Real Estate Investment Trusts (REITs)

Loading ...
edocr
Real Estate & Rentals
Real Estate
<p>Investor Bulletin: 
Real Estate Investment Trusts (REITs)
Real estate investment trusts (“REITs”) have been 
around for more than fifty years.  Congress established 
REITs in 1960 to allow individual investors to invest 
in large-scale, income-producing real estate.  REITs 
provide a way for individual investors to earn a share 
of the income produced through commercial real 
estate ownership – without actually having to go out 
and buy commercial real estate.
What is a REIT?
A REIT, generally, is a company that owns – and 
typically operates – income-producing real estate or 
real estate-related assets.  The income-producing real 
estate assets owned by a REIT may include office 
buildings, shopping malls, apartments, hotels, resorts, 
self-storage facilities, warehouses, and mortgages or 
loans.  Most REITs specialize in a single type of real 
estate – for example, apartment communities.  There 
are retail REITs, office REITs, residential REITs, 
healthcare REITs, and industrial REITs, to name a 
few.  What distinguishes REITs from other real estate 
companies is that a REIT must acquire and develop its 
real estate properties primarily to operate them as part 
of its own investment portfolio, as opposed to reselling 
those properties after they have been developed.
How to Qualify as a REIT?
To qualify as a REIT, a company must have the bulk 
of its assets and income connected to real estate 
investment and must distribute at least 90 percent 
of its taxable income to shareholders annually in the 
form of dividends.  A company that qualifies as a 
REIT is allowed to deduct from its corporate taxable 
income all of the dividends that it pays out to its 
shareholders.  Because of this special tax treatment, 
most REITs pay out at least 100 percent of their 
taxable income to their shareholders and, therefore, 
owe no corporate tax.
In addition to paying out at least 90 percent of its 
taxable income annually in the form of shareholder 
dividends, a REIT must:
•	 Be an entity that would be taxable as a 
corporation but for its REIT status;
•	 Be managed by a board of directors or trustees;
•	 Have shares that are fully transferable;
•	 Have a minimum of 100 shareholders after its 
first year as a REIT;
•	 Have no more than 50 percent of its shares 
held by five or fewer individuals during the 
last half of the taxable year;
•	
Invest at least 75 percent of its total assets in 
real estate assets and cash;
•	 Derive at least 75 percent of its gross income 
from real estate related sources, including rents 
from real property and interest on mortgages 
financing real property;
Investor Assistance (800) 732-0330
       www.investor.gov
1
•	 Derive at least 95 percent of its gross income 
from such real estate sources and dividends or 
interest from any source; and
•	 Have no more than 25 percent of its assets 
consist of non-qualifying securities or stock in 
taxable REIT subsidiaries.
Three Categories of REITs:  Equity, 
Mortgage, and Hybrid
REITs generally fall into three categories:  equity 
REITs, mortgage REITs, and hybrid REITs.  Most 
REITs are equity REITs.  Equity REITs typically 
own and operate income-producing real estate.  
Mortgage REITs, on the other hand, provide money 
to real estate owners and operators either directly 
in the form of mortgages or other types of real 
estate loans, or indirectly through the acquisition of 
mortgage-backed securities.  Mortgage REITs tend to 
be more leveraged (that is, they use a lot of borrowed 
capital) than equity REITs.  In addition, many 
mortgage REITs manage their interest rate and credit 
risks through the use of derivatives and other hedging 
techniques.  You should understand the risks of these 
strategies before deciding to invest in these types of 
REITs.  Hybrid REITs generally are companies that 
use the investment strategies of both equity REITs 
and mortgage REITs.
Because they often invest in debt securities secured 
by residential and commercial mortgages, mortgage 
REITs can be similar to certain investment companies 
that are focused on real estate.  Generally, companies 
that invest a majority of their assets in real estate are 
exempted from the rules that govern investment 
companies, such as mutual funds.  The SEC has 
initiated a review to determine whether certain 
mortgage REITs should continue to be exempt from 
investment company regulation.  Those rules generally 
limit the amount of leverage that a fund can use and 
regulate the fees that can be charged to investors.
Comparison of Publicly Traded REITs 
and Non-Traded REITs
Many REITs (whether equity or mortgage) are 
registered with the SEC and are publicly traded 
on a stock exchange.  These are known as publicly 
traded REITs.  In addition, there are REITs that are 
registered with the SEC, but are not publicly traded.  
These are known as non-traded REITs (also known 
as non-exchange traded REITs).  The table below 
compares the characteristics of publicly traded and 
non-traded REITs.
1 
	
