When you do a 721 exchange — or reach a REIT via the DST bridge — the REIT you transition into may be a non-traded REIT, which differs in important ways from a publicly-traded one. A non-traded REIT's shares aren't listed on a stock exchange, so it has limited liquidity (typically through periodic redemption programs rather than market trading), its value is determined by periodic valuations rather than market pricing, and it often has distinct (sometimes higher) fees. These features significantly affect your experience as a 721 investor — especially your liquidity and the transparency of your holding's value. Understanding non-traded REITs is essential if your 721 exchange transitions into one. Regulators like FINRA have specifically cautioned investors to review non-traded REITs carefully. This guide explains non-traded REIT liquidity and valuation, the fees, the trade-offs, and the due diligence.
Non-traded REITs and 721 exchanges
Many 721 exchanges transition into non-traded REITs, so understanding them is important for 721 investors. A non-traded REIT is a REIT whose shares aren't listed on a public stock exchange — unlike a publicly-traded REIT (whose shares trade on the market). Non-traded REITs are common destinations for 721 exchanges and DST bridge transitions, so many 721 investors end up holding non-traded REIT interests (OP units convertible into non-traded REIT shares).
The non-traded nature significantly affects the 721 investor's experience, particularly liquidity and valuation. Because the shares aren't market-traded, the liquidity (converting units to shares and accessing cash) works differently (through redemption programs, discussed below), and the value of the holding is determined by periodic valuations rather than real-time market pricing. So a 721 exchange into a non-traded REIT has distinct liquidity and valuation characteristics.
This matters because some 721 investors may assume their REIT holding will be as liquid and transparently-priced as a public stock — but a non-traded REIT isn't. So understanding the non-traded nature, if your 721 exchange transitions into one, is essential to having realistic expectations. Non-traded REITs and 721 exchanges — many 721 exchanges transitioning into non-traded REITs, which differ from traded REITs in liquidity and valuation — establish why understanding non-traded REITs matters for 721 investors. The non-traded nature affects your liquidity and value transparency. Understanding that 721 exchanges often end in non-traded REITs sets up their specific features. If your 721 exchange transitions into a non-traded REIT, its distinct characteristics significantly shape your experience.
How non-traded REIT liquidity works
Non-traded REIT liquidity works differently from traded REITs, primarily through periodic share-repurchase (redemption) programs rather than market trading. Because the shares aren't exchange-listed, you can't sell them on the open market. Instead, non-traded REITs typically offer liquidity through redemption programs — the REIT periodically buys back shares from investors, often subject to limits (a cap on how much can be redeemed per period), conditions, and the REIT's discretion (which can suspend or limit redemptions).
This means the liquidity is more limited and less certain than a traded REIT's market liquidity. You can request redemption, but it's subject to the program's availability, limits, and the REIT's discretion — so you may not be able to redeem as much or as quickly as you'd like, especially if many investors seek redemption at once (when the REIT may limit or suspend the program). So non-traded REIT liquidity is constrained by the redemption program's terms.
For a 721 investor, this means accessing liquidity (after converting OP units to non-traded REIT shares) depends on the redemption program — more limited than a traded REIT's market liquidity. So if liquidity is a priority, the non-traded REIT's redemption-based liquidity is an important limitation to understand. How non-traded REIT liquidity works — through periodic redemption programs (subject to limits, conditions, and the REIT's discretion) rather than market trading, making it more limited and less certain — is a key feature for 721 investors. The redemption-based liquidity is constrained compared to a traded REIT's. Understanding the liquidity mechanism clarifies what to expect. A non-traded REIT's liquidity is limited and program-based, an important consideration for 721 investors who value liquidity.
A non-traded REIT's liquidity comes through periodic redemption programs — subject to limits, conditions, and the REIT's discretion — not market trading, so it's more limited and less certain than a traded REIT's.
