A Real Estate Investment Trust is a trust company that raises capital from a group of investors, and uses it to invest in commercial real estate. REITs provide a consistent stream of income and potential capital gains to investors. Most REITs are equity REITs that invest directly in buildings, land, and other real estate. Some REITS are Mortgage REITS that invest in real estate credit. Other REITs have a hybrid strategy investing in both equity and debt.
Investing directly in real estate normally requires a large amount of up front capital, so retail investors can’t easily build a diversified portfolio . Plus real estate is illiquid and has high upkeep costs. By pooling investor capital REITs make real estate available to a wider group of investors. Congress established the REIT structure in the 1960s to allow retail investors to access investments t in large scale income producing commercial real estate normally only available to institutions.
Sam Zell, a famous real estate investor, was one of the earliest proponents of the REIT structure. Some even credit Zell as the creator of the contemporary REIT structure. Sam Zell’s autobiography mentions how the REIT structure was essential to opening up the real estate markets.
From Am I Being Too Subtle:
Step back in time and you’ll see that the birth of the public REIT industry was an enormous transformation from the “dark ages,” when commercial real estate was shrouded in mystery. Nobody but insiders could figure it out. Brokers held all the cards, and they weren’t telling. There was no visibility
See also: How Sam Zell Made His Fortune
Public and Private REITs
Traded REITS are listed on a major stock exchange. In contrast, non-traded and private REITS are offered on a continuous basis according to a prospectus or private placement memorandum(PPM). The main difference between publicly traded REITs and Non-traded REITs is liquidity You can buy and sell traded REITs relatively quickly at any online broker. Secondary trading is limited for non-traded REITs. Non-traded REITs typically have share repurchase plans under which they regularly provide limited liquidity to investors. However, investors in non-traded REITS should always take a long term perspective.
There are tradeoffs that come with liquidity. The quoted price for a traded REIT can fluctuate widely, and may be more correlated to the broader stock market than real estate. Consequently, it may not provide the same level of portfolio diversification that is available through non-traded REITs.
Public NT REITs aren’t listed on any exchanges, but they still must still be registered with the SEC, and are still required to file quarterly and annual reports. This information can all be found on the SEC’s EDGAR database. Although it can be difficult to dig through the massive amount of information in SEC Filings, you can Click Here to access key information on Non-traded REITs in an easy to analyze format.
Historically it has been difficult for investors to find unbiased information on non-traded REITs, but there have been major improvements in recent years. Alternative.Investments also provides detailed data on performance, fees and more. For Broker Dealers and RIAs, there are a variety of due diligence firms that provide in depth coverage of non-traded REITs, as well as other alternative investments. Specialist investors focused on the secondary market for non-traded REITs should check out the Direct Investments Spectrum.
Comparison: Public and Private REITs
|Liquidity||SEC Registration||Tax Benefits||Investment Minimums|
|Public Non Traded REITS||Limited||Yes||Yes||Typically $2,500|
|Private REITS||Limited||No||Yes||Generally Accredited Investors Only|
|Public, traded REITs||Yes||Yes||Yes||None|
Finite and Perpetual NAV REITs
Traditionally, non-traded REITS had a finite life span. Finite REITS would aim to have a liquidity event within 5- 10 years. A liquidity event might include a sale of the portfolio, a merger, or a listing on a stock exchange. Prior to the liquidity even, REITS would provide limited valuation information and liquidity.
NAV REIT is a type of NT REIT that regularly discloses its net asset valueNAV REITs per share, and conducts a continuous offering of its stock based on the NAV per share. NAV REITS also typically conduct regular share repurchases at NAV.
Most NAV REIts are also perpetual life programs. Perpetual life NAV REITs do not have a definitive liquidity date. Instead they plan to operate in perpetuity. Investors can exit through the share repurchases rather than through a liquidation or listing.
Over the past few years, perpetual life NAV REITs have raised the most capital in the non-traded REIT space. A popular example of a perpetual life NAV REIT is the Blackstone Real Estate Income Trust.
See this guide from DLA Piper to learn more about NAV REITs
Different Non-traded REIT Strategies
Non-traded REITS can follow a wide variety of different strategies. Some examples include:
- Self Storage
Key REIT Requirements
Like all REITs, a non-traded REIT has several tax advantages, but must also comply with certain requirements.
The main tax advantage is that REITs are not taxed on the entity level. Thus an investor in a REIT avoids the double taxation that typically comes with equity investment.
To maintain status as a REIT, a fund must comply with several key requirements, including:
- A REIT must invest 75% of its assets in real estate and cash, and obtain at least 75% of its gross income from real estate related sources including rent and mortgage interests. There are some subtle distinctions in what exactly constitutes real estate. For example, in 2015, a private letter ruling expanded the definition to include outdoor advertising displays.
- No more than 25% of its assets can consist of non-qualifying securities or stock in taxable REIT subsidiaries.
- It must pay 90% of its taxable income to shareholders. This requirement explains why REITs are so popular among income investors.
- Have a minimum of 100 shareholders after its first year as a REIT.
- Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
See the IRS website for the full definition of a REIT.