Investor Bulletin: 

Real Estate Investment Trusts (REITs)

Real estate investment trusts (“REITs”) have been 

around for more than fifty years. Congress established 

REITs in 1960 to allow individual investors to invest 

in large-scale, income-producing real estate. REITs 

provide a way for individual investors to earn a share 

of the income produced through commercial real 

estate ownership – without actually having to go out 

and buy commercial real estate.

What is a REIT?

A REIT, generally, is a company that owns – and 

typically operates – income-producing real estate or 

real estate-related assets. The income-producing real 

estate assets owned by a REIT may include office 

buildings, shopping malls, apartments, hotels, resorts, 

self-storage facilities, warehouses, and mortgages or 

loans. Most REITs specialize in a single type of real 

estate – for example, apartment communities. There 

are retail REITs, office REITs, residential REITs, 

healthcare REITs, and industrial REITs, to name a 

few. What distinguishes REITs from other real estate 

companies is that a REIT must acquire and develop its 

real estate properties primarily to operate them as part 

of its own investment portfolio, as opposed to reselling 

those properties after they have been developed.

How to Qualify as a REIT?

To qualify as a REIT, a company must have the bulk 

of its assets and income connected to real estate 

investment and must distribute at least 90 percent 

of its taxable income to shareholders annually in the 

form of dividends. A company that qualifies as a 

REIT is allowed to deduct from its corporate taxable 

income all of the dividends that it pays out to its 

shareholders. Because of this special tax treatment, 

most REITs pay out at least 100 percent of their 

taxable income to their shareholders and, therefore, 

owe no corporate tax.

In addition to paying out at least 90 percent of its 

taxable income annually in the form of shareholder 

dividends, a REIT must:

•	 Be an entity that would be taxable as a 

corporation but for its REIT status;

•	 Be managed by a board of directors or trustees;

•	 Have shares that are fully transferable;

•	 Have a minimum of 100 shareholders after its 

first year as a REIT;

•	 Have no more than 50 percent of its shares 

held by five or fewer individuals during the 

last half of the taxable year;

•	 Invest at least 75 percent of its total assets in 

real estate assets and cash;

•	 Derive at least 75 percent of its gross income 

from real estate related sources, including rents 

from real property and interest on mortgages 

financing real property;

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•	 Derive at least 95 percent of its gross income 

from such real estate sources and dividends or 

interest from any source; and

•	 Have no more than 25 percent of its assets 

consist of non-qualifying securities or stock in 

taxable REIT subsidiaries.

Three Categories of REITs: Equity, 

Mortgage, and Hybrid

REITs generally fall into three categories: equity 

REITs, mortgage REITs, and hybrid REITs. Most 

REITs are equity REITs. Equity REITs typically 

own and operate income-producing real estate. 

Mortgage REITs, on the other hand, provide money 

to real estate owners and operators either directly 

in the form of mortgages or other types of real 

estate loans, or indirectly through the acquisition of 

mortgage-backed securities. Mortgage REITs tend to 

be more leveraged (that is, they use a lot of borrowed 

capital) than equity REITs. In addition, many 

mortgage REITs manage their interest rate and credit 

risks through the use of derivatives and other hedging 

techniques. You should understand the risks of these 

strategies before deciding to invest in these types of 

REITs. Hybrid REITs generally are companies that 

use the investment strategies of both equity REITs 

and mortgage REITs.

Because they often invest in debt securities secured 

by residential and commercial mortgages, mortgage 

REITs can be similar to certain investment companies 

that are focused on real estate. Generally, companies 

that invest a majority of their assets in real estate are 

exempted from the rules that govern investment 

companies, such as mutual funds. The SEC has 

initiated a review to determine whether certain 

mortgage REITs should continue to be exempt from 

investment company regulation. Those rules generally 

limit the amount of leverage that a fund can use and 

regulate the fees that can be charged to investors.

Comparison of Publicly Traded REITs 

and Non-Traded REITs

Many REITs (whether equity or mortgage) are 

registered with the SEC and are publicly traded 

on a stock exchange. These are known as publicly 

traded REITs. In addition, there are REITs that are 

registered with the SEC, but are not publicly traded. 

These are known as non-traded REITs (also known 

as non-exchange traded REITs). The table below 

compares the characteristics of publicly traded and 

non-traded REITs.

PUBLICLY TRADED REITs NON-TRADED REITs 

Overview REITs that file reports with the 

SEC and whose shares trade on 

national stock exchanges. 

REITs that file reports with the SEC but 

whose shares do not trade on national stock 

exchanges. 

Liquidity Shares are listed and traded, 

like any publicly traded stock, 

on major stock exchanges. 

Most are NYSE listed. 

Shares are not traded on public stock 

exchanges. Redemption programs for shares 

vary by company and are typically very 

limited. Investors may have to wait to 

receive a return of their capital until the 

company decides to engage in a transaction 

such as the listing of the shares on an 

exchange or a liquidation of the company’s 

assets. 

Transaction Brokerage costs the same as Typically, fees of 9 - 10 percent of the 

PUBLICLY TRADED REITs NON-TRADED REITs 

Overview REITs that file reports with the REITs that file reports with the SEC but 

Costs for buying or selling any other 

publicly traded stock. 

investment are charged for broker-dealer 

commissions and other upfront offering costs. 