Valuation in non-traded REITs
Valuation in non-traded REITs differs from traded REITs, with implications for transparency. A traded REIT's shares have a real-time market price (set by trading), so you always know your holding's current value. A non-traded REIT's shares aren't market-traded, so their value is determined by periodic valuations — the REIT (or its appraisers) periodically estimates the net asset value (NAV) per share, often based on appraisals of the underlying real estate.
This means the value of a non-traded REIT holding is less transparent and less timely than a traded REIT's. The periodic NAV may not reflect real-time conditions (it's estimated periodically, not continuously), and the valuation methodology and assumptions may be less transparent than market pricing. So you have less real-time, market-tested insight into your holding's value in a non-traded REIT.
For a 721 investor, this valuation uncertainty is a consideration — your holding's value is based on the REIT's periodic estimates, not a market price. So you should understand the valuation methodology and frequency, and recognize the value is an estimate. Valuation in non-traded REITs — value determined by periodic NAV estimates (based on appraisals) rather than real-time market pricing, making it less transparent and timely — is a key feature for 721 investors. The valuation uncertainty contrasts with a traded REIT's market price. Understanding the valuation approach clarifies the transparency limitation. A non-traded REIT's value is a periodic estimate, less transparent than a market price, which 721 investors should understand.
Fees in non-traded REITs
Non-traded REITs often have distinct fee structures that 721 investors should understand. Non-traded REITs may have various fees — including upfront fees (sometimes including selling commissions and offering costs), ongoing management and advisory fees, and other expenses — which can be significant and, in some cases, higher than traded REITs' costs. These fees reduce the investor's net returns.
The fee structure matters because fees are a drag on returns over time — higher fees mean lower net returns. Non-traded REITs' fees have drawn regulatory attention (FINRA and others have highlighted the importance of understanding non-traded REIT fees), so 721 investors should carefully understand the specific fees of any non-traded REIT they'd transition into. The fees vary by REIT and offering.
For a 721 investor, the fees affect the net returns from the non-traded REIT holding, so understanding them is part of evaluating the REIT. Higher fees would reduce the income and returns from your holding. Fees in non-traded REITs — the various fees (upfront, ongoing management, and other expenses, sometimes higher than traded REITs') that reduce net returns — are an important consideration for 721 investors. The fees, which have drawn regulatory attention, should be carefully understood. Understanding the fees clarifies their impact on your returns. A non-traded REIT's fees can be significant, so 721 investors should understand them as part of evaluating the REIT, since they affect net returns.
The trade-offs versus traded REITs
Weighing non-traded versus traded REITs for a 721 exchange involves real trade-offs. Traded REITs offer robust market liquidity (sell shares anytime), transparent real-time pricing (you always know your value), and often lower fees — but with daily market volatility (the share price fluctuates with the market). Non-traded REITs offer no daily market volatility (the value isn't market-priced) but with limited liquidity (redemption programs), valuation uncertainty (periodic NAV), and often higher fees.
So the trade-off is: traded REITs (liquidity, transparency, lower fees, but market volatility) versus non-traded REITs (no daily volatility, but limited liquidity, valuation uncertainty, higher fees). Neither is universally better; they suit different preferences. An investor valuing liquidity and transparency might prefer a traded REIT; one prioritizing the absence of daily market volatility (and accepting the other limitations) might consider a non-traded REIT.
For 721 investors, this trade-off matters in choosing (or understanding) the REIT they transition into. If liquidity and transparency are priorities, a traded REIT is generally preferable. The trade-offs versus traded REITs — traded REITs (liquidity, transparency, lower fees, but volatility) versus non-traded REITs (no daily volatility, but limited liquidity, valuation uncertainty, higher fees) — frame the choice for 721 investors. The trade-off depends on your priorities. Understanding the trade-offs helps you weigh the REIT type for your 721 exchange. If liquidity and transparency matter most, a traded REIT is generally preferable; the non-traded REIT's trade-offs warrant careful consideration.
- Many 721 exchanges transition into non-traded REITs, which differ from traded REITs in liquidity, valuation, and fees.
- Non-traded REIT liquidity is through periodic redemption programs (limited, subject to the REIT's discretion), not market trading.
