A REIT is Real Estate Investment Trust, which is a company that owns income-producing real estate (or real estate-related assets). These assets may be physical buildings, such as apartments and restaurants, or real estate debt, such as mortgages.

REITs exist for all kinds of asset types: retail, office, healthcare, restaurants, resorts, industrial, and residential REITs are a few. REITs are a way for investors to be exposed to the real estate industry without having to directly own the building types they want to invest in.

But there is a big difference between publicly traded REITs and non-traded REITs. And there are good reasons to stay away from non-traded REITs.

Publicly traded REITs

Publicly traded REITs are just that: publicly traded on an exchange like the New York Stock Exchange. You can buy and sell them just as you would any other stock. And because they are publicly traded on an exchange, you can easily check on a REITs’ value by looking at the price of a share. There is altogether more transparency with publicly traded REITs than non-traded REITs.

The key difference between these publicly traded REITs and non-traded REITs is that non-traded REITs are not publicly traded and are not listed on any exchange.

The true value of non-traded REITs can be hard to tell

Why are non-traded REITs a risk? If a REIT isn’t publicly traded, then it becomes difficult to determine what their real value is. You can’t be sure what your shares go for on the open market, because they aren’t trading on the open market (like the NYSE). And because there is far less public information about your non-traded REIT, they also won’t have analyst reports available.

By contrast, the real value of a share of any publicly traded REIT is easy: it’s whatever price the shares are trading at. And because the shares of publicly-traded REITs are easily bought and sold (liquidity), you can more easily rely on the public price of a share to be an accurate reflection of its underlying value.

Non-traded REITs cannot be easily sold

Want to sell your shares of publicly traded REITs? No problem. You can do that in minutes. How about selling your shares of a non-traded REIT? You may be locked in for 10 years or more.

Non-traded REITs cannot be easily sold. Most of them have minimum holding periods. And to get out of the investment, you may have to wait until the non-traded REIT lists its shared on a public exchange (at which point it becomes a publicly traded REIT). Or, you could wait until the REIT sells its assets privately. In either case, these triggers may not happen for over 10 years after you’ve made your investment. 

Promoters of non-traded REITs may tell investors that they can redeem their shares early in an early redemption program. But these early redemption periods often have big limitations that make them not worthwhile. For example, they might let you sell early, but only at a discount, meaning you lose money on your investment. Some non-traded REITs also have the right to pull the plug on your rights to redeem your shares early without any notice at all.

Non-traded REITs come with high fees

Another downside to non-traded REITs? High fees.

REITs often come with high upfront fees for management and operations, before any real estate is purchased. These fees leave less money for the company to buy real estate, which is what you’re after in the first place.

How high are these fees? As high as 15 percent of the price of the REIT. If you bought into a non-traded REIT with 15 percent upfront fees, you will immediately be down 15 percent on your investment.

Other fees and costs include property acquisition fees and asset management fees to name a few.

Non-traded REITs dangle misleading distributions to get you to invest

One way that non-traded REITs get people to invest is by dangling high initial distributions (also called dividend yields).

But these high distributions are misleading for a couple reasons.

First, they may come from the initial money the REIT raised, not from the actual operations of the company. In other words, a non-traded REIT offering you a high initial distribution may effective be giving you back part of what you invested and calling it a ‘dividend.’ It is not from any profit that the REIT has earned.

Second, high initial distributions also reduce the money the REIT has to buy real estate.  

Third, high initial distributions will reduce the value of your private shares as well.

Finally, the high initial distributions are misleading because they are unlikely to represent what you will probably earn throughout the life of the investment.

A better measure is the total return of the non-traded REIT. That includes the capital appreciation in addition to the distributions—not just the distributions.

Non-traded REITs can have conflicts of interest with you, the shareholder

Non-traded REITs don’t usually have their own employees. Rather, they have a third party manage their investment.

Why is that a downside? Because the non-traded REIT may pay this manager fees based on the amount of property under management—not the performance of the company. In that case, the manager’s interests could conflict with the shareholders (you).

To make matters worse, the manager of a non-traded REIT may actually work for other companies that are in competition with your REIT.

Ask for the prospectus

If your broker tells you about a non-traded REIT, make sure that they give you the prospectus. The prospectus is a document that describes important features of the investment, including its objectives, the risks, the strategy, and other important information.

You can also find the prospectus yourself through the Securities and Exchange Commission’s (SEC) EDGAR database. (These documents are usually named 424B3 filings in the database). You can also find quarterly and annual reports that the company filed in EDGAR.

Contact us

If your non-traded REIT was sold to you with false promises, contact Wilkowski Law for a free assessment of your potential claims.