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REIT’s (Real Estate Investment Trusts)

Over nearly half a century, theU.S.real estate investment trust (REIT) industry has become an important segment of the U.S.economy and investment markets. U.S. REITs have seen their equity market capitalization soar from $90 billion to more than $200 billion in just the past 10 years. In the process, that growth has set the stage for the adoption of the REIT approach to securitized real estate investment across the globe.

Congress created REITs in 1960 as a way to make investment in large-scale, income-producing real estate accessible to all investors in the same way they typically invest otherwise – through the purchase and sale of liquid securities. Prior to the creation of listed real estate equities, access to the investment returns of commercial real estate equity as a core asset was available only to institutions and wealthy individuals having the financial deep pockets to undertake direct real estate investment.

In order for a company to qualify as a REIT in the U.S., it must invest at least 75 percent of total assets in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of dividends.  Resource: NAREIT

REIT’s Goal: Purchase interests in high-quality real estate that will provide immediate income from tenant rents and may appreciate in value so that they can ultimately be sold at a profit.

Assumptions: Real estate values and income will fluctuate based on economic and environmental factors.

Illiquidity: Investment hold period can last from anywhere of 7 to 10 years or more. REIT’s that are private and publically are non-traded and by definition Illiquid—-There is no secondary market to sell your shares if you want to sell;  Some REIT’s are redeemable by the REIT itself and generally available after 12 months of purchase and subject to a surrender schedule (early redemption penalties) which are almost always present and only redeemable if there is enough cash to do so, usually 5% of the REIT’s available cash; Board of Directors of REIT’s can close redemptions at anytime—Investors are warned to invest for the full duration and expect a long-term hold.

No Capital Calls: An investor’s liability is limited to their original capital contribution.

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