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Hospitality Leadership Through Learning
Faculty & Research

Nontraded REITS: Considerations for Hotel Investors

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Vol 8 No 19
By:  John B. Corgel Ph.D. and Scott Gibson Ph.D.

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Executive Summary: Nontraded REITs are an attractive buy-and-hold investment for income-oriented investors. Sold through broker-dealers, shares in these real estate investment trusts do not trade on public exchanges, promise relatively high returns, and contain specific triggers for liquidating the trust. In the first such study of nontraded REITs, an examination of the comparative effects of a long holding period and a short holding period shows that investors who purchase hospitality REITs early in the cycle see a diminished return as a result of subsequent sales. In effect, the early investors subsidize the commissions paid to the dealers who sell to late-term investors. This effect is an unintended consequence of the fact that the REITs’ share prices are fixed, regardless of the value of the underlying assets. The REITs’ high dividend structure somewhat mitigates the effect, but those high dividends mean that some REITs’ payout exceeded the amount cash they took in (as measured by funds from operations). While these characteristics do not mean that investors should exclude nontraded REITs from their portfolios, would-be investors should apply due diligence. This report offers recommendations to help guide that process.

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About John B. Corgel Ph.D.

Jack Corgel holds the Robert C. Baker Chair of Real Estate and is a full professor at the School of Hotel Administration. He served as the first director of the school’s Center for Hospitality Research from 1992-1994. After receiving undergraduate and PhD degrees from the University of Georgia in real estate and corporate finance, he taught at the University of Florida, Georgia State University, and the University of Connecticut. During the academic year 1985-1986, he was a visiting scholar at the Federal Home Loan Bank Board in Washington, DC. He is a fellow of the Homer Hoyt Institute. Corgel also maintains a consulting relationship with PKF Hospitality Research where he is helping to develop new products for the hotel industry based on property-level financial performance information. Corgel has published over 65 articles in academic and professional journals, mainly on the subjects of real estate finance, investment, valuation, and hospitality real estate. He has published in the most prestigious journals in real estate (Real Estate Economics), urban economics (Journal of Urban Economics), insurance (Journal of Risk and Insurance), business law (Journal of the American Business Law Association), and Hospitality Management (Cornell Hotel and Restaurant Administration Quarterly and International Journal of Hospitality Management). In addition, he has written for nearly every national journal read by real estate professionals. His textbook, "Real Estate Perspectives" (with Smith and Ling) was used throughout the nation for introductory real estate courses.

For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=114