Non-Traded REIT: Explanation, How They Work, Characteristics

What Is a Non-Traded REIT?

Non-traded REITs are not listed on public exchanges and can provide retail investors access to inaccessible real estate investments with tax benefits.

Understanding Non-Traded REITs

A non-traded REIT is a form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate. A non-traded REIT does not trade on a securities exchange and, because of this, is quite illiquid for long periods of time. Front-end fees can be as much as 15%, much higher than a traded REIT due to its limited secondary market.

The expectation of any REIT is that the investor will eventually see income from its real estate portfolio with rent being the most common source of income. The types of properties that a non-traded REIT invests in early on might be unknown to the investors and the initial property acquisitions might be made through a blind pool, where the investors do not know the specific properties that are being added to the program’s portfolio.

Early redemption of a non-traded REIT can result in high fees that can lower the total return. Like exchange-traded REITs, non-traded REITs are subject to the same IRS requirements that include returning at least 90% of taxable income to shareholders. Investors tend to seek exchange-traded and non-traded REITs for their income distribution.

Despite not being listed on any national securities exchanges, non-traded REITs must still be registered with the Securities and Exchange Commission (SEC). They are also required to make regular, periodic regulatory filings. This includes quarterly and annual reports as well as filing a prospectus.

Non-traded REITs could remain illiquid for years after their inception because they are not traded on national exchanges and may not have a steady income at the beginning. Periodic distributions to shareholders of non-traded REITs may be largely subsidized by borrowed funds. Such distributions are not guaranteed to be paid and may exceed the REIT operating cash flow. The board of directors for the non-traded REIT can decide whether or not to pay distribution and what amount will be given. When a non-traded REIT is just getting started, its earliest distributions might come entirely from the capital the investors put into it.

Many non-traded REITs are structured with a built-in finite time frame before which one of two actions must be taken. At the end of the period, the non-traded REIT must either become listed on a national exchange or must liquidate. The value of the investment made into such a REIT could have decreased or become worthless at the time the program is liquidated.