Private REIT acquisitions areon the rise. Investors are showing increasing interest in acquiringprivate REITs, which have a variety of real estate holdings. Thesetransactions are very different from standard real estate deals,but they also have significant benefits.

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"If real estate investors want to include in their potentialacquisition lists the expanding amount of real estate assets heldby private REITs in the U.S., they need to be familiar with the insand outs of acquiring a private REIT, which is a very differenttransaction from a traditional real estate purchase and sale,"Ben Fackler, a partner at AllenMatkins, tells GlobeSt.com. "And for both buyers andsellers it's important to understand those key transactionaldifferences in advance, in order to optimize the acquisitionprocess and reduce potential frictions and busted deals."

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Private REITs are particularly popular in a low-yieldenvironment. "Private REITs have long been preferred tax-advantagedyield vehicles, and have increased in popularity as an asset classin the low-yield environment we have found ourselves in since theglobal financial crisis," Max Brunner, seniorcounsel at Allen Matkins, tells GlobeSt.com. "Adding fuel to thefire, in December 2015 Congress passed the Protecting Americansfrom Tax Hikes Act, which has channeled an increased amount offoreign investment in U.S. real estate into private REITs."

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While there are advantages, there are also challenges tonavigating a private REIT acquisition. "When it is time to sell theproperty, many REIT holders insist on selling the shares of theREIT entity rather than the underlying real estate, in order tomaintain the favorable tax treatment that led them to initially usethe REIT in the first place," says Brunner. "Maintaining this taxstatus is often of critical importance for sellers, which meansbuyers need to be prepared to acquire the REIT if they want topurchase the underlying real estate."

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Investors looking to sell or buy a private REIT should start byunderstanding the legal guidelines. "From the outset, investorsneed to be fully aware of the numerous legal requirements needed toqualify as a private REIT and make sure that they have experiencedtax and legal advisors up to the task," says Brunner. "For all ofthe reasons we have discussed, the buyer of a private REIT entitytakes on much more risk versus directly buying the title to thereal estate asset, so it needs expert advice and protection beyondthe critical real estate diligence skillset. Similarly, the sellerwill want to make sure that it has appropriate terms in the complexsale contract to protect its interests."

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One standout tip: there is less liquidity for sellers of privateREITs. "This is because the seller either needs to find asophisticated buyer who is willing to take on this additionalcomplexity and risk and willing to pay higher transaction costs tonegotiate this type of transaction, or needs to first pay the costsneeded to collapse the REIT entity structure and then sell thetitle to the real estate asset directly," says Fackler.

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Despite any challenges, the benefits are still compelling,namely that private REITs are a great opportunity to unlock value."There may be unique opportunities to uncover value with atransaction to buy a private REIT, especially if the complexityreduces the size of the potential buyer pool," says Fackler. "Andfor buyers with the ability to move quickly, assess the risks andpropose practicable commercial solutions to address them, there aremore and more quality real estate assets that they will have accessto. Having experienced advisors to assist in this process iscritical."

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.