Ongoing acquisition and management fees 

and other expenses also are typical. Backend fees may be charged. 

Management Typically, the managers are 

employees of the company

Typically, the company has no employees 

and is managed by a third party pursuant to a 

SEC and whose shares trade on 

national stock exchanges. 

whose shares do not trade on national stock 

exchanges. 

Liquidity Shares are listed and traded, 

like any publicly traded stock, 

on major stock exchanges. 

Most are NYSE listed. 

Shares are not traded on public stock 

exchanges. Redemption programs for shares 

vary by company and are typically very 

limited. Investors may have to wait to 

receive a return of their capital until the 

company decides to engage in a transaction 

such as the listing of the shares on an 

exchange or a liquidation of the company’s 

assets. 

Transaction 

Costs 

Brokerage costs the same as 

for buying or selling any other 

publicly traded stock. 

Typically, fees of 9 - 10 percent of the 

investment are charged for broker-dealer 

commissions and other upfront offering costs. 

Ongoing acquisition and management fees 

and other expenses also are typical. Backend fees may be charged. 

Management Typically, the managers are 

employees of the company

Typically, the company has no employees 

and is managed by a third party pursuant to a 

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such as the listing of the shares on an 

exchange or a liquidation of the company’s 

PUBLICLY TRADED REITs NON-TRADED REITs assets. 

Transaction Brokerage costs the same as Typically, fees of 9 - 10 percent of the 

Costs for buying or selling any other investment are charged for broker-dealer 

publicly traded stock. commissions and other upfront offering costs. 

Ongoing acquisition and management fees 

and other expenses also are typical. Backend fees may be charged. 

Management Typically, the managers are Typically, the company has no employees 

employees of the company. and is managed by a third party pursuant to a 

management contract. 

Minimum One share. Typically, $1,000 - $2,500. 

Investment 

Amount 

Independent Stock exchange rules require a North American Securities Administrators 

Directors majority of directors to be Association (“NASAA”) guidelines, which 

independent of management. have been adopted by many states, require a 

NYSE and NASDAQ rules call majority of directors to be independent of 

for fully independent audit, management. NASAA guidelines also 

nominating, and compensation require that a majority of each board 

committees. committee consist of independent directors. 

Investor Investors elect directors. Investors elect directors. 

Control 

Corporate 

Governance 

Specific stock exchange rules 

on corporate governance. 

Subject to state and NASAA guidelines. 

Disclosure Required to make regular SEC Required to make regular SEC disclosures, 

Obligation disclosures, including quarterly including quarterly financial reports and 

financial reports and yearly yearly audited financial reports. 

audited financial reports. 

Share Value Real-time market prices are No independent information about share 

Transparency publicly available. Wide range value available. Company may provide an 

of analyst reports available to estimated share value 18 months after the 

the public. offering has closed. 

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Overview REITs that file reports with the 

SEC and whose shares trade on 

national stock exchanges. 

REITs that file reports with the SEC but 

whose shares do not trade on national stock 

exchanges. 

Liquidity Shares are listed and traded, 

like any publicly traded stock, 

on major stock exchanges. 

Most are NYSE listed. 

Shares are not traded on public stock 

exchanges. Redemption programs for shares 

vary by company and are typically very 

limited. Investors may have to wait to 

receive a return of their capital until the 

company decides to engage in a transaction 

such as the listing of the shares on an 

exchange or a liquidation of the company’s 

assets. 

Transaction 

Costs 

Brokerage costs the same as 

for buying or selling any other 

publicly traded stock. 

Typically, fees of 9 - 10 percent of the 

investment are charged for broker-dealer 

commissions and other upfront offering costs. 

Ongoing acquisition and management fees 

and other expenses also are typical. Backend fees may be charged. 

Management Typically, the managers are 

employees of the company. 

Typically, the company has no employees 

and is managed by a third party pursuant to a 

management contract. 

Minimum 

Investment 

Amount 

One share. Typically, $1,000 - $2,500. 

Independent 

Directors 

Stock exchange rules require a 

majority of directors to be 

independent of management. 

NYSE and NASDAQ rules call 

for fully independent audit, 

nominating, and compensation 

committees. 

North American Securities Administrators 

Association (“NASAA”) guidelines, which 

have been adopted by many states, require a 

majority of directors to be independent of 

management. NASAA guidelines also 

require that a majority of each board 

committee consist of independent directors. 

Investor 

Control 

Investors elect directors. Investors elect directors. 

Corporate 

Governance 

Specific stock exchange rules 

on corporate governance. 

Subject to state and NASAA guidelines. 

Disclosure 

Obligation 

Required to make regular SEC 

disclosures, including quarterly 

financial reports and yearly 

audited financial reports. 

Required to make regular SEC disclosures, 

including quarterly financial reports and 

yearly audited financial reports. 

Share Value 

Transparency 

Real-time market prices are 

publicly available. Wide range 

of analyst reports available to 

the public. 

No independent information about share 

value available. Company may provide an 

estimated share value 18 months after the 

offering has closed. 