- Value is determined by periodic NAV estimates (less transparent than a market price), and fees can be significant.
- Weigh the trade-offs: traded REITs offer liquidity and transparency (with volatility); non-traded REITs avoid daily volatility (with limited liquidity, valuation uncertainty, and higher fees).
Due diligence on non-traded REITs
Given their distinct features, performing due diligence on a non-traded REIT before a 721 exchange transition is essential. Key areas to examine include the liquidity (the redemption program's terms, limits, and history — how reliably it has provided liquidity), the valuation (the NAV methodology, frequency, and the underlying portfolio's quality), and the fees (the full fee structure and its impact on returns). These features significantly affect your outcome.
Also examine the REIT's portfolio quality, management and sponsor (track record, reputation, financial health), and the offering's specific terms. Because non-traded REITs are less transparent than traded ones (no market price, periodic valuations), thorough due diligence is especially important to understand what you're transitioning into. FINRA and regulators have emphasized careful review of non-traded REITs, reflecting their complexity and the importance of due diligence.
Performing this due diligence (with your advisor) before committing to a 721 exchange into a non-traded REIT helps you understand the liquidity, valuation, fees, and quality, setting realistic expectations. So due diligence is key to a sound non-traded REIT transition. Due diligence on non-traded REITs — examining the liquidity (redemption program), valuation (NAV methodology), fees, portfolio quality, and management/sponsor, given their lower transparency — is essential before a 721 exchange into one. Thorough due diligence, emphasized by regulators, ensures you understand what you're transitioning into. Understanding the due diligence needed prepares you to evaluate a non-traded REIT carefully. Careful due diligence is essential for a sound 721 transition into a non-traded REIT, given their distinct, less-transparent features.
How Baker 1031 helps with non-traded REITs
Baker 1031 Investments helps 721 investors understand and evaluate non-traded REITs — explaining their distinct liquidity (redemption programs), valuation (periodic NAV), and fees, and helping you perform due diligence on any non-traded REIT you'd transition into. We help you understand the trade-offs versus traded REITs and set realistic expectations for a non-traded REIT transition.
REIT units and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review — non-traded REIT investments involve securities, available to suitable investors after a review, and warrant careful evaluation (as FINRA emphasizes). We help you examine the liquidity, valuation, fees, portfolio quality, and sponsor of a non-traded REIT, so you understand what you're transitioning into. Our role is to help you evaluate non-traded REITs carefully for a 721 exchange — understanding their distinct features and trade-offs, performing due diligence, and setting realistic expectations — so if your 721 exchange transitions into a non-traded REIT, you do so with a clear understanding. We help you navigate the specific considerations of non-traded REITs in a 721 exchange.
Frequently Asked Questions
What is a non-traded REIT?
A REIT whose shares aren't listed on a public stock exchange — unlike a publicly-traded REIT (whose shares trade on the market). Non-traded REITs have limited liquidity (typically through periodic redemption programs rather than market trading), value determined by periodic valuations (NAV estimates) rather than market pricing, and often distinct (sometimes higher) fees. Non-traded REITs are common destinations for 721 exchanges and DST bridge transitions, so many 721 investors end up holding non-traded REIT interests. Their distinct features significantly affect the 721 investor's experience.
Do 721 exchanges often involve non-traded REITs?
Yes — many 721 exchanges (and DST bridge transitions) end in non-traded REITs, so many 721 investors hold non-traded REIT interests (OP units convertible into non-traded REIT shares). The non-traded nature significantly affects the experience, particularly liquidity and valuation. So if you're considering a 721 exchange, the REIT you transition into may well be a non-traded REIT, making it important to understand non-traded REITs' distinct features. Not all 721 exchanges involve non-traded REITs (some involve traded ones), but many do.
How do I get liquidity from a non-traded REIT?
Through the REIT's periodic share-repurchase (redemption) program — the REIT periodically buys back shares from investors, often subject to limits (a cap per period), conditions, and the REIT's discretion (which can suspend or limit redemptions). You can't sell on the open market (the shares aren't exchange-listed). So liquidity is more limited and less certain than a traded REIT's market liquidity — you request redemption, subject to the program's availability and limits. If many investors seek redemption at once, the REIT may limit or suspend the program. So non-traded REIT liquidity is constrained.