  
 
 
PUBLICLY TRADED REITs 
NON-TRADED REITs 
Overview 
REITs that file reports with the 
SEC and whose shares trade on 
national stock exchanges. 
REITs that file reports with the SEC but 
whose shares do not trade on national stock 
exchanges. 
Liquidity 
Shares are listed and traded, 
like any publicly traded stock, 
on major stock exchanges.  
Most are NYSE listed. 
Shares are not traded on public stock 
exchanges.  Redemption programs for shares 
vary by company and are typically very 
limited.  Investors may have to wait to 
receive a return of their capital until the 
company decides to engage in a transaction 
such as the listing of the shares on an 
exchange or a liquidation of the company’s 
assets.  
Transaction 
Brokerage costs the same as 
Typically, fees of 9 - 10 percent of the 
Costs 
for buying or selling any other 
publicly traded stock. 
investment are charged for broker-dealer 
commissions and other upfront offering costs.  
Ongoing acquisition and management fees 
and other expenses also are typical.  Back-
end fees may be charged. 
Management 
Typically, the managers are 
employees of the company. 
Typically, the company has no employees 
and is managed by a third party pursuant to a 
management contract. 
Minimum 
Investment 
Amount 
One share. 
Typically, $1,000 - $2,500. 
Independent 
Directors 
Stock exchange rules require a 
majority of directors to be 
independent of management.  
NYSE and NASDAQ rules call 
for fully independent audit, 
nominating, and compensation 
committees. 
North American Securities Administrators 
Association (“NASAA”) guidelines, which 
have been adopted by many states, require a 
majority of directors to be independent of 
management.  NASAA guidelines also 
require that a majority of each board 
committee consist of independent directors. 
Investor 
Control 
Investors elect directors. 
Investors elect directors. 
Corporate 
Governance 
Specific stock exchange rules 
on corporate governance. 
Subject to state and NASAA guidelines. 
Disclosure 
Obligation 
Required to make regular SEC 
disclosures, including quarterly 
financial reports and yearly 
audited financial reports. 
Required to make regular SEC disclosures, 
including quarterly financial reports and 
yearly audited financial reports. 
Share Value 
Transparency 
Real-time market prices are 
publicly available.  Wide range 
of analyst reports available to 
the public. 
No independent information about share 
value available.  Company may provide an 
estimated share value 18 months after the 
offering has closed. 
	
  
 www.investor.gov
Investor Assistance (800) 732-0330
2
1 
	
  
 
 
P
U
B
L
I
C
L
Y
 
T
R
A
D
E
D
 
R
E
I
T
s
 
N
O
N
-
T
R
A
D
E
D
 
R
E
I
T
s
 
O
v
e
r
v
i
e
w
 
R
E
I
T
s
 
t
h
a
t
 
f
i
l
e
 
r
e
p
o
r
t
s
 
w
i
t
h
 
t
h
e
 
S
E
C
 
a
n
d
 
w
h
o
s
e
 
s
h
a
r
e
s
 
t
r
a
d
e
 
o
n
 
n
a
t
i
o
n
a
l
 
s
t
o
c
k
 
e
x
c
h
a
n
g
e
s
.
 
