A real estate investment trust (REIT) is a corporation that combines the capital of many investors to acquire or provide financing for real estate. It offers the benefits of a real estate portfolio under professional management and generally does not pay corporate federal income tax.
Distributions of at least 90 percent of taxable income must be paid to investors to retain REIT tax status. If a REIT fails to qualify or maintain its qualification as a REIT for any taxable year, the REIT will be subject to federal income tax on taxable income at regular corporate rates, resulting in a decrease of net earnings for investment or distributions.
Today’s market offers traded and non-traded REIT options for investors seeking to add commercial real estate to a portfolio. Traded REITs, which are listed on a public exchange, offer liquidity to investors. However, they experience daily stock market price fluctuations based on consumer sentiment.
Non-traded REITs are less liquid than their traded counterparts, but they provide retail investors access to commercial real estate outside of the stock market. In addition, the REIT structure is aligned with the long-term nature of the real estate in which it invests. Non-traded REITs also seek to provide the diversification benefits that are frequently associated with commercial real estate. It is important to note that low correlation does not guarantee protection against losses.
Investors interested in diversifying through real estate may purchase shares in a non-traded REIT. The REIT uses that money to acquire real estate properties and other real estate-related assets. As capital is raised, the REIT builds an asset portfolio consistent with its investment strategy. The REIT’s management team oversees the property portfolio and may be involved with its day-to-day operations. In the case of a non-traded REIT, the REIT completes the offering near the end of its cycle by either listing its shares on a public exchange or by liquidating its assets and distributing any available proceeds to investors.
It is important to understand that investing in commercial real estate is a long-term activity. As such, there might be liquidations at less than original amounts invested and sometimes illiquidity throughout the REIT’s multiyear life cycle. However, this frees the REIT from some of the short-term pressures associated with the traded market, thus enabling the REIT’s management team to focus on a long-term strategy.
Distributions are not guaranteed and may consist of income offering proceeds and borrowings. When distributions are paid from sources classified as return of capital or borrowings, it may reduce the number of acquisitions, lower overall returns and not be sustainable.
Non-traded REITs are not suitable for all investors. Suitability standards are extensive and generally require an investor to have a net worth of at least $250,000, or a net worth of no less than $70,000 and an annual gross income of $70,000 or more.
In addition to limited liquidity and possible illiquidity, investments in non-traded real estate and REITs are subject to significant risks. These risks include limited operating histories, reliance on the advisors, conflicts of interests and payment of substantial fees to the advisors and their affiliates. Investing in these products is not suitable for all investors. A financial professional should determine whether risks associated with an investment in the shares are compatible with their client’s investment objectives.
This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offer may be made only through the prospectus. This sales and advertising literature must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which it relates.
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