REITs allow investors to get involved with real estate investing passively. There’s no property management as is often required with real property. An investor’s equity in a REIT turns into fractional ownership of real estate. There are many types of REITs to choose from. In this article, we’ll give an overview of several different types of REITs.
Public REITs
Public REITs are registered with the SEC (Securities Exchange Commission). Some public REITs trade on public exchanges such as the NYSE and NASDAQ. These are called public exchange-listed REITs. These REITs have a higher correlation with fluctuations in the stock market than real property.
Public REITs that do not trade on exchanges are called public non-listed REITs (PNLRs). These REITs do not have the advantage of instant price discovery available to exchange-listed REITs. Instead, their prices are based on net asset value or NAV. Updates to the NAV (net asset value) price can vary. Monthly updates are common.
Distributions from public and private REITs are at least 90% of taxable income to shareholders in the form of dividends.
NAV PNLRs
NAV PNLRs have a NAV-based price, which allows investors to sell their shares back to the REIT at the current NAV price. The NAV is updated regularly with intervals ranging from daily, weekly, to monthly, depending on the REIT.
These REITs make up the majority of PNLRs. Costs for selling shares are comprised of commissions and, in some cases, service fees. NAV PNLRs fees are often lower than life cycle PNLRs.
Life Cycle PNLRs
Unlike a NAV PNLR, life cycle PNLR investors must wait for a major liquidity event before selling their shares back to the REIT. These REITs do not provide NAV updates until after about 18 months when the offering has concluded. After that, NAVs are updated annually.
Life cycle PNLRs transaction costs include commissions and potential trailing performance fees.
Both NAV and life cycle PNLRs have minimum investment requirements that range from $1,000 to $2,500.
Private REITs
Private REITs are exempt from SEC registration. For this reason, they do not trade on public exchanges. The private nature of these REITs means it can be difficult to compare performance across various private REITs since such data is not readily available and takes some effort to compile.
Private REITs generally have high minimum investment requirements. In some cases, the investor may need to be accredited.
Compared to public exchange-listed REITs, private REITs are illiquid. The illiquidity is also due to minimum holding period requirements, generally a few years. This illiquidity means prices in the private market are marked to market, which can make prices less volatile than those of exchange-listed REITs. Prices of private REITs are more closely correlated to real estate price fluctuations.
721 UPREITs
A 721 UPREIT is a transaction that exchanges real property for shares in a REIT partnership. The REIT and the partnership are two different components in the structure. The REIT manages the properties while the umbrella partnership (the UP in UPREIT) owns them.
An investor can defer taxes owed on real property gains by exchanging the property for equity (e.g., operating units) in a UPREIT. The umbrella partnership owns the majority of OP units in the REIT.
Each of the above REITs allows investors to get involved in real estate. However, the investment process is different across each. The right REIT depends on the investor’s specific financial goals, which a financial advisor can help with.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of
mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
- Avoid referring to UPREITS as “investments” and instead refer to them as types of transactions, like 1031s are a type of transaction but not the actual investment vehicle.
- Standard terminology will be to say that investors are “investing into a DST with an UPREIT option”
Investors who have sold real estate and executed a 1031 Exchange into a DST may execute future 1031 Exchanges and continue to defer taxable gains. Alternatively, a client may enter into a transaction pursuant to IRS Code Section 721 (also known as an UPREIT transaction). In an UPREIT transaction, Clients will receive, at the REIT Sponsor’s option, cash or OP units. OP units are units of an operating partnership that is wholly owned by a REIT. If the client receives OP units, he or she has exchanged into a security and therefore no longer owns real estate and cannot execute another 1031 Exchange out of the OP units and into other real estate. However, pursuant to IRS Code Section 721, the UPREIT transaction into the OP units may qualify as a tax-deferred exchange. The disposition of their interest in OP units will result in a taxable transaction, including the recognition of their deferred capital gain and any depreciation recapture. The client’s gain will only be recognized upon sale or disposition of the OP units.
There is no guarantee that an UPREIT transaction will occur. The option for this transaction is at the discretion of the REIT Sponsor. Some DSTs allow the client to choose whether to take OP Units or cash. Clients should consult the prospectus and their advisor regarding the specifics.