R
E
I
T
s
 
t
h
a
t
 
f
i
l
e
 
r
e
p
o
r
t
s
 
w
i
t
h
 
t
h
e
 
S
E
C
 
b
u
t
 
w
h
o
s
e
 
s
h
a
r
e
s
 
d
o
 
n
o
t
 
t
r
a
d
e
 
o
n
 
n
a
t
i
o
n
a
l
 
s
t
o
c
k
 
e
x
c
h
a
n
g
e
s
.
 
L
i
q
u
i
d
i
t
y
 
S
h
a
r
e
s
 
a
r
e
 
l
i
s
t
e
d
 
a
n
d
 
t
r
a
d
e
d
,
 
l
i
k
e
 
a
n
y
 
p
u
b
l
i
c
l
y
 
t
r
a
d
e
d
 
s
t
o
c
k
,
 
o
n
 
m
a
j
o
r
 
s
t
o
c
k
 
e
x
c
h
a
n
g
e
s
.
 
 
M
o
s
t
 
a
r
e
 
N
Y
S
E
 
l
i
s
t
e
d
.
 
S
h
a
r
e
s
 
a
r
e
 
n
o
t
 
t
r
a
d
e
d
 
o
n
 
p
u
b
l
i
c
 
s
t
o
c
k
 
e
x
c
h
a
n
g
e
s
.
 
 
R
e
d
e
m
p
t
i
o
n
 
p
r
o
g
r
a
m
s
 
f
o
r
 
s
h
a
r
e
s
 
v
a
r
y
 
b
y
 
c
o
m
p
a
n
y
 
a
n
d
 
a
r
e
 
t
y
p
i
c
a
l
l
y
 
v
e
r
y
 
l
i
m
i
t
e
d
.
 
 
I
n
v
e
s
t
o
r
s
 
m
a
y
 
h
a
v
e
 
t
o
 
w
a
i
t
 
t
o
 
r
e
c
e
i
v
e
 
a
 
r
e
t
u
r
n
 
o
f
 
t
h
e
i
r
 
c
a
p
i
t
a
l
 
u
n
t
i
l
 
t
h
e
 
c
o
m
p
a
n
y
 
d
e
c
i
d
e
s
 
t
o
 
e
n
g
a
g
e
 
i
n
 
a
 
t
r
a
n
s
a
c
t
i
o
n
 
such as the listing of the shares on an 
exchange or a liquidation of the company’s 
 
PUBLICLY TRADED REITs 
NON-TRADED REITs 
assets.  
Transaction 
Brokerage costs the same as 
Typically, fees of 9 - 10 percent of the 
Costs 
for buying or selling any other 
investment are charged for broker-dealer 
publicly traded stock. 
commissions and other upfront offering costs.  
Ongoing acquisition and management fees 
and other expenses also are typical.  Back-
end fees may be charged. 
Management 
Typically, the managers are 
Typically, the company has no employees 
employees of the company. 
and is managed by a third party pursuant to a 
management contract. 
Minimum 
One share. 
Typically, $1,000 - $2,500. 
Investment 
Amount 
Independent 
Stock exchange rules require a North American Securities Administrators 
Directors 
majority of directors to be 
Association (“NASAA”) guidelines, which 
independent of management.  
have been adopted by many states, require a 
NYSE and NASDAQ rules call majority of directors to be independent of 
for fully independent audit, 
management.  NASAA guidelines also 
nominating, and compensation 
require that a majority of each board 
committees. 
committee consist of independent directors. 
Investor 
Investors elect directors. 
Investors elect directors. 
Control 
Corporate 
Governance 
Specific stock exchange rules 
on corporate governance. 
Subject to state and NASAA guidelines. 
Disclosure 
Required to make regular SEC Required to make regular SEC disclosures, 
Obligation 
disclosures, including quarterly 
including quarterly financial reports and 
financial reports and yearly 
yearly audited financial reports. 
audited financial reports. 
Share Value 
Real-time market prices are 
No independent information about share 
Transparency 
publicly available.  Wide range value available.  Company may provide an 
of analyst reports available to 
estimated share value 18 months after the 
the public. 
offering has closed. 
1 
	
