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Non Traded Real Estate Trust (REIT)

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, which are the focus of this alert.

Non Traded Real Estate Investment Trust (REIT)

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.


Potential Benefits of Real Estate Investment Trusts

  • REITs allow investors to diversify amongst many different real estate assets such as apartments, net lease properties, retail shopping centers, office buildings, senior housing, senior secured debt and mezzanine debt, healthcare facilities or industrial properties. REITs allow investors access to real estate as a complimentary tool to their stock and bond portfolio without the day to day management of real estate.
  • These REITs are designed to provide an income in the form of a monthly or quarterly dividend. Additionally there is the possibility of appreciation and growth within the portfolio.
  • Investors are not required to guarantee loans and minimum investment amount noted in each prospectus can be very minimal.


Potential Risks of Real Estate Investment Trusts

  • REITs do not guarantee income or total performance. Diversification in REITs does not guard against loss of income nor loss of principal. REITs are subject to economic volatility.
  • REITs may have conflicts of interest where the objectives of the management are not in the best interest of investors.
  • Non Traded REITs are typically illiquid.
  • Distributions from REITs may come from cash flow from operations OR paid from offering proceeds, or sales or refinances of assets within the REIT.
  • Fees associated with the REIT can affect the performance of the real estate.
  • Investors should read the prospectus for the risks and benefits of each particular investment. Investors may wish to work with advisors, tax and legal professionals that understand the complexities of real estate investments and seek their professional guidance on potential income and potential tax ramifications.

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