Know Your Non-Traded REITs: An Insight into Non-Traded REITs and Their Evolution
September 19, 2023 | SS&C
Driven by market pressures and regulatory changes, non-traded real estate investment trusts (non-traded REITs) have evolved over time to become more appealing to today’s investors. Fund structures today offer greater efficiency and transparency while continuing to provide the benefits of indirect ownership in institutional-quality commercial real estate. This whitepaper will provide an overview of REITs of all types, focusing on non-traded REITs, how they have evolved, key features of today’s product, the importance of technology-driven administration solutions and how innovations in analytics can be used to improve distribution.
What Is a REIT?
A REIT can be defined as a corporation that owns and manages a portfolio of real assets (e.g. commercial buildings or apartments) and real estate-related debt (e.g. mortgages). In 1960, the REIT Act was passed by the U.S. Congress in an attempt to encourage small investors to participate in commercial real estate investments. Publicly-traded REITs are the type of REITs that the U.S. Congress envisioned under the 1960 Act. Public REITs are governed by the rules of the Securities and Exchange Commission (SEC) and are therefore subject to a significant amount of regulatory oversight.
Introduction of Non-Traded and Finite Life/ Closed-End REITs
Following the 1986 Tax Reform Act, several REIT simplification changes took effect. The changes made way for the initial non-traded REITs which were structured at a fixed share price (usually at $10 or $20 per share) for the duration of a continuous offering (usually two to three years) period. Finite life products (i.e. closed-ended funds) were also introduced, which are nontraded funds with a life of five to ten years (at which time they would seek a liquidity event). The first non-traded finite life REITs were not hugely popular due to high upfront fee loads (generally a 7% selling commission and 3% dealer manager fees). In addition, the closed-end structure led to relative illiquidity, cycle-dependent life with arbitrary deadlines for exiting and other potentially limiting features that hampered net asset value (NAV) growth. In many ways they were “sold not bought” as a capillary network of brokers and financial advisors largely distributed the funds solely to retail investors as a means to add “core” real estate exposure to their investment portfolios. Furthermore, they were viewed as lacking in transparency and having dividend payout ratios not reflected in share values. All of the above, made way for an alternative product.