  
 
Overview 
REITs that file reports with the 
SEC and who  shares trade on 
national stock exchanges. 
REITs that file reports with the SEC but 
who e shares do not trade on national stock 
exchanges. 
Liquidity 
Shares are listed and traded, 
like any publicly traded stock, 
on major stock exchanges.  
Most re NYSE listed. 
Shares are not traded on public stock 
exchanges.  R dempti n programs for shares 
vary by company and are typically very 
limited.  Investors may have t  wait to 
receive a return of their ca ital until the 
company decides to engage in a transaction 
such as the listing of the shares on an 
exchange or a liquidation of the company’s 
assets.  
Transactio  
Costs 
Br kerage costs the ame as 
for buying or s lling any other 
publicly traded stock. 
Typically, fees of 9 - 10 percent of the 
investment are charged for broker-dealer 
commissions and other upfront offering costs.  
Ongoing acquisiti n and management fees 
and other xpenses also are typical.  Back-
end fe s may be charged. 
Management 
Typically, the managers are 
employees of he company. 
Typically, the company has o employees 
a d is managed by a third party pursuant to a 
management contract. 
Minimum
Investment 
Amount 
One share. 
Typically, $1,000 - $2,500. 
Independent 
Directors 
Stock exchange rules requir  a 
majority of di ectors to be 
in ependent of management.  
NYSE and NASDAQ rules call 
for ful
independent audit, 
nominating, and compensati n 
committees. 
North American Securities Admini trators 
Associ tion (“NASAA”) guidelines, which 
have been adopted by many states, require a 
majority of irectors to be i dependent of 
management.  NASAA guidelines also 
require that  majority of each bo rd 
committee consist of independent directors. 
Investor 
Control 
Investors elect directors. 
Investors elect directors. 
Corporate 
Governance 
Specific stock exchange rules 
on corporate governance. 
Subject to state and NASAA guidelines. 
Disclosure 
Obligation 
Required to make regular SEC 
disclosures, including quarterly 
financial reports and yearly 
audited financial reports. 
Required to make regular SEC disclosures, 
including quarterly financial reports and 
yearly audited financial reports. 
Share Value 
Transparency 
Real-time market prices are 
publicly available.  Wide range 
of analyst reports available to 
the public. 
No independent information about share 
value available.  Company may provide an 
estimated share value 18 months after the 
offering has closed. 
Source:  National Association of Real Estate Investment Trusts (NAREIT)
Some Caveats about Non-Traded REITs
•	 Lack	of	Liquidity:  Non-traded REITs are 
illiquid investments; they generally cannot be 
sold readily on the open market.  If you need 
to sell an asset to raise money quickly, you 
may not be able to do so with shares of a non- 
traded REIT.  Although non-traded REITs 
usually offer share redemption programs, these 
are typically subject to significant limitations 
and may be discontinued at the discretion 
of the company.  Investors may have to wait 
to receive a return of their capital until the 
company decides to engage in a transaction 
such as the listing of the shares on an exchange 
or a liquidation of the company’s assets.  The 
timing of these liquidity events is at the 
discretion of the company, and may be more 
than 10 years after the investment is made.
•	 Share	Value	Transparency:	 While the 
market price of a publicly traded REIT 
is readily accessible, it can be difficult to 
determine the value of a share of a non-traded 
REIT.  Because non-traded REITs are not 
traded on an exchange there is no market price 
available.  Non-traded REITs typically do not 
 www.investor.gov
Investor Assistance (800) 732-0330
3
provide an estimate of their value per share 
until 18 months after their offering closes, but 
this may be years after you have made your 
investment.  As a result, you may not be able 
to assess the value of your non-traded REIT 
investment for a significant time period and 
may not be able to assess the volatility of your 
investment.
•	 Significant	Up-Front	Fees:  Non-traded 
REITs are typically sold by financial advisers.  
Non-traded REITs generally have high upfront 
fees that lower the value of the investment 
by a significant amount.  They usually charge 