How is a non-traded REIT valued?
By periodic valuations — the REIT (or its appraisers) periodically estimates the net asset value (NAV) per share, often based on appraisals of the underlying real estate. Unlike a traded REIT (with a real-time market price), a non-traded REIT's value is a periodic estimate, so it's less transparent and timely. The NAV may not reflect real-time conditions, and the methodology may be less transparent than market pricing. So you have less real-time, market-tested insight into your holding's value in a non-traded REIT — the value is an estimate, which is a consideration for 721 investors.
Do non-traded REITs have higher fees?
They often have distinct, sometimes higher fees — including upfront fees (sometimes selling commissions and offering costs), ongoing management and advisory fees, and other expenses. These can be significant and reduce net returns. Non-traded REITs' fees have drawn regulatory attention (FINRA and others emphasize understanding them). So 721 investors should carefully understand the specific fees of any non-traded REIT they'd transition into, since fees are a drag on returns. The fees vary by REIT and offering, so examine them as part of evaluating the REIT.
Should I choose a traded or non-traded REIT for my 721 exchange?
It depends on your priorities. Traded REITs offer robust liquidity (sell anytime), transparent real-time pricing, and often lower fees — but with daily market volatility. Non-traded REITs avoid daily market volatility but have limited liquidity (redemption programs), valuation uncertainty (periodic NAV), and often higher fees. So if liquidity and transparency are priorities, a traded REIT is generally preferable; if avoiding daily volatility is the priority (and you accept the limitations), a non-traded REIT might be considered. Weigh the trade-offs for your situation, with careful due diligence on any non-traded REIT.
Why does FINRA caution about non-traded REITs?
Because non-traded REITs have features that warrant careful review — limited liquidity (redemption programs that can be restricted), valuation uncertainty (periodic NAV rather than market pricing), and potentially high fees — which can affect investors' outcomes and aren't always well understood. FINRA has issued guidance urging investors to carefully review non-traded REITs before investing, reflecting their complexity and the importance of due diligence. So the regulatory caution reflects the need to understand non-traded REITs' distinct features and risks. 721 investors transitioning into non-traded REITs should heed this and perform thorough due diligence.
What due diligence should I do on a non-traded REIT?
Examine the liquidity (the redemption program's terms, limits, and history), the valuation (the NAV methodology, frequency, and portfolio quality), the fees (the full structure and its impact on returns), the portfolio quality, and the management and sponsor (track record, reputation, financial health). Because non-traded REITs are less transparent than traded ones, thorough due diligence is especially important. Regulators emphasize careful review. Performing this due diligence (with your advisor) before committing helps you understand what you're transitioning into and set realistic expectations. Due diligence is essential for a sound non-traded REIT transition.
Can I lose money in a non-traded REIT?
Yes — like any real estate investment, a non-traded REIT carries risk; its value can decline (based on the underlying real estate's performance and the periodic valuations), and the limited liquidity can make it hard to exit at a desired time or value. The valuation uncertainty also means the stated value may not reflect what you could actually realize. So a non-traded REIT isn't risk-free — you can lose money, and the limited liquidity and valuation uncertainty add considerations. Understanding these risks, through due diligence, is important before transitioning into a non-traded REIT via a 721 exchange.
Is a non-traded REIT's liquidity guaranteed?
No — the redemption program's liquidity is subject to limits, conditions, and the REIT's discretion, so it's not guaranteed. The REIT can limit or suspend redemptions (especially if many investors seek them at once or in adverse conditions), so you may not be able to redeem as much or as quickly as you'd like. So you shouldn't count on a non-traded REIT's liquidity being readily available — it's program-based and discretionary, not guaranteed. This limited, uncertain liquidity is a key consideration if liquidity matters to you, and a reason to understand the redemption program carefully.
How does Baker 1031 help with non-traded REITs?
