Transparency in Commercial Real Estate Investment

Topic:  • By Michael Episcope • May 31, 2016 Views

“Honesty.” “Integrity.” “Transparency.” All are overused, vague words, especially in commercial real estate investment. Throw in “client service” and “expertise,” and that covers nearly every attribute financial service companies tout to potential investors.

We value these words at Origin Investments. But our motto is to build them into our process, documents and systems rather than just tout them on our website or in materials. In other words, show — don’t tell.

Commercial Real Estate Investing

Commercial Real Estate Investment at Origin

Transparency means providing our partners with the information we have in real time. We’ve invested in people and technology to make transparency a part of the way we do business. We don’t like surprises and know our investors don’t either. We send updates every quarter on all of our investments and hold regular Fund webinars. If something else material occurs within this time frame, either positive or negative, we send that information as well. In short, our partners know what we know. That’s true transparency.

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Our Definition Of Transparency

Conforming to the minimum standards of law so you won’t get sued does not meet our definition of transparency. All investment managers are required by law to disclose conflicts of interest and fees in their prospectuses. These are often long, tedious documents, and the information is buried in the back. This makes it hard to see what their fees really are and understand how their distributions work. While this tactic conforms to disclosure laws, it doesn’t meet our definition of transparency. These tactics cloud the true nature of the costs of investing in vehicles such as non-traded and private REITs.

Fees are only one issue. According to the Investment Program Association (IPA): The up-front fees associated with investing in a non-traded REIT may be in the range of 12 percent to 15 percent” and may involve other fees over the investment’s life. Why would anyone knowingly get into an investment where they’ve lost 15% on day one? “No brokerage should be allowed to sell these things,” former Securities and Exchange Commission economist Craig McCann told The Wall Street Journal.

Share price is also hard to assess. How does a share price that never floats truly represent the value of the underlying assets and provide transparency? It is false logic to think these vehicles are more stable because the share price doesn’t float. The security of dividends is another clever marketing trick. Most non-traded and private REITs don’t have the funds to pay all their investors’ dividends, so their managers entice investors into reinvesting it at a “discount” to share price. If the share price is $10, but the value of the underlying assets is $3, then reinvesting at $9.50 is akin to paying a 300 percent premium. But it is impossible to know this if the share price doesn’t float.

At Origin Investments, we are committed to true transparency. We champion it on our website, in our investor updates and in communications with potential investors. We’ve built it into the way we do business every day.

Posted By

Michael Episcope

Michael Episcope formed Origin Investments in 2007, along with Co-CEO David Scherer. He has more than 25 years of investment and risk management experience.