5 Things about Real Estate Investment Trust

There are 5 Things about Real Estate Investment Trust you should know:


What, Exactly, Is a REIT?

Real estate investment trusts (“REITs”) are, in essence, financial vehicles that allow investors to pool their capital for participation in real estate ownership or mortgage financing, while providing those investors with the benefits of many of the tax advantages available to larger and more sophisticated investors and businesses who can afford to invest directly in real estate and the benefits stemming from professional management of a highly diversified portfolio of real estate assets. Hence, REITs can generally be thought of as being a kind of business enterprise that is analogous to a mutual fund for real estate investments.

REITs is the quick and easy way of becoming a landlord without the hassle of attending to your tenants.

What is REIT’s Roll Ups?

Roll-ups are transactions in which one or more finite life limited partnerships (or similar finite-life entities) are combined or reorganized, with some or all of the investors in those finite-life limited partnerships receiving in exchange new securities or securities in another entity which involve a “significant adverse change” regarding voting rights, management compensation, term of existence of the entity and investment objectives.

A roll-up may be structured as an acquisition, a merger, a tender or exchange offer or in some other fashion.

In other words, any successor or acquiring entity that offers its securities to the investors of any limited partnership or entity with a fixed life span, in any transaction(s) involving a merger, share exchange, tender offer or similar acquisition, will be generally subject to the roll-up rules.

The SEC, the National Association of Securities Dealers, Inc. (the “NASD”), the North American Securities Administrators Association (“NASAA”) and several states (notably, California) have each adopted detailed rules requiring the preparation and delivery to such partnerships’ partners of extensive disclosures regarding the potential roll-up transaction and the participants in that transaction.

See, e.g., SEC Rule 901 et seq. These include, among others, certain disclosures as to all compensation paid to outside parties in the potential roll-up and whether or not a fairness opinion was obtained and provided for the members of each affected partnership.

The roll-up requirements are generally considered to be so burdensome, difficult both to implement and interpret, and expensive to meet that virtually all UPREIT transactions are structured with great efforts to avoid the potential application of these rules.

Most transactions do so by relying on an exemption for transactions involving securities to be either issued or exchanged that are not required to be and are not registered under the 1933 Act. To preserve this exemption in light of the SEC’s position on the integration of offerings of Units and REIT shares (see Part IV.B(iii), “A Trap for the Unwary: The Doctrine of Integration” above), most UPREITs do not allow redemptions of Units for registered REIT shares to be made until the Units have been outstanding for at least one year.

Under unwritten SEC staff interpretations, the filing of a registration statement to cover any redemption of Units for REIT shares that is made either two weeks before or two weeks after the one-year anniversary of the initial receipt of such Units will be regarded as being in compliance with this exemption. Roll-up implications may also arise in the organization of a REIT when properties held by limited partnerships are acquired in connection with the REIT’s formation transactions in exchange for REIT stock or Units in the UPREIT partnership. When limited partnership interests are acquired in a registered offering of REIT shares that do not meet the “seasoned issuer” exclusion (i.e., any transaction generally involving an entity with securities which have been reported and traded no less than twelve months before the date the roll-up solicitation is mailed to investors and where the securities to be issued in the roll-up do not exceed 20% of the issuer’s total outstanding securities), the roll-up rules may apply. When Units are acquired in a private placement, on the other hand, the private placement exclusion may apply.

Close attention must be paid to the offer of both REIT stock and Units to verify whether such issuances are a valid public offering or private placement, respectively, and to ensure that integration concerns are met. Rule 152’s “safe harbor” from integration and the related five-factor test set out in the Black Box, Inc. no-action letter and Reg D’s Rule 502 should be scrutinized closely to determine whether integration has occurred.

Are REITs a good investment?

One good reason to invest in REITs is due to the fact that they pay dividends. Often, the dividend yields on REITs are fairly generous.

So, you can build a regular income stream, in addition to the hope of capital appreciation from the shares that you hold.

Don’t try and time your exposure to REITs but rather use them as part of your long-term allocation and adjust accordingly.

It wasn’t that long ago in 2013 when all the “experts” recommended selling REITs only to see 2014 come in with returns of about 30%!

Keep in mind that returns are a combination of price and income.

You’ll see portfolios with different percentage exposures to REITS and how adding them to your portfolio extends how long the money could last.

Take for example the most common and historically recommended withdrawal rate of 4%.

If you retired at 65 years of age and had 45% exposure to Stocks, 45% to Bonds, 10% to Cash, and 0% exposure to REITS, it would last until you’re 92.

Adding just 10% exposure to REITs (by reducing 5% from Stocks and 5% from Bonds in Portfolio 2) makes your money last three years longer; and keep in mind your risk level never increased.

Now obviously REITs are not the magical fairly dust that you sprinkle on a portfolio and everything becomes perfect; we’re just suggesting that most investors are uneducated and underexposed to this asset class and its potential benefits.

Types of REITs

There are generally 6 common types of REITs + REITs ETF

Commercial REIT

Healthcare REIT

Hospitality REIT

Industrial REIT

Residential REIT

Retail REIT



Generally, REITs are classified as either equity or mortgage REITs.

Equity REITs own real estate and generate income primarily through the collection of rents.

Mortgage REITs invest in loans secured by real estate and generate income through interest payments.

Publicly-listed REITs are registered with the SEC and have shares that trade on national stock exchanges.

Non-listed REITs may, or may not, be registered with the SEC and typically sell shares through private placement to both individual and institutional investors.

Because most non-listed REIT shares do not trade on a daily basis, their share price is generally more insulated from shocks to the stock market.

4 BEST Tips for Investing in REITs

REITs can provide excellent income and growth opportunities for the right investor. If you’re considering making the leap, here are a few tips to consider before investing:

  1. Understand the types of properties you are investing in. Most REITs specialize in a certain sector which should be easy to find in the fund summary. Understand the risks of each sector. For example, REITs holding undeveloped land or retail shopping centers in a bad economy will carry more risk than high-end apartments in a major metropolis.
  2. Look at the numbers. It is important to see if dividends are being paid from operations or if the fund is being forced to use additional capital. A well-run REIT should rely on its operations to pay for expenses and dividends. Also, be wary of large, one-time real estate sales that might skew the financials upwards.
  3. Find out when the REIT began investing. If investments were made before a market downturn, the REIT could hold properties that are underperforming or need to be refinanced. In such cases, REITs may need to lower dividends or sell additional shares in order to raise cash in the near future. However, if the fund was created after a housing market recession, it could own and be buying valuable properties at low prices.
  4. Know your time horizon. Especially in a non-traded REIT, investors could hold shares for at least five years before seeing a return of principal. Make sure you can handle this potential lack of liquidity.

If you want to avoid stock market volatility and you meet minimum guidelines, non-traded REITs could play an important role in your personal investment portfolio.

As with all investments, it is important to do your homework and understand where you are putting your money and why.

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