We help you understand and evaluate non-traded REITs — explaining their distinct liquidity (redemption programs), valuation (periodic NAV), and fees, helping you perform due diligence on any non-traded REIT you'd transition into, and setting realistic expectations. We help you weigh the trade-offs versus traded REITs. Non-traded REIT investments involve securities, offered through the broker-dealer (Aurora Securities, member FINRA/SIPC) after a suitability review, and warrant careful evaluation. We help you examine the liquidity, valuation, fees, portfolio, and sponsor, so you understand what you're transitioning into for an informed decision.
Can a non-traded REIT later become traded?
Sometimes — some non-traded REITs have a stated goal or possibility of eventually listing on a public exchange (becoming traded) or being acquired, which would provide a liquidity event for investors. However, this isn't guaranteed and the timing is uncertain. So a non-traded REIT might eventually offer market liquidity through a listing or sale, but you shouldn't count on it. If a potential future liquidity event (listing) matters to you, understand the REIT's stated intentions and the uncertainty. Don't assume a non-traded REIT will become traded — evaluate it based on its current non-traded characteristics, with any future listing as a possibility, not a certainty.
Are non-traded REIT distributions reliable?
Non-traded REITs typically pay distributions, but their reliability depends on the REIT's income and policy, and distributions aren't guaranteed (they can be reduced or suspended). Importantly, some non-traded REITs have at times funded distributions partly from sources other than operating income (like offering proceeds or borrowings), which isn't sustainable long-term — a concern regulators have noted. So examine whether the distributions are covered by the REIT's actual operating income (a sign of sustainability) as part of your due diligence. Don't assume the distributions are reliable without understanding their source and coverage. Distribution sustainability is an important due-diligence point for non-traded REITs.
Is a non-traded REIT a bad choice for a 721 exchange?
Not necessarily — non-traded REITs can offer the core 721 benefits (deferral, diversification, passivity, estate planning) and avoid daily market volatility, which some investors prefer. But they have distinct limitations (limited liquidity, valuation uncertainty, often higher fees) that warrant careful evaluation. So a non-traded REIT isn't inherently a bad choice, but it requires thorough due diligence and realistic expectations about its limitations. If liquidity and transparency are priorities, a traded REIT may suit you better; if you accept the trade-offs, a well-evaluated non-traded REIT may fit. Evaluate the specific REIT carefully rather than assuming non-traded is good or bad.
Glossary
- Non-Traded REIT
- A REIT whose shares aren't exchange-listed, with limited liquidity.
- Publicly-Traded REIT
- A REIT whose shares trade on a market, with robust liquidity.
- Redemption Program
- A non-traded REIT's periodic share-repurchase, its limited liquidity mechanism.
- Net Asset Value (NAV)
- The periodic per-share value estimate for a non-traded REIT.
- Periodic Valuation
- The estimate of a non-traded REIT's value, not real-time.
- Liquidity Limit
- The cap on redemptions per period in a non-traded REIT.
- Valuation Uncertainty
- The lack of a real-time market price in a non-traded REIT.
- Upfront Fees
- Initial costs (commissions, offering costs) in some non-traded REITs.
- Management Fees
- Ongoing fees reducing a non-traded REIT's net returns.
- Discretionary Redemption
- The REIT's ability to limit or suspend redemptions.
- Market Volatility
- The traded REIT's price fluctuation, absent in non-traded REITs.
- Transparency
- The clarity of value, higher in traded REITs.
- Due Diligence
- The careful evaluation essential for non-traded REITs.
- Sponsor
- The non-traded REIT's manager, whose quality to evaluate.
- FINRA Caution
- The regulatory guidance to review non-traded REITs carefully.
- OP Units
- The 721 units convertible into non-traded REIT shares.
Sources & References
- FINRA. Public Non-Traded REITs—Perform a Careful Review Before Investing
- U.S. Securities and Exchange Commission. Investor Bulletin: Non-Traded REITs
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
- Nareit. What's a REIT (Real Estate Investment Trust)?
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
