A REIT, or Real Estate Investment Trust, is a unique corporation that directly invests in real estate, either through properties or mortgages, and is then sold as a security. Unlike traditional corporations, REITs are exempt from paying corporate income taxes as long as they adhere to specific rules and restrictions. One of these requirements is that at least 90 percent of the REIT’s taxable income must be distributed to shareholders annually in the form of dividends. This allows the REIT to avoid double taxation, as the dividends are only taxed at the investor level.

To raise capital, REITs typically aim to secure 1-2 billion dollars and gradually build a diverse portfolio of properties over several years. The primary objective is for these properties to generate rental income, ensuring a steady stream of revenue for the REIT. However, the success of a REIT depends on various factors, including the performance of the properties within the portfolio and the overall trends in the real estate market.

There are two ways in which REITs can be offered to investors. Private placement investments are exclusively available to accredited investors, while publicly traded REITs are accessible to the general public. It’s important to note that investments through Cornerstone are considered illiquid, meaning they cannot be easily converted to cash. Although the ultimate goal for many REITs is to go public through an initial public offering or be acquired by a larger REIT, these outcomes are uncertain and rely heavily on the performance of the properties within the REIT and the overall real estate market.

There are different types of REITs, each with its own investment strategy. Equity REITs primarily invest in and own properties, generating revenue from rental income. Mortgage REITs, on the other hand, focus on investing in property mortgages. They either loan money for mortgages to real estate owners or purchase existing mortgages or mortgage-backed securities, earning revenue primarily from the interest on these loans. Hybrid REITs combine the strategies of both equity and mortgage REITs by investing in both properties and mortgages.

Private REIT Liquidity, Valuation, Fees, and Risks

Private REITs can provide exposure to real estate through a privately offered security, but they generally have less liquidity and less transparent market pricing than exchange-listed REITs. Before evaluating one, review its redemption terms, valuation method, fees, use of leverage, distribution policy, offering documents, and risks, and consider whether your time horizon can accommodate delays. Investor Bulletin: Non-traded REITs, SEC Office of Investor Education and Advocacy, August 31, 2015; Real Estate Investment Trusts: Alternatives to Ownership, FINRA, August 2, 2022. The SEC bulletin provides general context about non-traded REITs and does not replace the terms of a specific private REIT offering.

Liquidity and redemption terms

If a private REIT is not exchange-listed, investors may not have a readily available market in which to sell shares. Any redemption or share-repurchase program is controlled by the specific offering documents and may include limits, conditions, discounts, or a right to discontinue the program. The SEC advises investors to examine the liquidity plan and consider whether they can tolerate a potentially long holding period. Investor Bulletin: Non-traded REITs, SEC Office of Investor Education and Advocacy, August 31, 2015.

Valuation and fees

Without an exchange-traded share price, valuation depends on the method and frequency disclosed by the specific REIT. Review how the valuation is calculated, who performs or oversees it, and how fees and expenses affect the amount invested and any reported value. The SEC also cautions that distributions may not always represent earnings from operations, so investors should review the full offering and financial disclosures rather than focusing on a distribution figure alone. Investor Bulletin: Non-traded REITs, SEC Office of Investor Education and Advocacy, August 31, 2015.

Material risks to review

Risk review should cover potential loss of principal, property and tenant performance, sponsor and management decisions, leverage, financing costs, interest-rate changes, operating expenses, conflicts of interest, tax treatment, and limited control. The risks and terms vary by offering, so read the private placement memorandum and related disclosures before making an investment decision. See Cornerstone’s overview of REIT risks and risks of alternative investments for related educational context.

Questions to ask before evaluating a private REIT

  • What are the liquidity, redemption, transfer, and exit provisions?
  • How is the REIT valued, how often is it valued, and what assumptions are used?
  • Which fees and expenses apply, and how can they affect the investment?
  • What assets, leases, financing arrangements, and concentration risks support the strategy?
  • What is the stated source of any distributions, and what disclosures explain the risks and conflicts?

These questions are educational prompts, not individualized investment, tax, or legal advice. The private placement memorandum and other offering documents control the specific terms, risks, fees, and disclosures for an offering. Review all applicable disclosures and offering documents carefully before making an investment decision.

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