Source: National Association of Real Estate Investment Trusts (NAREIT)

Some Caveats about Non-Traded REITs

•	 Lack of Liquidity: Non-traded REITs are 

illiquid investments; they generally cannot be 

sold readily on the open market. If you need 

to sell an asset to raise money quickly, you 

may not be able to do so with shares of a nontraded REIT. Although non-traded REITs 

usually offer share redemption programs, these 

are typically subject to significant limitations 

and may be discontinued at the discretion 

of the company. Investors may have to wait 

to receive a return of their capital until the 

company decides to engage in a transaction 

such as the listing of the shares on an exchange 

or a liquidation of the company’s assets. The 

timing of these liquidity events is at the 

discretion of the company, and may be more 

than 10 years after the investment is made.

•	 Share Value Transparency: While the 

market price of a publicly traded REIT 

is readily accessible, it can be difficult to 

determine the value of a share of a non-traded 

REIT. Because non-traded REITs are not 

traded on an exchange there is no market price 

available. Non-traded REITs typically do not 

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provide an estimate of their value per share 

until 18 months after their offering closes, but 

this may be years after you have made your 

investment. As a result, you may not be able 

to assess the value of your non-traded REIT 

investment for a significant time period and 

may not be able to assess the volatility of your 

investment.

•	 Significant Up-Front Fees: Non-traded 

REITs are typically sold by financial advisers. 

Non-traded REITs generally have high upfront 

fees that lower the value of the investment 

by a significant amount. They usually charge 

sales commissions and upfront offering fees of 

approximately nine to 10 percent. Investors 

should understand that a portion of the share 

purchase price represents sales commissions 

and that the amount actually invested in the 

company is reduced by these commissions.

•	 Distributions May Be Paid from Offering

Proceeds and Borrowings: Investors may 

be attracted to non-traded REITs by their 

relatively high dividend yields compared to 

those of publicly traded REITs. However, 

investors should consider the total return of a 

non-traded REIT – capital appreciation plus 

dividends – instead of focusing exclusively 

on the high dividend yield. Unlike publicly 

traded REITs, non-traded REITs frequently 

pay distributions in excess of their funds from 

operations. To do so, they may use offering 

proceeds and borrowings. This practice, which 

is typically not used by publicly traded REITs, 

reduces the value of the shares and reduces 

the cash available to the company to purchase 

additional assets. In considering an investment 

in a non-traded REIT, you should assess the 

extent to which distributions have been paid 

from sources other than funds from operations.

•	 Conflicts of Interest: Non-traded REITs 

are typically externally managed—meaning 

the REITs do not have their own employees. 

The external manager may be paid significant 

fees by the REIT for things that may not 

necessarily be aligned with the interests 

of shareholders, such as fees based on the 

amount of property acquisitions and assets 

under management. In addition, the external 

manager may also manage other companies 

that may compete with the REIT.

Investing in REITs

As with any investment, you should take into account 

your own financial situation, consult your financial 

adviser, and perform thorough research before making 

any investment decisions concerning REITs. You can 

review a REIT’s disclosure filings, including annual 

and quarterly reports and any offering prospectus at 

sec.gov. You can invest in a publicly traded REIT, 

which is listed on a major stock exchange, by 

purchasing shares through a broker (as you would 

other publicly traded securities). Generally, you can 

purchase the common stock, preferred stock, or debt 

securities of a publicly traded REIT. You can purchase 

shares of a non-traded REIT through a broker that 

has been engaged to participate in the non-traded 

REIT’s offering. You can also purchase shares in a 

REIT mutual fund (either an index fund or actively 

managed fund) or REIT exchange-traded fund.

Special Tax Considerations

The shareholders of a REIT are responsible for paying 

taxes on the dividends that they receive and on any 

capital gains associated with their investment in the 

REIT. Dividends paid by REITs generally are treated 

as ordinary income and are not entitled to the reduced 

tax rates on other types of corporate dividends. For 

this reason, some investors prefer to own shares of a 

REIT or REIT fund inside a tax-deferred account 

(such as a retirement account) in order to defer paying 

taxes on the dividends received and any capital gains 

incurred from that REIT until they start withdrawing 

money from the tax-deferred account. Finally, a 

REIT is not a pass-through entity. This means that, 

unlike a partnership, a REIT cannot pass any tax losses 

through to its investors. Consider consulting your tax 

adviser before investing in REITs.

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Related Information

SEC Division of Corporation Finance Disclosure 

Guidance: Topic No. 3—Staff Observations in 

the Review of Promotional and Sales Material 

Submitted Pursuant to Securities Act Industry 

Guide 5

SEC Concept Release: Companies Engaged in the 

Business of Acquiring Mortgages and MortgageRelated Instruments (September 7, 2011)

FINRA Investor Alert: Public Non-Traded 

REITs—Perform a Careful Review before Investing

The Office of Investor Education and Advocacy has 

provided this information as a service to investors. It 

is neither a legal interpretation nor a statement of 

SEC policy. If you have questions concerning the 

meaning or application of a particular law or rule, 

please consult with an attorney who specializes in 

securities law.

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