Why Private REIT Acquisitions Are Becoming Wildly Popular
Private REITs own a variety of real estate assets, and as a result, investors are becoming increasingly interested in the nuances of acquiring a private REIT.
“If real estate investors want to include in their potential acquisition lists the expanding amount of real estate assets held by private REITs in the U.S., they need to be familiar with the ins and outs of acquiring a private REIT, which is a very different transaction from a traditional real estate purchase and sale,” Ben Fackler, a partner at Allen Matkins, tells GlobeSt.com. “And for both buyers and sellers it’s important to understand those key transactional differences in advance, in order to optimize the acquisition process and reduce potential frictions and busted deals.”
Private REITs are particularly popular in a low-yield environment. “Private REITs have long been preferred tax-advantaged yield vehicles, and have increased in popularity as an asset class in the low-yield environment we have found ourselves in since the global financial crisis,” Max Brunner, senior counsel at Allen Matkins, tells GlobeSt.com. “Adding fuel to the fire, in December 2015 Congress passed the Protecting Americans from Tax Hikes Act, which has channeled an increased amount of foreign investment in U.S. real estate into private REITs.”
While there are advantages, there are also challenges to navigating a private REIT acquisition. “When it is time to sell the property, many REIT holders insist on selling the shares of the REIT entity rather than the underlying real estate, in order to maintain the favorable tax treatment that led them to initially use the REIT in the first place,” says Brunner. “Maintaining this tax status is often of critical importance for sellers, which means buyers need to be prepared to acquire the REIT if they want to purchase the underlying real estate.”
Investors looking to sell or buy a private REIT should start by understanding the legal guidelines. “From the outset, investors need to be fully aware of the numerous legal requirements needed to qualify as a private REIT and make sure that they have experienced tax and legal advisors up to the task,” says Brunner. “For all of the reasons we have discussed, the buyer of a private REIT entity takes on much more risk versus directly buying the title to the real estate asset, so it needs expert advice and protection beyond the critical real estate diligence skillset. Similarly, the seller will want to make sure that it has appropriate terms in the complex sale contract to protect its interests.”
One standout tip: there is less liquidity for sellers of private REITs. “This is because the seller either needs to find a sophisticated buyer who is willing to take on this additional complexity and risk and willing to pay higher transaction costs to negotiate this type of transaction, or needs to first pay the costs needed to collapse the REIT entity structure and then sell the title to the real estate asset directly,” says Fackler.
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 a transaction to buy a private REIT, especially if the complexity reduces the size of the potential buyer pool,” says Fackler. “And for buyers with the ability to move quickly, assess the risks and propose practicable commercial solutions to address them, there are more and more quality real estate assets that they will have access to. Having experienced advisors to assist in this process is critical.”