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.

What Questions Should You Ask Before Evaluating a Private REIT?

These questions help investors organize a private REIT review. They focus on liquidity, redemption terms, valuation, fees, assets, financing, distributions, conflicts, and material risks. The private placement memorandum and related offering documents control the specific terms. This educational information is not individualized investment, tax, or legal advice. SEC Investor Bulletin: Non-traded REITs.

What Are the Liquidity, Redemption, Transfer, and Exit Provisions?

Review whether the REIT is exchange-listed, whether a redemption or repurchase program exists, what limits or conditions apply, whether discounts are possible, and whether the program can be suspended. These terms describe how and when an investor may be able to access capital and should be read alongside the stated holding period. SEC Investor Bulletin: Non-traded REITs.

How Is the REIT Valued, and How Often Is It Valued?

Review the valuation method, frequency, assumptions, responsible parties, and related disclosures. A private REIT may not have a continuously quoted exchange price, so the reported value should be understood in the context of the specific offering documents and the absence of a readily available secondary market. SEC Investor Bulletin: Non-traded REITs.

Which Fees and Expenses Apply?

Review upfront and ongoing fees, property acquisition or disposition costs, asset management fees, financing costs, and other expenses described in the offering documents. Fees and expenses can reduce the amount available for investment or distributions, so review the complete fee schedule rather than focusing on one distribution figure. SEC Investor Bulletin: Non-traded REITs.

What Assets, Leases, Financing Arrangements, and Concentration Risks Support the Strategy?

Review the properties or other real estate-related assets, lease terms, tenant or borrower exposure, financing arrangements, leverage, and concentration described in the offering materials. The mix of assets and financing can affect the risks of the specific REIT and should be evaluated with the related disclosures. FINRA: Real Estate Investment Trusts.

What Is the Stated Source of Any Distributions, and What Disclosures Explain the Risks and Conflicts?

Review what the offering documents say about the source of distributions, fees, conflicts of interest, operating results, and material risks. A distribution figure alone does not describe the full investment. Read the private placement memorandum and related disclosures carefully before making an investment decision. SEC Investor Bulletin: Non-traded REITs.

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