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.
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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
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. Back-
end 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.
 
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Investor Assistance (800) 732-0330
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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. Back-
end 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.
1
 

Overview
REITs that file reports with the
SEC and who shares trade on
national stock exchanges.
REITs that file reports with the SEC but
who e shares do not trade on national stock
exchanges.
Liquidity
Shares are listed and traded,
like any publicly traded stock,
on major stock exchanges.
Most re NYSE listed.
Shares are not traded on public stock
exchanges. R dempti n programs for shares
vary by company and are typically very
limited. Investors may have t wait to
receive a return of their ca ital 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.
Transactio
Costs
Br kerage costs the ame as
for buying or s lling 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 acquisiti n and management fees
and other xpenses also are typical. Back-
end fe s may be charged.
Management
Typically, the managers are
employees of he company.
Typically, the company has o employees
a d 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 requir a
majority of di ectors to be
in ependent of management.
NYSE and NASDAQ rules call
for ful
independent audit,
nominating, and compensati n
committees.
North American Securities Admini trators
Associ tion (“NASAA”) guidelines, which
have been adopted by many states, require a
majority of irectors to be i dependent of
management. NASAA guidelines also
require that majority of each bo rd
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 non-
traded 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 Mortgage-
Related 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.
December 2011
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