Non-Listed REITS

Real Estate is a Substantial Asset Class¹ 

Real Estate has become a substantial Asset Class for both institutional and individual investors seeking current income and the potential growth of income.

_{1 Source: CoStar Group, Wilshire Associates, Security Industry and Financial Markets Association and Bloomberg.} 

As a substantial asset class today, real estate is often packaged, for ease of investing, into REITS, Real Estate Investment Trusts, and is available to both institutions and individuals. A REIT is a company that invests its stockholder money into a number of commercial real estate properties. Those properties pay rent to the Trust, and then the Trust typically passes most of that rent through to its investors as a dividend or distribution. Many REITS are listed on the stock exchanges and trade daily for liquidity. 

REITS are typical hedges against inflation. Normally, interest rates go up because the economy is strong. The stronger the economy, the more businesses expand and occupy more real estate. That additional demand for commercial real estate space can put upward pressure both on real estate prices and on rents. As rents rise, that benefits the investor, because for a REIT to maintain its REIT status, it must continue to pass through 90% of its rents to investors so as not to be taxed at the corporate level on that rent collected. 

Non-Listed REITS are becoming one of the largest categories of Alternative Investments. I have devoted a whole page of my website to Non-Listed REITS because of their many advantages in Retirement Income Planning. Non-Listed REITS are predominately offered through independent broker-dealers. Like they sound, Non-Listed REITS are not listed on the exchanges. They give up daily liquidity, but they have many other advantages for investors. 

How Non-Listed REITS function: 

Non-Listed REITS function as aggregators of real estate. They are able to buy properties one at a time, and therefore, often get better pricing buying from individual sellers. Large multi-billion dollar publically traded REITS typically don't have the staff large enough to ferret out individual properties. 

Those large publically traded REITS instead generally buy larger portfolios of properties already assembled, typically at a premium to the underlying property Non-Listed REIT acquisition cost. 

3 stages of a Non-Listed REIT life cycle are: 

1. Money raise and property purchase- These occur simultaneously. While the money comes into the REIT from individual investors, the REIT is busy building a pipeline of possible purchases and begins to buy properties. Typically money is raised over a 1 to 3 year period after which time the REIT is closed to new money coming in from investors. 
2. Managing the portfolio- During this management phase, Non-Listed REITS are involved in property improvements, releasing space as needed, restructuring financing, lowering property taxes where possible, and in general focusing on more efficiently managing the properties by cutting costs where possible. 
3. The Liquidity Event- Typically investors can expect a Non-Listed REIT to have a liquidity event in 5-7 years from the time it's opened for investing. Today, some Non-Listed REITS have shortened that time frame to 1.5 to 3 years, however, there can be no certainty that that might occur with any given Non-Listed REIT. 

(a) The entire real estate portfolio can be listed on a public exchange as a new security, 

(b) The whole portfolio might be sold to an already listed REIT, insurance company, large endowment or pension fund, etc. 

(c) The portfolio can be sold off one property at a time or in multi-property packages, returning the proceeds to the investors.

Advantages of Non-Listed REITS:  

• Because Non-Listed REITS are not listed on the exchanges, they are not subject to the ups and downs or whims of daily stock market volatility. They can act as a more stable security in your portfolio.  
• Non-listed REITS can offer the investor potential for both capital appreciation and dividend/distribution growth.  
• Because they are illiquid, Non-Listed REITS help keep the investor from panicking during stock market volatility, and liquidating the REITS prematurely.  
• Non-Listed REITS typically have a low correlation to publicly traded stocks, and publicly traded listed REITS. 
• Non-listed REITS can act as inflation hedges.  
• Non-Listed REITS may offer tax benefits, as special tax treatment of distributions and any mortgage interest and depreciation can potentially be passed on to the investor.  
• Managers of Non-Listed REITS are typically left to grow and manage their portfolios without having to answer to public shareholders quarterly as do traded REITS.  
• Dividends or distributions of Non-listed REITS can be re-invested into buying additional shares typically at a 5% discount, thereby further compounding the potential return.  
• All Non-Listed REITS that I offer my clients are SEC (Securities and Exchange Commission) Registered Public Offerings. 

• Non-Listed REITS are illiquid, and you may not be able to get your principal back when you need it. 
• Your principal is not guaranteed, and may fluctuate with the underlying values of the properties inside the REIT. 
• If the REIT has borrowed money to partially finance properties, as interest rates rise, that could affect the distribution paid by the REIT. 

Non-listed REITS are available by Prospectus only. If you would like to learn more about the benefits and risks² of Non-listed REITS, qualifications for investing, and how they might fit into the alternative investment durable income part of your retirement portfolio, please give us a call to schedule a meeting, or to reserve a seat at one of our monthly lunch and learn seminars. 

_{2 RISK FACTORS: Risks of investing in REITS are similar to those associated with direct investments in real estate securities including falling property valuesdue to increasing vacancies, declining rents resulting from economic, legal, tax, or political developments, lack of liquidity, limited diversification, and sensitivity to certain economic factors such as interest rate changes and market recessions.} 

_{Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and mid-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies.} 

_{Most non-traded REITS will be blind pools and have no or limited operating history with a limited number of properties. As such, in these programs, you will be unable to evaluate the economic merit of future investments before they are made.} 

_{No public market currently exixts, and one may never exist, for shares of common stock in a publicly registered, non-traded REIT. In these types of programs, if you are able to sell your shares, you would likely have to sell them at a substantial discount.} 

_{In non-readed REIT programs, if distributions exceed available cash from operations, the REIT may fund distributions from other sources sush as subscription proceeds and borrowing, which could reduce the funds that are available for investments and affect the overall investment return in the REIT.} 

_{Non-traded REITS may incur substantial debt, which could hinder the ability to pay distributions to stockholders or could decrease the value of it's investment in the event that income on, or the value of, the property securing the debt falls. There are substantial conflicts of interest among non-traded REITS among the parties involved in real estate investment programs among the affiliate sponsor, advisor, dealer manager and property manager, such as the fact that its principal executive officers often owns a majority interest in the advisor, dealer managerand property manager.} 

_{If a REIT fails to qualify or to maintain the requirements to be taxed as a REIT, it would reduce the amount of the incomeavailable for distributions to stockholders.} 

_{In any non-traded REITS, you may not own more than 9.8% in value of the outstanding shares of it's stock or more than 9.8% in value or number of shares (whicheveris more restrictive) of any class or series of its outstanding shares of stock.} 

_{Non-traded REITs are typically dependent on an advisor to select investments and conduct operations and they pay substantial fees to its advisor, affiliates and participating broker dealers.}