The Anna Maria Island Sun Newspaper

Vol. 14 No. 31 - May 28, 2014


Anna Maria Island Sun News Story

The ABC’s of non-traded REITs

Investment Corner

REIT is an acronym for Real Estate Investment Trust. REITs are effectively a mutual funds that own a diversified portfolio of commercial and residential properties. The owner of REIT shares receives a pro-rate share of rental income and appreciation of value over time.

Most real estate investment trusts trade like stocks on an exchange and are very easy to sell if you need your money out of the investment for some other purpose. These publically traded REITs are priced to reflect investors’ views of the value of the properties in the portfolio every business day.

Some REITs are not listed on an exchange and are illiquid until the general operating company running the REIT liquidates the properties held, then distributes cash to the shareholders. This second type is known as a non-traded real estate investment trust.

Non-traded REITs tend to be sold at a share price of $10. Prior to the 2008 financial crisis, owners of non-traded REITs would see their shares carried on their statements at the $10 price for the entire life of the REIT, which was typically 7 to 10 years. Of course, they would also collect quarterly distributions from the rental income of the properties in the portfolio along the way until the portfolio was eventually liquidated and their share of the sales proceeds distributed in cash.

The ludicrous part of the fixed pricing scheme came to light as the financial crisis unfolded. Everyone knew that the prices of both residential and commercial property were declining at the time, so to hold the value on the statement at $10 per share was a total misrepresentation of the true value of the portfolio. Regulators stepped in to remedy the situation and many non-traded REITs were re-priced in the $5 to $6 range.

Today, non-traded REITs are required to get all the portfolio’s properties appraised once a year and the share value of the portfolio recalculated based on the appraisals. So, while non-traded real estate investment trusts don’t change price daily, there is a process to bring the price into line with reality once a year.

There are pros and cons to investing in non-traded REITs. Advantages include higher distribution yields than most traded REITs. And, while share prices are adjusted once a year, the generally stable pricing tends to dampen the investors portfolio volatility.

One thing to be aware of is that most non-traded REITs are sold by brokers and financial planners, who earn significant up-front commissions on the sale. There is nothing wrong with this if you value the advice and planning services provided by the broker or planner. Clients of fee-only registered investment advisors may be able to avoid the up-front sales fees, but instead pay the normal management fee charged by such an advisor.

Lastly, an interesting trend seems to be emerging in non-traded REITs. The long commitment of 7 to 10 years has started to shorten. Some REIT organizers have been liquidating portfolios in much shorter timeframes of 2 to 3 years. Still, investors should have a long-term commitment to these investments since there is no guarantee that the sale of the portfolio will take place that quickly.

Discuss these types of investment with your advisor to determine their suitability in your investment plan.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit


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