Private real estate investment trusts (REITs) operate much differently than their publicly-traded counterparts.
Shares of private real estate investment trusts (REITs) are typically only offered to institutional investors such as large pension funds and high-net-worth accredited investors because their shares aren’t traded on any public exchanges, which makes them highly illiquid. Private REITs also aren’t required to register with the Securities and Exchange Commission, so they don’t have to provide regular disclosure agreements that can provide valuable insight into their business operations.
Fees are another area where private REITs are much different from comparable investment vehicles. This article examines private REIT fee structures to provide investors with a better understanding of how they work and what types of fees are normally associated with private REITs.
What Are Private REIT Fees?
For many investors, real estate is a crucial component of a well-diversified portfolio. Millions of retail investors have used real estate investment trusts to add commercial real estate to their portfolios – more than 145 million American households hold REIT stock in their 401(k)s and other investment funds, the National Association of Real Estate Investment Trusts reports.¹
Stock in public REITs can be bought and sold at will through brokerage firms or trading platforms for standard brokerage or trading fees. Shares of private non-traded REITs, however, are typically offered by brokers and financial advisers who may charge as much as nine to 10 percent of the total investment, the SEC cautions.² However, There can be other applicable fees with private REITs as well, including:
- Offering and acquisition fees. These fees cover the sponsor’s costs incurred in finding deals and expenses associated with onboarding new investors.
- Management fees. REIT managers use these fees to cover management services.
- Administrative and marketing fees. These smaller fees are used to cover any marketing expenses as well as costs incurred from filing any applicable financial, tax, or auditing compliance documents.
Combined, these fees can consume as much as 15 percent of the value of your investment and erode potential returns. Front-end fees for non-traded REITs typically come in two parts: offering fees and sales commissions, and additional and ongoing fees that are paid from funds raised through the offering period. Private REITs may also charge fees associated with the disposition of assets when it comes time to wind-down the investment.
The Bottom Line
High investment fees can water down the financial strength of your investment dollars. When looking at potential private REIT investments, investors should consider how the higher up-front fee structure and any ongoing fees associated with private REITs might impact their investment dollars over the holding period of the investment.
Sources:
1. REITs by the numbers, Nareit, https://www.reit.com/data-research/data/reits-numbers
2. Understanding Fees and Taxes, What are REITs, SEC.gov, https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
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. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. 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. 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.
