Investment Fern

Reclassifying REITs

Knowing the different REIT structures and types helps experts make good investment decisions.

In today’s surging and oftentimes turbulent real estate investment market, responsible real estate professionals and investors must make decisions and strategically plan future steps armed with all the relevant facts. One area that consistently baffles the investment press and therefore scores of misinformed readers is non-traded real estate investment trusts. This confusion often includes false perceptions about the differences and similarities between traded and non-traded REITs. Commercial real estate professionals should be aware of the significant discrepancies between these two structures and the realities that define this growing force in capital and asset aggregation within today’s real estate landscape.

Historical Classification Methods
Historically REITs have been classified according to property type or investment focus. For example, in its searchable database of REITs, the National Association of Real Estate Investment Trusts classifies its membership by property type. NAREIT also classifies each REIT by mortgage, equity, or hybrid. Other forms of REIT investments are available in the marketplace but generally are accompanied by an allocated pool among many REIT companies, such as REIT mutual funds. Mortgage REITs generally derive their revenue from income associated with interest and servicing payments made on loans originated or purchased in certain real estate property types by the REIT. Equity REITs actually own investment interests in real estate in certain property types, which often are focused on specific geographic regions stateside or abroad. Many times these REITs also derive income from management and leasing activities as well as other tenant services. Hybrid REITs derive income from both loans and equity investments in real property.

Today, these simple classifications are not enough to provide the full REIT picture. Fortunately there are other REIT classification methods.

Private REITs
Popular trade journals have been filled with stories proclaiming private REITs the latest commercial real estate tour de force and the new home for large acquisition appetites. While it is reasonable to assume that the capital being raised for acquisitions by truly private REITs has increased in the shadow of the tech bust and the diminishing near-term returns of other investment alternatives, along with other commercial real estate market sectors, the real investment trend story is non-traded public REITs.

The most publicized equity dollar pool increases have actually been generated by and reported in the Securities and Exchange Commission filings of companies raising capital via nonlisted publicly registered REIT stock offerings. This confusion by the press in referring to the nontraded public REITs as private is the result of classifications that do not properly account for the many differences with and similarities to traditional traded public REITs.

Many nontraded REITs have been called private but actually are registered public companies similar to Equity Office Property Trusts, Brandywine Realty Trust, or Boston Properties. Knowing the differences between public and private REITs is significant for investors making real estate diversification choices, just as it is for real estate professionals working directly with these organizations.

Jason Mattox

Jason Mattox is the executive vice president of Behringer Harvard in Addison, Texas. Contact him at (214) 655-1600 or [email protected]

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