Frequently Asked Question on REIT
"Private REITs" & "Public Non-Traded REITs" - What's the Difference?
Broadstone Net Lease is a "Private REIT." Private REITs are not SEC-registered entities, but are required to conform with the SEC's rule 506, regulation D. The offerings are available only to investors that meet one or more of the SEC's "Accredited Investor" thresholds, and are sold directly via private placement. Investors' shares are valued on a quarterly basis via a "Net Asset Value" calculation, which is outlined in detail in the FAQ. While private REITs are, by law, allowed to charge front-loaded commissions on investments, Broadstone Net Lease does not charge a commission to invest, and does not pay any broker-dealer commissions on sales of BNL shares. The REIT has, instead, built in a one-time capital-raising fee of 0.5%, which helps cover the cost of the offering, including legal and marketing expenses. This means that 99.5% of every dollar invested in Broadstone Net Lease goes directly towards purchasing income producing real estate.
"Non-Traded REITs" are SEC-registered offerings, and are required to conform with the Securities Acts of 1933 and 1934. These offerings are most frequently marketed and sold by a "broker/dealer" or "dealer manager," which may not be the same entity as the REIT itself, but may be "affiliated," and ultimately controlled by the same management team. These "broker/dealers" often charge investors front-loaded commissions as high as 10% of the purchase value, and, according to a 2012 report from the Securities Litigation and Consulting group, Inc., the all-in commissions for "organization and offering expenses" can sometimes reach as high as 15%.
How do I invest with Broadstone?
What is a 1031 exchange and how does it work?
What is an UPREIT transaction and how does it work?
What does “Net Lease” mean? What about “Triple Net Lease?”
What is a REIT?
What is the criteria necessary to qualify as an “Accredited Investor?”
What are “Alternative Investments?”
"Private REITs" and "Public Non-Traded REITs" are oftentimes confused with one-another, as both types of products are structured as open-ended vehicles, and neither type of product is listed or traded on public stock exchanges. There are key differences, though, in the way that these types of offerings are sold to investors, how they are valued, and the commissions & fees that can be involved in a purchase.
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Perhaps the most well-known way for an owner of real estate to defer the tax on capital gain is to exchange the real property for another real property in a 1031 exchange (after Section 1031 of the Internal Revenue Code). In a 1031 exchange, the property being sold in the exchange is referred to as the “relinquished property” and the property being acquired in the exchange is referred to as the “replacement property.” According to IRS requirements, within 45 days after the sale of the relinquished property, the owner must identify the replacement property. Once identified, the owner must acquire the replacement property within 180 days after the sale of the relinquished property. Thus, the property owner faces challenging time frames to identify the replacement property and to negotiate and close the sale and the purchase. And because the owner has sold one property and acquired another, there will be no change in liquidity and likely no change in property management responsibilities. To discuss a potential UPREIT or 1031 transaction, please contact our Acquisitions Team.
Short for Umbrella Partnership Real Estate Investment Trust, an UPREIT is an entity structure used by REITs to allow property sellers to convert their ownership into an interest into a private or public security. In the basic UPREIT structure, all REIT properties are acquired and owned directly or indirectly by its “umbrella partnership.” The umbrella partnership is the entity through which the REIT operates and collects all income from the properties, which is why the umbrella partnership is commonly referred to as the “operating partnership.” The REIT does not directly own any real estate properties in the UPREIT structure, rather it owns substantial interests in the operating partnership as both its sole general partner and one of its limited partners. In the case of our structure, Broadstone Net Lease, Inc. is the REIT and the managing member of Broadstone Net Lease, LLC, which is the “operating company” of the REIT. See the last page of this memorandum for a basic diagram of Broadstone’s UPREIT structure. In an UPREIT transaction, property owners contribute their properties in exchange for ownership units in an operating partnership (“OP Units”). UPREIT transactions provide an attractive tax deferred exit strategy for owners of real estate who will recognize a significant taxable gain in a cash sale of a highly appreciated property with a low tax basis. If real estate is sold or contributed directly to the REIT, it would result in a stepped-up cost basis in the property for the REIT and a taxable event for the contributing property owner. However, by contributing the property to the operating partnership instead of the REIT, the contributing property owner’s historical cost basis is maintained. Indeed, the primary incentive for a selling property owner in entering into an UPREIT transaction is that it can be completed on a tax deferred basis. Again, the owner of the property being contributed to the operating partnership does not recognize immediate gain on the transaction because the owner does not acquire shares of stock in the REIT, but rather receives OP Units in the REIT’s operating partnership. In addition, if the OP Units end up in the owner’s estate, the ultimate recipients of the OP Units will receive a stepped-up basis equal to the value at death and the inherent gain resulting from the UPREIT transaction will not be subject to capital gains or income tax. The tax deferral or avoidance, as the case may be, gives REITs utilizing the UPREIT structure a large advantage over cash purchasers of real estate. While tax deferral/avoidance may be the primary incentive to entering into an UPREIT transaction, there are many other great benefits for selling property owners as a result of completing an UPREIT transaction. See the “Summary of Benefits” listed below. Summary of Benefits:
A net lease requires the tenants to pay some or all of the property expenses that are otherwise paid by the property owner, such as real estate taxes, insurance, maintenance, and utilities. A triple net lease is an agreement in which the tenant is solely responsible for all of the costs related to the property they're leasing, in addition to rental fee. The name “triple net” comes from the three types of costs the tenant has to pay—net real estate taxes, net building insurance, and net maintenance.
Short for Real Estate Investment Trust, a REIT is an organization that owns—and usually operates—income-producing real estate. It can include commercial and residential properties. A REIT can deduct dividends paid to its owners and avoid incurring all or part of its U.S. federal income tax liabilities. REITs are required to distribute all of its net annual income to its shareholders. REITs were first introduced in the U.S. to provide all investors an opportunity to invest in large portfolios of income-producing real estate through the purchase of liquid securities. A REIT is in many ways like a mutual fund for real estate with investors obtaining the benefit of a diversified portfolio under professional management.
According to the Securities and Exchange Commission, Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors." The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
An alternative investment is one that does not involve the traditional investments of stocks, bonds and cash. It includes tangible assets such as precious metals, art, antiques, or coins, as well as financial assets such as commodities, private equity, and hedge funds. Real estate often falls under the term “alternative investment.” Such investments are often used to diversify, thereby reducing overall risk. Alternative investments such as real estate often require a high degree of investment analysis before buying. They may also be relatively illiquid.