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
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
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.