Private REITs: Explained

Private real estate investment trusts, or private REITs, are real estate investment vehicles that are not listed on a national securities exchange. They may give eligible investors access to a portfolio of income-producing properties, but they also involve important tradeoffs, including limited liquidity, valuation uncertainty, fees, sponsor risk, and the possibility of losing principal. This guide explains how private REITs work and what accredited investors should review before considering an offering.

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What Is a Private REIT?

A private REIT is a real estate investment trust whose interests are not traded on a national securities exchange. Depending on its structure, it may own or finance income-producing real estate and may be offered through a private placement. The offering documents control the investment terms, investor eligibility, fees, valuation method, and redemption provisions.

A REIT generally owns, operates, or finances income-producing real estate. Common categories include equity REITs, which own or operate properties, and mortgage REITs, which invest in mortgages or mortgage-related assets. REIT qualification involves statutory tests, including requirements concerning real-estate assets, income, ownership, and distributions. The exact tax treatment of an investment depends on the entity, the distribution, the investor, and current law.

A private REIT is different from a publicly traded REIT because its interests do not trade on a national exchange. It may also be different from a public non-listed REIT, which is registered with the SEC but is not exchange-listed. These labels describe broad categories, not a substitute for reviewing the actual offering documents.

Sources: Nareit, What’s a REIT?; Nareit, Private REIT; Internal Revenue Service, Instructions for Form 1120-REIT.

Public vs. Private REITs: Key Differences

Public REITs trade on national exchanges and generally provide daily market pricing and easier access to liquidity. Private REITs do not trade on those exchanges and are usually offered to a narrower investor group, often with longer holding periods and limited redemption terms. Public non-listed REITs occupy a separate category, so the specific offering structure matters.

Feature	Publicly traded REIT	Public non-listed REIT	Private REIT
Trading venue	National securities exchange	Not listed on a national exchange	Not listed on a national exchange
Pricing	Market price during exchange trading	Generally based on stated NAV or another valuation process	Valuation method and timing are set by the offering documents
Liquidity	Usually easier to buy or sell, subject to market conditions	Limited and subject to the program terms	Limited and subject to transfer, redemption, and exit terms
Investor access	Generally available through a brokerage account	Eligibility varies by offering	Often limited to accredited or institutional investors
Disclosure and oversight	Registered public-company reporting and exchange requirements	SEC-registered, but not exchange-listed	Offering structure and exemption determine required disclosures
Fees	Expense and transaction costs vary	Offering, selling, management, and program fees may apply	Placement, management, acquisition, financing, performance, and other fees may apply

There is no single category that is appropriate for every investor. A comparison should focus on the actual investment objective, liquidity needs, concentration, leverage, valuation process, fees, conflicts, and exit provisions disclosed for the specific offering. Do not compare headline distributions without reviewing how distributions are funded and how expenses affect investor value.

Source: Nareit, What’s a REIT?. Classification and disclosure details should be confirmed in the offering’s current documents.

Who Can Invest in a Private REIT?

Many private REIT offerings limit participation to accredited investors, but eligibility is offering-specific and must be confirmed in the subscription materials. An individual may qualify under SEC financial or professional criteria. Meeting a general definition does not make an investment suitable, and eligibility does not remove the risks of loss, illiquidity, or limited information.

Under the SEC’s general accredited-investor definition, an individual may qualify through a net worth over $1 million, excluding the primary residence, individually or with a spouse or partner. An individual may also qualify through income over $200,000 in each of the prior two years, or joint income over $300,000, with a reasonable expectation of reaching the same income level in the current year. Certain licensed investment professionals and other categories may qualify under additional criteria.

Accredited-investor status is not a recommendation and is not a government approval of an investment. The sponsor, broker-dealer, or other responsible parties may require documentation or other verification, depending on the offering and exemption. Review the subscription agreement and ask the offering contact what information is required before assuming you qualify.

Source: U.S. Securities and Exchange Commission, Accredited Investors, June 12, 2024.

Private REIT Fees: What to Review

Private REIT fees vary by sponsor, structure, property strategy, financing, and distribution channel. The complete fee picture may include selling compensation, acquisition and disposition costs, management fees, financing costs, administration, property-level expenses, and performance-based compensation. Review the offering’s fee table and conflicts disclosures instead of relying on a headline yield.

• Offering and placement costs: compensation and expenses connected with raising capital and distributing interests.
• Acquisition and disposition costs: transaction expenses when properties or other assets are purchased or sold.
• Management and administration: fees for asset management, property management, accounting, reporting, legal work, and administration.
• Financing costs: interest, lender fees, refinancing costs, and other costs associated with debt.
• Performance-based compensation: any promote, incentive allocation, or similar payment must be understood alongside its triggers, hurdles, and conflicts.
• Investor-level costs: transfer, redemption, tax-reporting, custodial, or other costs described in the documents.

