Non-traded real estate investment trusts (non-traded REITs) are privately held property portfolios. A REIT is a type of corporation that allows multiple investors to share interest in a real estate portfolio, much in the same way that investors share in the profits of a stock portfolio through a mutual fund. A REIT can be publicly traded on a stock exchange or privately held. Unlike RIETs, non-traded REITs do not trade shares in the REIT on a public stock exchange.
The concept of the REIT originated in the U.S. in 1960, but has since spread to many countries around the world. Since many countries do not allow foreign citizens to own property, the REIT has become a legitimate way for foreign investors to reap the benefit of partial ownership of foreign real estate. The traditional REIT is publicly traded, enabling free transferability of stock by the investor at any time over a stock exchange. During worldwide financial market downturns, the ability of investors to ditch their shares in a publicly traded REIT begins to affect the value of the publicly traded REIT and the returns it could offer investors.
Popularity of non-traded REIT is a result of poor economic climate as a vehicle that could force investors to weather economic vagaries. Investors in a non-traded REIT commit their money for a specific length of time, typically seven to 10 years, and cannot easily withdraw or trade that interest until the term of the investment has expired. During that time period, the investor earns dividends on his investment until the investment term ends and the non-traded REIT is liquidated or an initial public offering is arranged. The investor in this type of private REIT trades liquidity for stable dividend returns, protecting against the volatility of the stock market. Publicly traded REITs are vulnerable to volatile markets.
In many other respects, non-traded REITs are just like publicly traded REITs. In the U.S., both must register with the Securities & Exchange Commission and are required to pay out 90% of income as dividends. Both types of REITs enjoy the same tax benefits as a pass-through tax corporation that can avoid double taxation. Non-traded REITs have even expanded into the realm of specialty realty that had been the purview of publicly traded REITs. In addition to the four standard types of real estate — office, retail, apartment and industrial — non-traded REITs are now investing in self-storage facilities, health care buildings, entertainment venues, timberland and other types of non-traditional holdings.