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.

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