Non-Traded REIT

What Is A Non-Traded REIT?

A Non-traded REIT (real estate investment trust) is a certified real estate investment trust duly registered with the Securities Exchange Commission but is not listed on an exchange for public trading. Thus, it aims at providing retail investors (accredited) to invest in inaccessible real estate products along with certain tax benefits.

Non-traded REITs are required by the SEC to file regular reports and follow regulatory compliance. Also, they need to fulfill all the IRS requirements for REITs, like returning a minimum of 90% of taxable income to the stakeholders or investors. Although, such investment involves high risk compared to the publicly traded REIT.

• A non-traded REIT is a real estate investment registered with the Securities and Exchange Commission (SEC). Still, it is not available for public trading on any major exchange.
• The issuing companies must comply, periodically file reports with the SEC, and meet the Internal Revenue Service (IRS) requirements.
• Registered broker-dealers and financial advisors sell such investments to accredited retail investors.
• The PNLRs often lack transparency and liquidity. Hence, these are high-risk and expensive investment vehicles that offer higher-than-average returns when compared to other securities.

Non-Traded REIT Explained

Non-traded REITs or public non-listed REITs (PNLRs) are those real estate investment vehicles that are not publicly available for trading on a stock exchange. Thus, these non-traded real estate investment trusts own, operate and manage income-yielding properties and assets like commercial buildings, warehouses, shopping malls, apartments, etc. Moreover, the companies issuing such securities.

Hence, the Securities and Exchange Commission (SEC) requires them to register and file periodic reports. Also, these investment products follow the same set of Internal Revenue Service (IRS) rules as the other REITs. Moreover, the offering documents and prospectus of the REIT should disclose the commission structure for non-traded REITs. Hence, investors can expect to encounter a standard type of commission and fees associated with these investments.

• Upfront sales commission: When an investor purchases shares of a non-traded REIT, a portion of the investment amount is often allocated as an upfront sales commission.
• Dealer manager fee: This fee is paid to the broker-dealer or financial advisor acting as the dealer manager for the REIT.

Unlike publicly-traded REITs, which list on stock exchanges and trade like stocks, investors lack a readily available market to buy or sell these PNLRs. Instead, broker-dealers or financial advisors sell and promote public non-traded REITs. As a consequence, financial market participants consider such investments to be illiquid. This lack of liquidity makes it challenging for investors to sell their shares before a predetermined liquidity event occurs.

However, there has been some development in recent years in creating limited secondary markets for non–traded REIT shares. Additionally, these unlisted REITs may distribute dividends to their shareholders regularly. Thus, dividends from non-traded REITs are often generated from the rental income and are collected from the properties owned by the REIT.

REIT or Real Estate Investment Trusts - Video Explanation

Examples

Let us understand the concept better with the help of an example.

Example #1

Suppose Hawthorn Hospitality Trust focuses on acquiring and managing hotel properties in popular tourist destinations across the United States. Besides, the REIT aims to generate income and potential capital appreciation through hotel operations and strategic property management.

Here are some critical details about the hypothetical Hawthorn Trust:

• Investment Strategy:  The Trust invests in full-service hotels, boutique hotels, and resorts. The REIT targets properties in popular tourist destinations with high occupancy rates, strong demand, and potential for future growth.
• Geographic Focus: The REIT focuses on acquiring hotel properties in key tourist destinations across the United States, such as beachfront locations, major cities, or areas known for their natural attractions. Specific locations may include coastal regions, urban centers, or areas near national parks.
• Property Management: The Trust employs an experienced management team that oversees the day-to-day operations of the hotel properties in its portfolio. Moreover, the group focuses on delivering exceptional guest experiences, maintaining high-quality standards, and maximizing revenue potential through effective marketing and operational strategies.

Therefore, Potential investors in this would typically have the opportunity to purchase shares through a private placement. Hence, financial advisors or broker-dealers often facilitate them.

