Throughout my experiences in Investor Relations, I seem to get asked daily: “Is a Fund the same as a REIT?” Since it is such a popular topic, I thought it would be helpful to provide a breakdown of the two.
What is a REIT, technically speaking?
A Real Estate Investment Trust, commonly referred to as a REIT, is a type of tax structure created in 1960 to allow individual investors to invest in large-scale, income-producing real estate.1 REITs invests at least 75% of total assets in real estate, cash, or US Treasuries and derive at least 75% of its gross income from rents, interest on real property mortgages, or real estate sales.2 REITs must pay a minimum of 90% of taxable income in the form of shareholder dividends.3 This brings us to the first big difference between a Fund and a REIT, but I will continue with the definitions first to ensure we are on the same page.
The second main difference is that a REIT must be an entity that’s taxable as a corporation and be managed by a board of directors or trustees.4 Additionally, a REIT must have at least 100 shareholders after its first year of existence, with no more than 50% of its shares held by five or fewer individuals.5
So, now that we know the technical rules of a REIT, you may be wondering what types of REITs are there?
The most common REIT that people think of is the publicly traded REIT. These are the most visible and any retail investor with a Robinhood app can buy shares. However, not all REITs are publicly traded. There are non-traded REITs. These are companies that publicly report financials and are available to all investors, through licensed Broker Dealers, but do not trade their shares on any exchange. And lastly, there are Private REITs. These are commonly private equity funds with individual or institutional accredited investors, with exempt offerings through a Private Placement.6
What is a Private Real Estate Fund?
A Private Real Estate Fund is a private offering, or placement, and issuance of securities. The proceeds of which will be used to invest directly in real estate. Frequently, these funds will buy multiple assets and merge the funds. There is no specific structure of a Private Real Estate Fund. However, at Ashcroft, we structure our Funds as a Limited Partnership.
How is a REIT the same as a Private Real Estate Fund?
Most commonly, both will own a diverse portfolio of income-producing property. Technically, either could hold a single asset, i.e., the Empire State Building is a single-asset REIT structure, but portfolios are more common.7
How is a REIT different from a Private Real Estate Fund?
The biggest difference for many investors is the tax treatment. For example, your tax form from a REIT investment will be a 1099-DIV and your tax form from a Private Real Estate Fund will commonly be a K-1, depending on how it is structured.8
What is the benefit of a REIT v. Private Real Estate Fund?
For many investors, the benefit of a PR Fund is the tax treatment through the K-1. Losses can be passed through directly to the Limited Partners on a K-1, which is not available in a REIT and 1099.9
Please note: There are significant differences between a publicly-traded REIT and a Private Real Estate Fund regarding liquidity, access for investors, transparency of reporting, etc. The intent of this article is to provide a high-level overview and comparison between REITs and PR Funds. Please consult with your tax advisor before making any investment decisions and consider the effect that taxes may have on your returns.
1 SEC Investor Bulletin: Real Estate Investment Trusts (REITs), https://www.sec.gov/files/reits.pdf
3 Chen, James. “Real Estate Investment Trust (REIT) Definition.” Investopedia. Investopedia, May 19, 2021. https://www.investopedia.com/terms/r/reit.asp.
4 SEC Investor Bulletin: Real Estate Investment Trusts (REITs), https://www.sec.gov/files/reits.pdf
6 Bourgi, Sam. “Know the Different Types of Reits.” Dividend.com. Accessed January 27, 2022. https://www.dividend.com/how-to-invest/know-the-different-types-reits/.
7 DiLallo, Matthew. “What Is a Real Estate Investment Fund?” Millionacres. Millionacres, April 13, 2021. https://www.millionacres.com/real-estate-investing/reits/what-is-a-real-estate-investment-fund/.
8 Panknin, Josh. “REIT vs. Real Estate Fund – What’s the Difference?” Altusgroup.com. Accessed January 27, 2022. https://www.altusgroup.com/argus/insights/reit-vs-real-estate-fund-whats-the-difference.
9 Sharkansky, Max. “The Benefits and Basics of Real Estate Funds.” Trion Properties, July 16, 2021. https://trionproperties.com/real-estate-investment-education/articles/the-benefits-and-basics-of-real-estate-funds/.