REITs are real estate investment trusts that purchase commercial properties. The tax structure of REITs requires them to pay out 90% of their income. REITs are half the price they were in September 2008, but Dan Amoss of the "Rude Awakening Newsletter" says they are not a bargain. He's advising investors to sell their REITs.

Commercial real estate is the next area of the economy that's headed for a rough patch. Commercial real estate expanded along with the residential boom. Now the problems of the residential market are affecting the commercial market resulting in plummeting demand for commercial space. In addition tight credit markets are causing problems. Amoss believes that REITs are in the early stages of an extensive deleveraging cycle that could take years.

Like homeowners, commercial real estate developers are finding it a challenge to sell properties as foreclosure and liquidations have put continuous downward pressure on property values.

Fitch Ratings warned on June 11th that "REITs are contending with an unprecedented downturn in property markets, as indicated by increasing tenant defaults and reductions in net operating income." Steven Marks, head of Fitch's REIT group went on to say, "Commercial real estate firms also face a sizable overhang of debt maturities in coming years, stressed property values and potential ratings downgrades."

The smart money is buying the REIT's debt, not the stock (the equity) of the REIT. The debt holders will have claim on the property when the REIT goes into bankruptcy.

The REIT model is to grow by acquisitions, funded by borrowing and the sale of stock, which should result in paying attractive dividends to stockholders. Because of their tax structure, REITs can't hold onto much money (90% required distributions). REITs are thus vulnerable to an economic downturn. When the REITs have vacancies and cannot obtain refinancing, many could go bankrupt.

John Laub is the Chairman of the Phoenix CEO-CFO Group.

1. "Sell Reits." Dan Amoss. The Rude Awakening. July 15, 2009.

2. "Sell Reits II." Dan Amoss. The Rude Awakening. July 17, 2009.

3. "Fitch Warns on REIT Funding Pressures." John Spence. Marketwatch. July 15, 2009.