Ask for the current private placement memorandum, subscription agreement, financial statements or reports provided for the offering, and the complete fee schedule. Compare fees with the services and risks described, and ask how fees affect net asset value, distributions, and the amount available for investment. A steady reported value is not evidence that an investment has low costs or low risk.

Risks and Limitations of Private REITs

Private REIT risks can include loss of principal, limited liquidity, uncertain valuation, sponsor and manager conflicts, leverage and interest-rate exposure, property or tenant concentration, operating risk, and changing tax treatment. Redemption programs may be limited, suspended, or unavailable. Review these limitations near any discussion of potential income or diversification.

• Illiquidity: there may be no public market for the interests, and a transfer or redemption may be restricted or unavailable when you need cash.
• Valuation uncertainty: values may be determined periodically rather than by a live market, and the reported value may not equal the amount received in an eventual sale.
• Property and market risk: vacancies, tenant credit, property damage, local conditions, and changes in rents or property values can affect results.
• Leverage and interest-rate risk: debt can magnify losses and refinancing may become more expensive or difficult.
• Sponsor and conflict risk: fees, affiliated transactions, property selection, and management arrangements may create conflicts that must be reviewed.
• Tax and reporting risk: tax documents and reporting depend on the specific structure and investor circumstances. Consult your own tax adviser.

Private REIT interests are securities. They are not bank deposits, are not insured by the FDIC, and should not be described as safe or guaranteed. Past performance, projected outcomes, target distributions, or a sponsor’s history do not guarantee future results.

Related reading: Risks of Real Estate Investment Trusts.

How to Evaluate a Private REIT Before Investing

A disciplined review starts with the offering documents, not the projected distribution. Examine the properties, sponsor, strategy, leverage, valuation, fees, conflicts, redemption rules, tax reporting, and exit assumptions. Confirm that the investment fits your objectives and liquidity needs with your own qualified advisers before making a decision.

1. Read the current documents: review the private placement memorandum, subscription agreement, financial statements, risk factors, and any supplements or amendments.
2. Understand the assets: identify property type, location, tenants, occupancy, leases, debt, concentration, and the assumptions behind the business plan.
3. Review the sponsor: examine experience, related-party arrangements, incentives, conflicts, reporting practices, and how prior results are presented and substantiated.
4. Map the liquidity terms: identify transfer restrictions, redemption windows, caps, suspension rights, valuation timing, and the expected exit process.
5. Calculate the total cost: review every fee and expense, including property-level and financing costs, and understand how the costs affect net value.
6. Ask tax and legal questions: obtain advice about your own circumstances. Do not assume that REIT interests qualify for a Section 1031 exchange. A later 721 exchange involving a DST or UPREIT is a separate structure with different requirements and risks.

Cornerstone’s educational resources on private placement memorandums and due diligence can help frame questions. For the distinct 721 exchange topic, see What Is an UPREIT 721 Exchange?. Those resources do not replace the current documents or advice for your situation.

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Frequently Asked Questions

Private REIT FAQs usually center on definition, eligibility, liquidity, fees, and tax treatment. The short answers below are educational starting points. The current offering documents, applicable securities rules, and your own financial, tax, and legal advisers control the decision for any specific investment.

What is a private REIT?

A private REIT is a real estate investment trust whose interests are not traded on a national securities exchange. It may own or finance income-producing real estate and may be offered through a private placement. Terms, fees, valuation, eligibility, and liquidity depend on the specific offering.

Are private REITs only for accredited investors?

Many private REIT offerings limit participation to accredited investors, but the exact eligibility rules depend on the offering and exemption. The SEC’s general criteria include certain income, net-worth, and professional qualifications. Review the subscription materials and required verification process rather than relying on a general description.

How are private REITs different from public REITs?

Public REITs trade on national exchanges and generally have market pricing and easier access to buying or selling. Private REITs are not exchange-traded, may have limited redemption or transfer options, and typically provide access to a narrower investor group. The specific documents determine the actual terms.

What fees do private REITs charge?

Potential costs include offering and placement compensation, acquisition and disposition costs, management and administration, property-level expenses, financing costs, performance-based compensation, and investor-level charges. Fees vary, so review the complete fee table and conflicts disclosures in the current offering documents.

Can private REIT interests be used in a 1031 exchange?

REIT interests are securities and generally should not be assumed to qualify as direct replacement property for a Section 1031 exchange. A DST-to-UPREIT 721 exchange is a separate structure with different rules and risks. Consult a qualified tax adviser and review the actual transaction documents.

Sources: SEC, Accredited Investors; SEC, Exempt Offerings; Nareit, What’s a REIT?; Nareit, Private REIT; IRS, Form 1120-REIT instructions.