What is a 'Finite-Life REIT - FREIT'

A Finite Life REIT – FREIT is a real estate investment trust (REIT) that maintains a specific time frame in which to sell its investments.

BREAKING DOWN 'Finite-Life REIT - FREIT'

Finite-life REITs were introduced in the U.S. in the 1980s. A conventional REIT offers an investor the ability to purchase a share in a portfolio of real estate properties that produces rental income. By adding a definitive date for the sale of the underlying properties, finite-life REITs provide investors a second income stream that reflects the actual value of the real estate in the portfolio, which gets realized as a capital gain at the end of the trust agreement. In theory, this differentiation would make a finite-life REIT more attractive than a conventional REIT, which theoretically prices based upon its potential income stream than upon its underlying assets. Historically, however, this has not necessarily been the case.

The Cigar Excise Tax Extension of 1960 formally established REITs as a way for individual investors to participate in diversified rental income from commercial properties, including hotels, apartment complexes, shopping malls and hospitals.

Most REITs specialize in a specific real estate sector, for example office REITs or healthcare REITs. Within this space, REITS purchase and operate their holdings as a part of a portfolio of properties in which they typically lease space. The REITs then distribute gains from rental revenue to investors via dividends.

‘Finite Life REIT – FREIT’ vs. REITs

Both finite-life REITs and REITs offer investors alternatives to limited partnerships as an investment vehicle for diversified real estate holdings. Conventional REITs can have an infinite lifetime since the trust can continue to sell holdings in its portfolio and purchase new holdings as necessary to pursue its dividend strategy. Most  REITS carry their properties at their acquisition value, which can be substantially below current market value. To the extent that valuation falls short of the current value of the portfolio's underlying assets, investors can expect shares of the trust to trade at lower prices than they would if the REIT sold its portfolio off and distributed the funds to its shareholders.

Finite-life REITS, on the other hand, self-liquidate after a specified period of time, typically between four and 15 years. Since the market expects a finite-life trust to sell or refinance its holdings during its existence and expects capital appreciation of the underlying assets over the life of the REIT, in theory, shares of finite-life REITS should more closely reflect their underlying asset values or trade at a premium.

RELATED TERMS
  1. Real Estate Investment Trust - ...

    A real estate investment trust, or REIT, is a company that owns, ...
  2. Captive Real Estate Investment ...

    A real estate investment trust (REIT) that is controlled by a ...
  3. Funds Available For Distribution ...

    Funds available for distribution is an internal, non-GAAP measure ...
  4. Non-Traded REIT

    A non-traded REIT does not trade on a securities exchange and ...
  5. Income Trust

    An income trust is an investment trust that holds income-producing ...
  6. Real Estate

    Real estate is property made up of land as well as anything on ...
Related Articles
  1. Investing

    5 Types of REITs and How to Invest in Them

    Real estate investment trusts are a sound addition to a diversified portfolio. Learn what you need to know to invest.
  2. Financial Advisor

    REITs: Still a Viable Investment?

    Are REITs viable investments now? Here's a look at the history of REITs' performance during rocky economic times and other factors that may impact returns.
  3. Investing

    Are REITs Beneficial During A High-Interest Era?

    Amid expectations of high interest rates, do REITs offer a viable investment option? Investoepdia studies the historical data to decide.
  4. Investing

    REITs Could be Affected by Higher Interest Rates

    Learn how REITs may be impacted by an increase in interest rates, and understand why certain types of REITs could benefit from higher rates.
  5. Investing

    How To Analyze Real Estate Investment Trusts

    REITs are much like dividend-paying companies, but analyzing them requires consideration of the accounting treatment of property.
  6. Investing

    The Basics of Reinvesting REIT Dividends

    Learn the essentials of dividend reinvestment in real estate investment trusts and how a dividend reinvestment plan can magnify your long-term returns.
  7. Investing

    A Look at REITs vs. Real Estate Mutual Funds (ESRT, TRREX)

    REITs and real estate mutual funds have their differences, yet they both offer liquidity and easy access to diversified real estate assets.
  8. Investing

    3 Types Of REITs For Your Portfolio

    Learn the key features of three subcategories of equity REITs: industrial, multifamily and hotel REITs.
  9. Investing

    The Impact Of Interest Rates On Real Estate Investment Trusts

    REITs are high-yield investments, but do they have an inverse relationship with interest rates? Find out here.
  10. Investing

    Real Estate Investing in a High-Interest-Rate Environment

    Learn how private real estate investing and public real estate investing (or investing in REITs) is affected by a high-interest rate environment.
RELATED FAQS
  1. What is the difference between a REIT and a master limited partnership

    While both are prized for their dividends by income investors, there are notable differences between REITs and master limited ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center