sales commissions and upfront offering fees of 
approximately nine to 10 percent.  Investors 
should understand that a portion of the share 
purchase price represents sales commissions 
and that the amount actually invested in the 
company is reduced by these commissions.
•	 Distributions	May	Be	Paid	from	Offering	
Proceeds	and	Borrowings:	 Investors may 
be attracted to non-traded REITs by their 
relatively high dividend yields compared to 
those of publicly traded REITs.  However, 
investors should consider the total return of a 
non-traded REIT – capital appreciation plus 
dividends – instead of focusing exclusively 
on the high dividend yield.  Unlike publicly 
traded REITs, non-traded REITs frequently 
pay distributions in excess of their funds from 
operations.  To do so, they may use offering 
proceeds and borrowings.  This practice, which 
is typically not used by publicly traded REITs, 
reduces the value of the shares and reduces 
the cash available to the company to purchase 
additional assets.  In considering an investment 
in a non-traded REIT, you should assess the 
extent to which distributions have been paid 
from sources other than funds from operations.
•	 Conflicts	of	Interest:  Non-traded REITs 
are typically externally managed—meaning 
the REITs do not have their own employees.  
The external manager may be paid significant 
fees by the REIT for things that may not 
necessarily be aligned with the interests 
of shareholders, such as fees based on the 
amount of property acquisitions and assets 
under management.  In addition, the external 
manager may also manage other companies 
that may compete with the REIT.
Investing in REITs
As with any investment, you should take into account 
your own financial situation, consult your financial 
adviser, and perform thorough research before making 
any investment decisions concerning REITs.  You can 
review a REIT’s disclosure filings, including annual 
and quarterly reports and any offering prospectus at 
sec.gov.  You can invest in a publicly traded REIT, 
which is listed on a major stock exchange, by 
purchasing shares through a broker (as you would 
other publicly traded securities).  Generally, you can 
purchase the common stock, preferred stock, or debt 
securities of a publicly traded REIT.  You can purchase 
shares of a non-traded REIT through a broker that 
has been engaged to participate in the non-traded 
REIT’s offering.  You can also purchase shares in a 
REIT mutual fund (either an index fund or actively 
managed fund) or REIT exchange-traded fund.
Special Tax Considerations
The shareholders of a REIT are responsible for paying 
taxes on the dividends that they receive and on any 
capital gains associated with their investment in the 
REIT.  Dividends paid by REITs generally are treated 
as ordinary income and are not entitled to the reduced 
tax rates on other types of corporate dividends.  For 
this reason, some investors prefer to own shares of a 
REIT or REIT fund inside a tax-deferred account 
(such as a retirement account) in order to defer paying 
taxes on the dividends received and any capital gains 
incurred from that REIT until they start withdrawing 
money from the tax-deferred account.  Finally, a 
REIT is not a pass-through entity.  This means that, 
unlike a partnership, a REIT cannot pass any tax losses 
through to its investors.  Consider consulting your tax 
adviser before investing in REITs.
www.investor.gov
Investor Assistance (800) 732-0330
4
Related Information
SEC Division of Corporation Finance Disclosure 
Guidance: Topic No. 3—Staff Observations in 
the Review of Promotional and Sales Material 
Submitted Pursuant to Securities Act Industry 
Guide 5
SEC Concept Release:  Companies Engaged in the 
Business of Acquiring Mortgages and Mortgage-
Related Instruments (September 7, 2011)
FINRA Investor Alert:  Public Non-Traded 
REITs—Perform a Careful Review before Investing
The Office of Investor Education and Advocacy has 
provided this information as a service to investors.  It 
is neither a legal interpretation nor a statement of 
SEC policy.  If you have questions concerning the 
meaning or application of a particular law or rule, 
please consult with an attorney who specializes in 
securities law.
December 2011
Investor Assistance (800) 732-0330
5
</p>