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Non-Traded REIT Investments


Institutional Real Estate

Publicly Registered Non-Traded


What is a REIT?

A Real Estate Investment Trust—or “REIT”—is a professionally managed company that mainly owns, and in most cases operates, income-producing real estate. REITs pool the money of numerous investors to purchase a portfolio of properties that the typical investor might not otherwise be able to purchase individually. The properties owned by a REIT create income that may be passed to investors as distributions. In fact, REITs are required by law to pass at least 90 percent of taxable income to stockholders.

Traded vs. Non-Traded REITs

Traded REITs are bought and sold just like traditional exchange-traded stocks. As such, they are subject to the same sort of market fluctuations as exchange-traded stocks. Traded REITs are registered with and regulated by the US Securities and Exchange Commission (SEC).

Non-Traded REITs are also registered with and regulated by the SEC, but they are not bought or sold on a national stock exchange. However, non-traded REITs do not offer the liquidity of traded REITs. Investors in non-traded REITS are typically seeking income from distributions over a period of years. Upon liquidation, return of capital may be more or less than the original investment, depending on the value of assets. Investors must meet minimum suitability requirements to invest in non-traded REITs.

Private (or private-placement) REITs do not trade on an exchange. They are not registered with the SEC, nor are they subject to the same disclosure requirements as traded and non-traded REITS. Investors in private REITs must be “accredited investors” as defined by federal securities law.


Types of REITs

While all REITs invest in real estate, exactly how they invest varies. Some REITs directly own the real estate in their portfolios, while others hold mortgages to their properties. Additionally, some REITs are publicly traded on a national securities exchange and others are not, which affects how investors can purchase shares in the REIT.

REITs Can Be Property Owners or Mortgage Holders

  • Equity REITs purchase, own, and manage income-producing real estate properties. Investors in equity REITs have the potential to earn dividends through rental income from the property and capital gains from any appreciation in the property’s value when it is sold.
  • Mortgage REITs lend money directly to real estate owners and their operators, or acquire loans that are secured by real estate. These REITs generate revenue through the interest that they are paid on the loans.
  • Hybrid REITs are a combination of equity and mortgage REITs. Their income-producing potential comes from rent and capital gains (like an equity REIT) as well as interest payments (like a mortgage REIT).


REIT Properties

Different REITs tend to feature different investment objectives and may vary in the types of properties they focus on:

  • Office Buildings
  • Healthcare Facilities
  • Warehouses
  • Apartments
  • Shopping Centers
  • Retail Stores
  • Self Storage
  • Hospitality


Risks of Non-Traded REITs

  • There is no public trading market for shares of non-traded REITs and there may never be one; therefore, it may be difficult to sell your shares.
  • Because non-traded REITs are typically “blind pool” offerings, stockholders will not have the opportunity to evaluate the investments that are made with the proceeds of the offerings before shares are purchased.
  • If a non-traded REIT pays distributions from sources other than the REIT’s cash flow from operations, it will have fewer funds available for the acquisition of properties, and the overall return to stockholders may be reduced. Typically, non-traded REITs may use an unlimited amount from any source to pay distributions.
  • Distribution declarations are at the sole discretion of the REIT’s board of directors and are not guaranteed.
  • If a REIT is unable to raise substantial funds, it will be limited in the number and type of investments it may make, and the value of any investment will fluctuate with the performance of the specific properties the REIT acquires.
  • A non-traded REIT’s advisor will face conflicts of interest relating to the incentive fee structure under the REIT’s advisory agreement, which could result in actions that are not necessarily in the long-term best interests of the REIT’s stockholders.
  • Payment of substantial fees and expenses to the REIT’s advisor and its affiliates will reduce cash available for investment and distribution.
  • A non-traded REIT may not be able to sell properties at a price equal to, or greater than, the price for which it purchased such properties, which may lead to a decrease in the value of its assets.
  • Adverse economic conditions may negatively affect property values, returns and profitability
  • Increases in interest rates could increase the amount of debt payments and adversely affect a REIT’s ability to make distributions.
  • Disruptions in the credit markets and real estate markets could have a material adverse effect on a REIT’s results of operations, financial condition and ability to pay distributions.
  • Failure to qualify as a REIT would adversely affect operations and the ability to make distributions due to additional tax liabilities.
  • You may have tax liability on distributions you elect to reinvest in the REIT’s common stock.
  • Special considerations apply to employee benefit plans, IRAs, or other tax favored benefit accounts investing in non-traded REITs.
  • Some non-traded REITs have limited prior operating history or established financing sources.


REITs and Today's Investment Landscape

Ongoing concerns about market volatility, coupled with a desire for investments that offer the potential for a stream of income, continue to influence long-term investment strategies. These same issues have fueled a growing interest in REITs.

Why? Because REITs offer investors the opportunity to diversify their portfolios beyond publicly traded stocks, bonds, and mutual funds. Equally important, they may also be a suitable choice for investors seeking:

  • Capital Preservation
  • Monthly Income
  • Growth Potential


Incorporating Non-Traded REITs Into a Long-Term Investment Portfolio

Investing for the long term requires a well-crafted plan of action that will weather all sorts of changing market conditions-determining an appropriate asset allocation mix is a key step in this process. Including a non-traded REIT in a long-term investment portfolio offers the potential for:

  • Increased portfolio diversification through participation in a market cycle that may behave differently from stocks and bonds.
  • Preservation of capital through investment in tangible assets that are in high-demand locations. Non-traded REITs also have reduced exposure to market volatility since they are not traded on an exchange although this feature makes them less liquid than traded REITs.
  • Monthly income through the payment of distributions. Non-traded REITs must distribute at least 90 percent of annual taxable income to shareholders to qualify as a REIT for federal income tax purposes. In addition, there is the potential for payments to increase or decrease if the REIT's revenue levels change.
  • Capital appreciation through increases in the value of properties in a REIT's portfolio upon its sale or liquidation-which means REIT's have the potential to serve as a hedge against inflation over the long term. Factors such as the growth of the underlying assets within the portfolio are required to achieve this benefit.