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Rich Uncles Responds to The DI Wire’s Crowdfunding Article

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Editor’s note: The DI Wire received the following letter written by Harold Hofer, chief executive officer of Rich Uncles NNN REIT, in response to the article, Crowdfunded REITs: Big Savings for Investors or a Recipe for Disaster?, that was published on May 17, 2017.

We would like to address some of the topics raised in your recent post regarding consumer-direct REIT offerings, including Rich Uncles NNN REIT.

In your otherwise well researched and written post, several items warrant clarification:

1. You referenced Rich Uncles’ 3% Organization and Offering Expense reimbursement, which we compare to NASAA Guidelines’ 15% figure. Note that the NASAA Guidelines definition of Organization and Offering Expense includes broker-dealer commissions, and that many (if not most) other non-listed public REITs avail themselves of this full 15% figure – including Blackstone REIT.

In other words, Rich Uncles NNN REIT reimburses its adviser the lesser of (i) actual Organization and Offering Expenses or (ii) 3% of offering proceeds. Blackstone REIT (and again, many others) reimburses its adviser the lesser of (i) actual Organization and Offering Expenses (including broker-dealer commissions) or (ii) 15% of offering proceeds. Clearly, as to this up-front, off-the-top element of offering load, Rich Uncles NNN REIT represents the superior value proposition.

2. Much of your post referenced our 40% promoted interest, subordinated to a 6.5% client preferred return. You compare this to other REIT sponsors’ 15% promoted interest.

The financial comparison schedule that we provided to you showed that Rich Uncles 3% O&O Expense reimbursement cap and 40% promoted interest is better for clients as compared to NASAA Guidelines’ 15% O&O Expense cap and 15% promoted interest. The 15% O&O load, which again includes commissions (including T-shares), just takes too large of an up-front bite out of the investor apple.

Perhaps most critically, our investors embrace the “you make money when we make money” element of our promoted interest structure.

Blackstone REIT’s promoted interest is 12.5% , subject to a 5% preferred return coupled with a “catch up” feature. Disregarding all other fees, Rich Uncles’ promoted interest structure is better for the client up to the point an average annual 9.5% total return (distributions + increase in NAV per share) is realized. In other words, 12.5% of a 9.5% return equals 40% of the excess of 9.5% above Rich Uncles’ 6.5% preferred return. When comparing fee structures, investors prefer a promoted interest structure that favors the sponsor only after a 9.5% yield is achieved – this falls back into the “you make money when we make money” reality.

3. You discuss dividend coverage in your article. Rich Uncles waives and defers fees, to close the current gap between Funds from Operations (FFO) and distributions paid. We expect this gap to close as NNN REIT scales and fixed public company costs become proportionally smaller. This is in contrast to most other non-listed public REITs, which disclose that distributions may be funded with offering proceeds. Rich Uncles distributions are NOT supported by offering proceeds.

4. Your post cites the fee structures of Reg A+ REITs sponsored by Fundrise and Realty Mogul. Note that these firms act as intermediaries between investors and third-party real estate investment sponsors – an entirely different business model compared to Rich Uncles. On top of the brokerage fees charged by Fundrise and Realty Mogul, these third-party sponsors also have fee structures and promoted interests which are unknown to investors.

In conclusion, there are many reasons CBRE’s chairman, Ray Wirta, founded Rich Uncles. First and foremost is his desire to deliver a fair investment opportunity to investors, starting with radically reduced front-end fees.