Future of Some Senior Housing REITs Threatened by Regulation

Senior housing real estate investment trusts (REITs) associated with Griffin Capital, NorthStar Asset Management Group and other organizations could face dramatic new restrictions under a proposed Department of Labor rule, the fate of which could be decided in the near future.

With time running out on the federal budget’s Friday deadline, some lawmakers have hinted they may attach a rider to a must-pass budget bill that would essentially block the DOL rule. The rider would effectively replace the fiduciary rule, without the proposed restrictions.

Even Hillary Clinton has weighed in to support the controversial DOL proposal, though it is still unclear exactly what path policymakers who are opposed may take in an attempt to block it. Supporters frame this as a consumer protection issue, while those opposed highlight the constraints the rule would impose.

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The DOL’s fiduciary rule proposal would update a standard that has not been changed since 1974. The proposal addresses conflicts of interests between brokers and consumers with a Best Interest Contract Exemption (BICE). As currently written, it would mandate that financial advisors and brokers act in the best interests of their clients under fiduciary standards for retirement savings, which could possibly eliminate the sale of high-commission, high-cost retirement investment products, including non-traded public senior housing REITs.

Compared to traded public REITs, non-traded REITs are not listed on a national stock exchange and are generally considered more opaque investments, with high commission rates for brokers. As part of an investment portfolio, shareholders may hold onto these non-traded securities through the life span of the REIT without much chance to readily trade the shares in a secondary market.

If the rider is attached to the federal budget, industry insiders who are anxiously waiting could see a decision in the next few days. As of Wednesday, Dec. 9, only a short-term budget proposal was introduced by the House Committee on Appropriations, which would extend the current budget resolution by five days and allow Congress more time to approve a long-term budget.

What’s at Stake 

The formal fiduciary rule is likely still a long ways off, but its impact has already rippled across the industry for non-traded public REITs. The DOL proposal, as it stands, could potentially put an end to high commission investment products.

“When it comes to non-traded REITs, they are a product that has been historically sold primarily by brokers who get paid some pretty healthy commissions for the products,” Michael Kitces, director of planning research and partner at private wealth management firm Pinnacle Advisory Group, told Senior Housing News. “The fiduciary is expected to dramatically reduce, if not eliminate, commissions.”

In anticipation of the rule, AR Capital, arguably one of the biggest influencers in the non-traded, public REIT sector, announced last month that it would stop new equity capital fundraising by the end of the year as a result of “market uncertainty.” AR Capital, a real estate investment company that primarily creates new, non-traded public REITs, has earmarked investments for its current deals, including its senior housing properties. AR Capital and its affiliate businesses have been embroiled in their own troubles that stretch beyond the looming fiduciary rule, but the move still marks a major decision for a company to position itself from the potential threats of the fiduciary rule.

“It’s certainly a challenging sign for the whole space when [AR Capital] is effectively the largest player, and they come out and say they’re not certain the product is viable in a fiduciary future,” Kitces told SHN.

However, not all non-traded public REIT businesses are preparing in the same way, and most are simply waiting to see what the final outcome will be, according to Kitces. With a long comment period and heavy backlash, a watered down version of the rule is also possible.

Kevin Shields, CEO and chairman of Griffin Capital, told NAREIT that “for better or for worse, it will come into effect.” Griffin Capital is a co-sponsor of Griffin-American Health Care REIT III, a non-traded public REIT that invests in senior housing and health care properties.

“We are still waiting to see what it will look like,” Shields said. “We’re still waiting for some published guidance there.”

NorthStar Asset Management Group Inc., a leading sponsor of alternative investment programs with a large senior housing non-traded public REIT, sought to delay the rule by requesting that the DOL extend the comment period, which was originally scheduled for 45 days.

“…We strongly believe that an extension of the comment periods is necessary for all impact parties to fully analyze the scope of this broad package and to make comments based on a comprehensive view of the current marketplace and regulatory regime,” Northstar Chief Investment and Operating Officer Daniel Gilbert wrote in a letter to DOL administrators earlier this year.

Northstar Healthcare Income is a $2.5 billion non-traded public REIT with 65% of its portfolio in senior housing properties across the country.

Griffin Capital and NorthStar Asset Management did not respond to press inquiries from SHN as of press time.

Others have argued that an update to the fiduciary rule is long overdue, and a delay tactic to lengthen the comment period could run out the clock on its viability to be enacted.

“A vote to delay the rule further is a vote to kill the rule—that’s how things work in Washington,” Arthur Levitt Jr., a former chairman of the U.S. SEC and director of Bloomberg LP, wrote in Investment News.

Up In The Air

The Labor Department is also considering banning certain alternative investment products from retirement accounts altogether, though a finalized list of such products has not been released.

“This is a very controversial area of the rule,” Kitces told SHN. “The [DOL] said some alternative investments are so opaque that they didn’t think anybody could realistically figure out whether it would be a good deal in the long-term interests of consumers, so they might just ban certain types of alternative investments overall. There’s some discussion on whether non-traded REITs might be on that list as well.”

The proposed rule is also at the center of what some in the industry see as a power grab by the DOL attempting to expand its reach while operating under the Employee Retirement Income Security Act (ERISA). Historically, the SEC has held greater jurisdiction in the role of regulating brokers and advisors.

“Part of the challenge here is that there are different regulators with overlapping territory,” Kitces told SHN. “…The claim has been, or the suggestion has been that it should really be the SEC that gets these rules done, not the DOL. The problem is that the SEC is so influenced by the industry that exists today, many people have suggested the SEC is incapable of doing this role on their own.”

Those opposed to the DOL fiduciary rule have vehemently argued this jurisdiction controversy.

“I’m a little disappointed that this is an agenda on the DOL side,” Shields told NAREIT. “To me, it’s more appropriately held at the SEC level…”

Members from the House Committee on Ways and Means stated that they are working on a draft of legislative proposal that would limit the regulations on financial advisors and brokers.

“The growing bipartisan interest we have seen demonstrates the continued concerns many have with the department’s approach and the need for Congress to offer a responsible solution,” the members of this working group stated.

While this group of Congressmen has proposed no final details—promising only to present legislation before Congress breaks for the holidays—possible riders to the budget include defunding the DOL’s rule.

Presidential candidate and former Secretary of State Hillary Clinton jumped into the debate on Monday by penning an op-ed in The New York Times. She urged Congressional leaders and President Obama to stand up to those on the other side of the aisle who oppose the fiduciary rule.

“Right now, Republicans in Congress are working to attach damaging deregulation riders to the must-pass spending bill,” Clinton wrote. “They want to roll back common-sense efforts to prevent conflicts of interest by financial managers. And they’re trying to undo constraints on risk at some of the largest and most complex financial institutions.”

The Financial Planning Coalition told members of Congress in a Dec. 7 letter that attaching while a rider to the federal budget “may sound harmless, it is not.”

President Obama has also asserted that the promulgation of the fiduciary rule is a priority before he leaves office.

Written by Amy Baxter

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