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Real Estate Investment Trusts, commonly referred to as REITs, were created by the U.S. Congress in 1960 to give individual investors the opportunity to own a portioned interest in large-scale commercial real estate.

 

They are a special type of corporation that purchases and professionally manages real estate in an effort to generate income and capital appreciation for shareholders. REITs generally pay no corporate income tax if they distribute at least 90 percent of their taxable rental income to investors, excluding income from operations or sales through taxable REIT subsidiaries. These distributions may be partially tax deferred due to depreciation and other tax items passed through to the investor.

 

Benefits of Investing in Commercial Real Estate:

 

  • Real estate is a tangible asset that has the potential to produce income and increase in value over time.
  • Adding real estate to an investment portfolio helps increase investment diversification and allows participation in a market cycle that can complement stock and bond market cycles.
  • Real estate investments can help investors preserve capital and soften the effects of inflation.

Real Estate Investment Strategies

Core investment programs generally employ conservative strategies for lower-risk investments held for a relatively long term. These real estate investments are generally structured for investors seeking current income yield with stable current income characteristics, diversification, and inflation-hedging benefits. Capital appreciation expectations are moderate for core investment strategies. To achieve this combination of attributes, core investment sponsors usually seek investments in well-established markets and stable, well leased, and maintained buildings with conservative leverage and minimum capital improvement and repair requirements. To further moderate risk these programs target properties with multiple, high credit worthy tenants in geographically diverse markets.

Value-added investment programs usually assume a moderate level of risk with the goals of buying properties, improving or repositioning them in some fashion to increase current yield, and then selling when market conditions are ripe for achieving capital appreciation. Program managers seek to acquire properties that exhibit management or operational problems such as below-market occupancy rates, require physical improvement, or suffer from capital constraints. The asset financing in this category often features moderate leverage levels. To add value to the property, fund managers may attempt to re-tenant, recapitalize, or reposition the property.

Opportunistic investment programs

assume greater risks with the objective of generating the highest possible returns for investors seeking short-term capital appreciation with minimal current income requirements. Fund managers seek a broader range of properties that can present significant opportunities for near-term capital appreciation, often in markets with higher volatility in occupancy, lease rates, and sales prices, lower barriers of entry, and high growth potential. Acquisitions may be concentrated in limited geographic areas and their financing often features relatively higher leverage percentages. To add value to these properties, fund managers may attempt to re-tenant, recapitalize, or even develop/redevelop the property.

A Comparison of REIT Structures: Traded versus Non-Traded

 

A Public, Non-Traded REIT typically has three distinct periods during its lifespan. These periods can be summarized as:

 

Offering period – when capital is being raised and initial property acquisitions are made.

 

Operating period – when capital is no longer being raised, acquisitions continue to be made, and properties are being managed for their operational cash flow.

 

Disposition period – when the portfolio assets are being sold, either singularly, or in bulk.

 

 

An important distinction between Publicly Traded and Public, Non-Traded REITS is that a Public Non-Traded REIT is often in a cash raising capacity either when selling its shares during the offering period, or from investors reinvesting their dividends during the operating period. This can provide the REIT manager with sufficient cash on hand to take advantage of acquisition opportunities as they may arise. The Publicly Traded REIT manager, however, is typically limited to raising cash by either selling existing portfolio properties, increasing the REIT’s debt level, or by issuing additional shares, which is dilutive to existing shareholders. These factors could inhibit the Publicly Traded REIT manager’s ability to act quickly when acquisition opportunities arise.

 

If conditions are favorable and the property portfolio is sizable in value a Public, Non-Traded REIT manager may decide to forgo an asset disposition period and instead choose to create a shareholder liquidity event by listing on a national exchange.

 

 

Potential Non-Traded REIT Investment Risks:

 

  • The value of shares of the trust will fluctuate with the portfolio of the underlying real estate related investments.
  • Redemption will be at the price which may be more or less than the original price paid for units of the trust.
  • There can be no assurance that a secondary market for the REIT will be maintained by the issuer. Therefore, there is risk that an investment in the REIT may be illiquid.
  • The REIT is subject to risks such as potential conflicts of interests, risks associated with the lack of liquidity, lack of experience in operating a REIT, risks associated with the leveraging the investment, the special risks if investing in real estate such as market risk, interest rate risk, lease terminations, and potential adverse economic and regulatory changes.
  • Current income and future cash flow is not guaranteed.

 

 

Potential Non-Traded REIT Investment Benefits:

 

  • Current income from regularly scheduled cash distributions
  • Capital appreciation when selling real estate assets at higher prices
  • Tax-Advantaged returns from partially tax-deferred income due to depreciation
  • Capital preservation due to well-located real estate that has enduring value
  • Hedge against inflation with protection from erosion in earning power
  • Asset diversification that may reduce portfolio volatility and risk

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“Utilizing Real Estate in the Search for True Diversification”

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At a Glance: A Comparison of REIT Structures

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Disclosure:

This material does not constitute an offer to sell or a solicitation to buy any securities. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. Read the applicable prospectus before you invest or send money. There is no assurance that the investment objectives of these programs will be attained. Consult the applicable prospectus or offering memorandum for suitability standards and minimum investments in your state.  Participation in a real estate program is an investment in the program and not a direct investment in real estate or any other assets owned by the program.  There are risks involved in investing, including market fluctuation and possible loss of principal value, and the investment may not be suitable for all investors.

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Check the background of Our Firm and Investment Professionals on FINRA’s BrokerCheck.

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