Article: Rising interest rates and non traded reit

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Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.

Interest rates have risen consecutively,except one,in the last couple of years.  Pundits have also differed about predicting the behavior of the Fed going forward.  Some are saying that the Fed will hold rates to the end of this year.  Some are saying that the rates will trend up further.to the end of this year and into the first quarter of 2007.

It is believed that the fed funds rates can indicate the Fed's expectations of the trend of inflation, especially long rates.  Long rates are very correlated to inflationary expectations.

So what can rising rates do to REITs-interest rates can affect  REITs,especialiy those that are highly in debt.Those REITs can experience-1)increased cash flow volatility, greater exposure to refinanciag risk, pay higher for short term versus long term because of the inverted yield curve phenomenon.

REITs which are highly in debt-difficult to acquire assets,limit on portfolio flexibility at appropriate times,difficulty to pay down debt,tie to a set interest rate-positive when rates in general rise and negative when rates fall.

But there are circustances when use of debt makes sense: inability to prepay existing debt without significant penalties.  1031 accomodations to investors(IRS require like kind exchanges of equal or greater debt to allow tax deferral) debt is used to close the deal.

Debt when used appropriately and sensibly and within predefined limits can limit the sensitivity to interest rate enviornments.

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