What Is a Private REIT and How Does It Work?

Real Estate Investment Trusts, commonly known as REITs, are companies that own, operate, or finance income-producing real estate across various property sectors. These entities allow individuals to invest in large-scale real estate portfolios without directly acquiring, managing, or financing properties themselves. REITs are structured to provide investors with a share of the income generated from real estate assets, similar to how mutual funds pool investments in stocks or bonds. While many REITs are publicly traded on major stock exchanges, there is also a category known as private REITs, which operate outside of public markets.

Understanding Private REITs

A private REIT is a company that owns and typically operates income-producing real estate, but it is not listed or traded on a public stock exchange. These REITs are generally offered through private placements, meaning their shares are not available to the general investing public through traditional brokerage accounts. Private REITs enable investors to pool capital for investment in diversified real estate portfolios, which can include various property types such as office buildings, apartment complexes, retail centers, or industrial facilities.

Private REITs generate income primarily through rent collection from their owned properties, and sometimes through the sale of these properties. They must distribute a significant portion of their taxable income to shareholders, typically at least 90%, to maintain their tax-advantaged status, where the entity itself generally avoids corporate income tax. This structure allows the income to be taxed once at the shareholder level, similar to a pass-through entity, rather than being subject to double taxation at both the corporate and individual levels. These entities often take the legal form of corporations or trusts, and they must meet specific Internal Revenue Service (IRS) requirements to qualify as a REIT.

The “private” designation means these REITs are not subject to the same stringent public reporting and disclosure requirements as companies listed on national stock exchanges. This reduced regulatory burden can lead to differences in how they are managed, valued, and how information is made available to investors. While they still have certain reporting obligations, these are typically less frequent and less detailed than those for publicly traded entities.

Key Characteristics of Private REITs

Private REITs have distinct features due to their non-public nature. A primary characteristic is illiquidity, meaning investments cannot be easily bought or sold on an open market. Investors typically face lock-up periods, which can range from several years, and redemption options may be limited or subject to specific conditions and fees.

Valuation of private REITs also differs significantly from publicly traded securities. Since their shares are not traded daily, their value is not determined by continuous market pricing. Instead, private REITs are typically valued periodically, often quarterly or annually, through independent third-party appraisals of their underlying real estate assets. This less frequent valuation can mean the reported net asset value (NAV) does not always reflect real-time market fluctuations.

Investors in private REITs may have access to less current or comprehensive financial and operational information about the trust and its properties. This limited transparency places a greater emphasis on the due diligence performed by the investor or their financial advisor.

Access to private REITs is generally restricted to specific types of investors. These offerings are not typically available to the general public through standard investment platforms. This means private REITs cater to a particular segment of the investment community, often those with higher net worth or specific financial sophistication.

Private vs. Public REITs

The distinctions between private and public REITs are fundamental, primarily stemming from their listing status. Public REITs are traded on major stock exchanges, like the New York Stock Exchange, providing investors with daily liquidity. Conversely, private REITs are not publicly traded and lack an active secondary market, making them inherently illiquid.

Public REIT shares can be bought and sold quickly, similar to other stocks, offering investors ready access to their capital. Private REITs, by contrast, typically involve lock-up periods, and redemption options are often limited or subject to specific timeframes and penalties. Selling shares in a private REIT can be a challenging and time-consuming process.

Valuation methods differ significantly. Public REITs are valued continuously by market forces, with share prices fluctuating throughout the trading day based on supply and demand, investor sentiment, and real-time news. Private REITs, however, are valued periodically, usually on a quarterly or annual basis, through appraisals of their underlying real estate assets, providing less immediate price discovery.

Transparency and reporting requirements vary substantially. Public REITs are subject to extensive regulatory oversight by the SEC, necessitating frequent and detailed public filings, including quarterly and annual financial reports. Private REITs have fewer public disclosure obligations, meaning investors may receive less frequent or less granular financial information, often through private offering documents.

Accessibility is another key difference. Public REITs are generally accessible to all types of investors, with low minimum investment requirements, sometimes just the cost of a single share. Private REITs, however, typically have higher minimum investment thresholds and are often restricted to accredited investors due to their private placement nature.

Investing in Private REITs

Investing in private REITs typically occurs through specific channels. These offerings are usually made via private placements, which are exempt from the extensive registration requirements of public securities offerings under federal securities laws.

Access to private REITs is often limited to “accredited investors,” a designation defined by the SEC. To qualify as an accredited investor, an individual typically must meet certain income or net worth thresholds, such as an annual income of at least $200,000 ($300,000 for married couples) for the past two years with an expectation of the same in the current year, or a net worth exceeding $1 million, excluding the value of their primary residence. This requirement aims to ensure that investors in less regulated private offerings have the financial capacity to bear potential risks.

Individuals interested in private REITs often access these opportunities through financial advisors, wealth management firms, or directly from the REIT sponsor. These intermediaries can provide information about specific private offerings and facilitate the investment process.

Given the limited public information and illiquid nature of private REITs, conducting thorough due diligence is particularly important. Potential investors should carefully review all offering documents, such as the private placement memorandum, which details the REIT’s investment strategy, fees, risks, and redemption policies. Understanding these documents is crucial for evaluating whether a private REIT aligns with an investor’s financial goals and risk tolerance.