REITs - Publically Registered Non-Traded v. Exchange Traded

Real Estate Investment Trust Fraud and Breach of Fiduciary Duty Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

Many investors have heard of real estate investment trusts (REITs) but what is the difference between a publically registered non-trade REIT vs. an exchanged traded REIT?  This post is designed to provide general educational information relative to this subject.  However, it is not designed to be complete in all material respects.  Thus, it should not be relied upon as legal or investment advice.  If you have any questions relative to REITs, you should consult with a qualified professional.

Extended periods of low interest rates has contributed to many investors seeking products offering attractive yields. One such product is the publicly registered non-exchange traded real estate investment trust (REIT) or "non-traded REIT" for short. While non-traded REITs and exchange-traded REITs share many features in common, they differ in several key respects. Most significantly, as the name implies, shares of non-traded REITs do not trade on a national securities exchange. For this reason, non-traded REITs are generally illiquid, often for periods of eight years or more. Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and adversely effect total return. Furthermore, the periodic distributions that help make these products so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges, which are typically derived solely from earnings.

What Is a REIT?

A real estate investment trust, or REIT, is a corporation, trust or association that owns (and might also manage) income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties-from office buildings and shopping centers to hotels and apartments, even timber-producing land-which the typical investor might not otherwise be able to purchase individually.

REITs can offer tax advantages. For instance, qualified REITs that meet Internal Revenue Service requirements can deduct distributions paid to shareholders from corporate taxable income, avoiding double taxation. The REIT must also distribute at least 90 percent of its taxable income to shareholders annually. These distributions are taxable to the extent of any ordinary income and capital gains included in the distribution.

There are two types of public REITS: those that trade on a national securities exchange and those that do not. REITs in this latter category are generally referred to as publicly registered non-exchange traded, or simply non-traded REITS.

Features of Non-Traded REITs

Like exchange-traded REITs, non-traded REITs invest in real estate. They are also subject to the same IRS requirements that an exchange-traded REIT must meet, including distributing at least 90 percent of taxable income to shareholders. Like exchange-traded REITS, non-traded REITs are registered with the Securities and Exchange Commission and are required to make regular SEC disclosures, including filing a prospectus and quarterly (10-Q) and annual reports (10-K), all of which are publicly available through the SEC's EDGAR database. While these two types of REITs share these similarities, there are also numerous differences between them.  To review some of these differences please follow the appropriate highlighted link.

Before You Invest:

Be wary of pitches or sales literature offering simplistic reasons to buy a REIT investment. Sales pitches might play up high yields and stability while glossing over the product's lack of liquidity, fees and other risks. Ask whoever is recommending that you purchase a REIT how much they (and their company) are receiving in selling commissions or other fees. Also ask them to explain why they think the REIT is the right investment for you and how will it help you achieve your specific investment objectives and goals.

Always ask to review the initial prospectus and any prospectus supplements, as these documents will contain a more extensive and balanced discussion of the risks involved than any sales material you receive or pitches you hear. You can obtain a prospectus by going to the SEC's EDGAR database of company filings and typing in the name of the REIT, then search for entries titled "Prospectus." Remember that the fact that a company has registered its securities or has filed reports with the SEC does not mean that it will be a good investment-or that it will be right for you.

Ask about fees associated with the product. Also ask how the distribution is being funded and whether a portion of that distribution is comprised of a return of investor capital. Make sure you understand that you will be locking up your investment, with only limited avenues for redemption. If the REIT offers a share redemption program, make sure you understand how the repurchase price for your shares will be determined and, most importantly, the limitations of the plan. Review with your financial professional the risks associated with real estate investment and evaluate other products that could meet your investment objectives (investment income, for instance). Understand the various liquidity events specific to the REIT you are considering.  Remember to only invest if you are confident the product can help you meet your investment objectives and you are comfortable with the associated risks.