Non-Traded REIT

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Non-Traded REITs — What They Are

Non-traded real estate investment trusts (REITs) are pooled real estate investment vehicles that are not listed on public securities exchanges. They own and operate income-producing real estate (office buildings, shopping centers, apartments, healthcare facilities, etc.) but shares are illiquid because they do not trade on a secondary market.

How They Work

  • Investors buy shares directly through broker-dealers or the issuing sponsor.
  • The REIT uses equity and often debt to acquire, manage, and develop properties.
  • Income is typically generated from rent and property operations and may be distributed to shareholders as dividends.
  • Early-stage acquisitions are sometimes made from a “blind pool,” where specific properties are not identified at the time of the offering.
  • Many non-traded REITs are structured with a finite life. At the end of that period the REIT generally must either list on an exchange or liquidate.

Key Characteristics

  • Illiquidity: Shares cannot be freely sold on public markets and may remain illiquid for years.
  • Distribution focus: Like listed REITs, non-traded REITs generally must distribute at least 90% of taxable income to shareholders under IRS rules.
  • Registration and reporting: Although not exchange-listed, they are typically registered with the SEC and provide prospectuses and periodic regulatory filings.
  • Potential for subsidized distributions: Early distributions may be funded from investor capital or borrowing rather than operating cash flow.
  • Valuation opacity: Lack of a public market can make ongoing valuation less transparent.

Benefits

  • Access to institutional-quality commercial real estate that may be otherwise difficult for retail investors to reach.
  • Potential for steady income distributions.
  • Certain tax advantages similar to other REITs (pass-through income treatment, 90% distribution requirement).

Risks and Drawbacks

  • High fees: Up-front and selling commissions can be substantial (front-end fees have been cited as high as ~15% in some offerings).
  • Limited liquidity and redemption restrictions: Early redemptions often incur steep penalties, and repurchase programs—if offered—are limited.
  • Distribution sustainability: Distributions can be paid from capital or debt and are not guaranteed.
  • Concentration and blind-pool risk: Investors may not know initial property holdings, increasing the risk of poor early asset selection.
  • Conflicts of interest: Sponsor-affiliated management and fee structures can create incentives that may not align with outside investors.
  • Event risk: If a REIT must liquidate, investors could receive less than their original investment if property values have fallen.

Fees and Typical Costs

  • Sales commissions / placement fees (up-front).
  • Ongoing management and servicing fees.
  • Performance or disposition fees when assets are sold.
  • Potential early redemption fees.
    Always review the prospectus and fee table to understand total cost of ownership.

Regulation and Tax Treatment

  • Subject to SEC registration and periodic filings (prospectus, quarterly/annual reports).
  • Must meet IRS REIT requirements (including distributing most taxable income to shareholders), which affects taxable treatment of distributions.

Who Might Consider Them

Non-traded REITs may be appropriate for investors who:
* Seek income-producing real estate exposure beyond publicly traded REITs.
* Have a long-term investment horizon and can tolerate extended illiquidity.
* Are comfortable with limited liquidity, higher fees, and greater reliance on sponsor/manager performance.

They are generally not suitable for investors who need short-term access to capital, prefer transparent market pricing, or cannot tolerate the risk of principal loss.

Due Diligence Checklist — Questions to Ask

  • What are the total fees (up-front and ongoing) and how are they calculated?
  • Is the offering a blind pool? If so, how is acquisition strategy determined?
  • What is the sponsor’s track record and alignment with investors (e.g., sponsor co-investment)?
  • How are assets valued and how often are valuations updated?
  • What are the liquidity provisions, redemption policies, and likely timelines for a liquidity event?
  • How much leverage does the REIT use and how is debt structured?
  • Are third-party audits, independent valuations, or an independent board in place?

Conclusion

Non-traded REITs can provide access to private commercial real estate and attractive income opportunities, but they come with material trade-offs: limited liquidity, complex fee structures, valuation opacity, and sponsor-related risks. Thorough investigation of fees, management, structure, and liquidity provisions is essential before investing.