Private REIT deals arebecoming more popular as a way to gain real estate market share,but acquiring a private REIT is a much different deal than a directreal estate transaction—where buyers acquire real estate titlesdirectly.

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"In a direct real estate acquisition, the buyer acquires titleto real estate directly from a seller," BenFackler, a partner at Allen Matkins,tells GlobeSt.com. "In a private REIT acquisition, the buyerinstead only indirectly acquires real estate by acquiring thecommon stock of a business entity, which also has 100+ third partypreferred shareholders. That entity typically holds equityinterests in another entity that directly or indirectly owns titleto the property."

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As a result, there are many differences between the twotransactions that investors should understand. "There arefundamental transactional differences between these two purchasestructures, which impact price and exposures post-closing.Navigating such a deal not only requires real estate knowledge andexperience, but also strong tax and corporate law knowledge," saysFackler.

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In addition, direct real estate deals have more limited risksthan private REIT deals. "In a direct real estate acquisition, thebuyer's primary risk is whether it will have title to the realestate, which is substantially covered by reputable third-partytitle insurance and verifiable through public title records,"Max Brunner, senior counsel at Allen Matkins,tells GlobeSt.com. "A private REIT acquisition is completelydifferent from a real estate deal, since the buyer will own commonshares in an entity, which hold equity interests in other entities,and take on all legacy liabilities that come with theentities."

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Due to structural differences between the two transactions,buyers of private REITs  have a more arduous due diligenceperiod. "Regardless of how clean title to the real estate is, abuyer still needs to understand and protect itself from an issueswith the actual asset it is purchasing—the common shares of theREIT—for which there is no equivalent title insurance or publicchain of ownership information," says Brunner.

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In addition, the buyer will inherit certain liabilities, likelegacy litigation liabilities, contract liabilities and employmentliabilities," according to Brunner. "The risk profile is muchhigher as a result," says Brunner. "To mitigate these risks, thebuyer and seller should agree up front at the term sheet stage on aliability construct that is similar to stock purchase agreement foran operating business."

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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.