland Empire.

In the Red: The Federal Housing Administration says an insurance program backing reverse mortgages is “losing money and can no longer remain viable in its present form”  with defaults and foreclosures surging.  So much for all of those late night infomercials with famous actors.

Grinding to a Halt: The tax reform bill could be a death sentence for the way that many affordable housing developments are currently financed.


I Really Hope That This is True:  A new study found that eating cheese every day may actually be good for you.

Bitcoin Roundup: Bitcoin futures started trading on Sunday and the price went HAMSee Also: The large discrepancy between prices on Bitcoin exchanges is possible sign of liquidity issuesAnd: About 1,000 people own 40% of the Bitcoin market which helps to make it especially volatile.

Chart of the Day

Business loan growth on banks’ balance sheets remains below 1% per year, a sharp decline from 2017.  Sure looks like companies are putting borrowing on hold until they figure out what their tax situation is going to be going forward.

Source: The Daily Shot


Paging Mr. Darwin: A Chinese man who referred to himself as “China’s First Rooftopper” fell to his death while trying to scale a 62-story building because the gene pool needs chlorinating again.

Level Headed Response: A woman who was busted smoking on a Southwest flight from Portland to Sacramento threatened to “kill everyone on this plane” when she was escorted to law enforcement upon landing.  This will definitely end well for her since no one has a better sense of humor about nicotine withdrawal fits than the TSA.

Future Leader: Meet the Indiana teen who was arrested when she accidentally sent a text message to a police officer offering to sell him meth.

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