FAQ

What is A REIT?

A Real Estate Investment Trust, or REIT, is a company that owns, and in most cases operates, income- producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors. Congress decided that a way for average investors to invest in large scale commercial properties was the same way they invest in other industries — through the purchase of equity. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: portfolio diversification, strong and reliable dividends, liquidity, solid long-term performance and transparency.

As of Dec. 31, 2008, there were 136 REITs registered with the Securities and Exchange Commission in the United States that trade on one of the major stock exchanges — the majority on the New York Stock Exchange. Additionally, there are REITs that are registered with the SEC but are not publicly traded, and REITs that are not registered with the SEC or traded on a stock exchange. Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns.

*Source: National Association of Real Estate Investment Trusts – REIT.com

Traded vs. non-traded: What’s the difference?

The REIT universe consists of both traded REITs listed on major stock exchanges, and non-traded REITs sold through financial advisors. Because non-traded REITs have a share price that doesn’t fluctuate on a daily basis, they are generally considered less volatile than their publicly-traded counterparts. Non-traded REIT investors typically sacrifice ready liquidity in exchange for higher yields, and the product is generally only suitable for investors who can afford to commit their capital to a long-term hold (typically 7 to 10 years) to gain the full potential advantage of real estate investing. Most nontraded REIT sponsors offer limited Share Repurchase Programs (SRP) to address the unanticipated emergency liquidity needs of their investors. Additionally, non-traded REITs make a future liquidity event (such as an exchange listing or asset sales) part of their long-term business plan. In other respects, the two types of REITs are very similar.

Both have strict quarterly and annual SEC disclosure requirements, and are overseen by an independent board of directors. Whereas traded REITs are usually self advised and managed, non-traded REITs are typically externally advised and managed.

What are the components of the non-traded REIT lifecycle?

Non-traded REITs follow a four-stage lifecycle: raising capital; acquiring properties; portfolio management; and a liquidity event. Value creation (or a liquidity event) can happen in three ways: liquidation of the portfolio assets and return of proceeds to investors; a merger with a publicly-traded REIT; or a public stock exchange listing. Most sponsors of non-traded REITs estimate the entire lifecycle to last 7 to 10 years, with monthly or quarterly dividend distributions paid throughout the lifetime. Investment objectives are clearly stated in the prospectus, and the portfolio of properties is acquired by a professional real estate team for its potential to provide to sable income and appreciation for the shareholders.

When you invest in shares of a non-traded REIT, what costs are involved?

An investor pays certain fees upon purchasing shares of non-traded REIT (shares are typically priced at $10 per unit). Those fees cover a sales commission to the broker/dealer or financial advisor that facilitated the share purchase, in addition to any offering and organizational expenses. Each non-traded REIT has a different fee structure, but typically, the up-front expense – or “sales load” – typically averages 10% of the total purchase. Keep in mind that there are also costs associated with buying shares of a publicly traded REIT, when the purchase is made through an investment advisor or stock broker.

Non-traded REITs lack the same share liquidity that publicly-traded REITs have. Is that a disadvantage?

It is not a disadvantage when you consider that non-traded REITs are designed to be long-term investments. The lifecycle of a typical non-traded REIT lasts between 7 to 10 years, from the beginning of the capital raise to a final liquidity event. During that time, investors receive regular dividend payments on their investment, but have limited ability to sell their shares through Share Redemption Programs (typically capped at 5% of total shares outstanding per year). The illiquid nature of non-traded REIT shares does provide an intrinsic benefit, however, because it removes the volatility of a fluctuating stock price. That built in stability gives REIT managers the flexibility to focus primarily on acquiring assets and managing the portfolio. Investors are able to focus on long-term capital appreciation, rather than worry about the negative effects of a widespread sell-off triggered by uncontrollable market conditions. And, since non-traded REITs control the timing of a liquidity event, they can time the market to best suit their investors.

What are the average returns for all non-traded REITs that have completed a liquidity event?

Non-traded REITs have two income components – the dividend (typically between 6% is achieved when the REIT completes a liquidity event. According to a 2007 study performed by Robert A. Stanger & Co., an investment banking company that analyzes the non-traded REIT sector, seven Non-traded REITs representing $11 billion of capital invested between 1995 and 2005 had been liquidated and provided investors the equivalent of 7.3% to 16.6% annualized returns.

Do non-traded REITs provide the same level of corporate governance and transparency as publicly traded REITs?

Despite not being traded on an open market, non-traded REITs follow strict SEC reporting and control guidelines, just like publicly traded REITs. That includes quarterly reports on transaction and balance sheet activity, in addition to regular SEC filings for all material events. In addition, their prospectus and ongoing transactional activity must be reviewed by securities officials at the state level, which is an additional level of scrutiny that publicly traded REITs do not endure. In addition, all conflicts of interest are extensively discussed and disclosed in each company’s prospectus filed with the SEC, which must be read and signed off on by the individual investor. Finally, non-traded REITs are controlled by an independent board of directors that guides the actions of the REIT management team.

  REIT FAQs (510.0 KiB)