Example #2

Redeem requests from non-traded U.S. real estate income trusts (REITs) have reached an all-time high, pushing private equity companies to put restrictions in place to prevent withdrawals.

Blackstone Inc, Starwood Capital Group, and KKR & Co Inc announced that they will ban investors from redeeming their holdings. Therefore, anytime such withdrawals reach a predefined 5% of the total quarterly assets of the REITs.

According to real estate consultancy firm Robert A. Stanger & Company, the number of such redemptions across U.S. non-traded REITs surged to $12.2 billion in 2022. Therefore, an increase of eight times the $1.5 billion made by investors the year before.

Therefore, the increase in repayments coincides with a recent divergence in returns between privately held REITs and their publicly traded equivalents.

Pros And Cons

Pros

• More than Average Returns: Such investment products comprise income-generating real estates like commercial buildings, offices, malls, warehouses, apartments, etc., which yield high returns for the investors in the form of rent, lease, or mortgage.
• Inflation Hedge: Since the returns from such investments are considerable and keep increasing, it efficiently beats the rising inflation rates.
• Periodic dividends: The PNLRs offer regular dividend payouts to the investors or shareholders until liquidation, which is a plus for them.
• Diversification: Another key benefit is its ability to diversify the investor's portfolio when the other assets are highly volatile to the market swings.
• Different Ways of Liquidation: The companies can liquidate their assets in numerous ways, such as selling off the properties wholly or partially or merging with another company to convert into an exchange-traded REIT.

Cons

• Illiquidity: Since such REITs do not have a listing in the secondary market like a stock exchange for trading, shareholders cannot sell their holdings immediately in case of an urgent fund requirement.
• Complex and Uncertain Valuation: These securities do not have a listing for trading on any exchange, thus the public does not have ready access to their actual market value, and it is not possible to determine their precise value.
• No Guarantee of Distributions: The dividend yields of such investments are though high but often uncertain.
• Risky: The underlying assets of such an investment vehicle are not easily traceable. Also, it is difficult to determine the exact market value of these securities, which increases the risk of loss for the investors.
• Excessive Front-End Fees: The companies issuing such REITs spend a significant amount on the marketing and compensation of the broker-dealer and financial advisors, which result in high front-end fees charged from the investors.

Non-Traded REIT vs Private REIT vs Interval Fund

Non-Traded, Private, and Interval Fund do not have a listing for public trading. Therefore, they lack liquidity and transparency. However, there are various distinctions between them, as discussed below:

Basis	Non-Traded REIT	Private REIT	Interval Fund
Overview	These real estate investment trusts own, manage and operate various income-generating properties. However, these securities are not listed on any major exchange for public trading.	Private REITs are not listed on any national exchange, nor do they need to register with SEC or comply with the SEC regulations. Instead, these are sold through brokers.	Interval funds are not available for public trading in the secondary market.
Repurchase	Not applicable	Not applicable	Companies buy back their outstanding shares at NAV
Investors	Accredited investors	Institutional investors and accredited	Accredited investors
Management	Externally advised and managed	Externally advised and managed	Internally or externally advised and managed

Non-Traded REIT Vv Traded REIT

Although the SEC requires both non-traded and publicly traded REITs to register, they differ significantly in the following ways.:

Basis	Non-Traded REIT	Traded REIT
Overview	Such real estate investments are not listed on any national stock exchange for public trading.	These REITs are listed on the national stock exchange for public trading.
Eligibility Criteria	Sold to accredited investors whose net worth is $1000000 or more and whose annual income in the past two years is at least $200000.	No such criteria; all traders can participate
Management	Assets are externally managed	Self-managed assets
Liquidity	Illiquid due to non-listing since these shares cannot be exchanged in the secondary market.	Liquidity is high as the traders can buy and sell these securities anytime in the secondary market, just like the common stocks or equity.
Risk Involvement	High	Comparatively low
Income Distribution	Regular but uncertain dividend payout	Dependable quarterly dividends

Frequently Asked Questions (FAQs)

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