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Real Estate Investment Trusts

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Globalization of Real Estate Securities. Tax Treaty Issues for REITs and REIT Shareholders. Company must be in the commercial real estate business ... – PowerPoint PPT presentation

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Title: Real Estate Investment Trusts


1
Real Estate Investment Trusts The United
States Experience
CTPA Roundtable February 2, 2006 Paris,
France Tony M. Edwards, EVP General Counsel
2
Overview
  • U.S. Tax Treatment of REITs and REIT Shareholders
  • Operation and Profile of U.S. REITs
  • Benefits of Investment in U.S. REITs
  • Globalization of Real Estate Securities
  • Tax Treaty Issues for REITs and REIT Shareholders

3
Qualification as REIT for U.S. Tax Purposes
  • Company must be in the commercial real estate
    business
  • At least 75 of assets must be real property and
    be held for the long-term
  • At least 75 of revenue must come from real
    estate
  • Stock must be widely held
  • At least 100 shareholders
  • 5 or fewer individuals can not collectively own
    more than 50 of the REITs stock

4
U.S. Tax Treatment of REITs and Shareholders
  • REIT structure intended to eliminate entity-level
    tax
  • At least 90 of taxable income must be
    distributed annually to shareholders
  • Company receives a dividends paid deduction
  • Income taxes are paid at the shareholder level

5
What is a U.S. REIT?
  • Full-time professional management teams
  • Business plans designed to maximize shareholder
    value
  • SEC financial reporting and transparency
  • Stock values backed by real assets
  • Traditional corporate governance and
    accountability
  • Tax transparency

6
The U.S. REIT Industry in 2005
  • Over 475 billion of commercial real estate owned
  • 15-20 of investment-grade commercial real estate
  • More than 24,000 properties nationwide
  • All major property sectors
  • All major geographic regions
  • 331 billion equity market capitalization
  • 197 publicly traded REITs in the NAREIT index
  • 169 REITs trade on the NYSE
  • 35 REITs in SP indexes (9 in SP 500)

7
5 Reasons to Invest in U.S. REITs
  1. Diversification
  2. Dividends
  3. Liquidity
  4. Performance
  5. Transparency

8
Dividends REITs Deliver Reliable Current Income
Average annual total returns 13.8 Average
annual dividends 8.1 percentage points or 59
of total return
Percent
Average annual dividend return 8.1
9
DividendsU.S. REITs Produce High Yields
Before-tax yields as of January 17, 2006
Percent
Equity REITs
Corporate Bonds
10-Year T-Notes
SP 500
3-Month T-Bills
10-Year TIPs
10
PerformanceShort-Term and Long-Term Performance
Compound annual total returns in percent,
December 31, 2005
30-Year Compound Total Return
3-Year Compound Total Return
REITs
SP 500
SP 500
REITs
11
Globalization of Real Estate Securities
  • Many countries have adopted a REIT-type
    structure
  • LPT - Listed Property Trusts (Australia)
  • Dutch FBI - Fiscal Beleggings Instelling
    (Netherlands)
  • S-REIT Singapore Real Estate Investment Trust
  • J-REIT - Japanese Real Estate Investment Trust
  • SIIC Sociétés d'investissements Immobiliers
    Cotées (France)
  • Canadian REITs Legislated in 1993, growing
    universe
  • Belgium REITs Growing universe
  • Hong Kong REITs Largest REIT IPO Completed in
    November 2005
  • Bulgarian REITs Newest country with REIT
    legislation
  • Malaysian REITs Growing universe
  • Under discussion
  • United Kingdom Draft legislation issued by UK
    Treasury in Dec. 2005
  • Germany Enabling legislation expected in 2006
    or 2007

12
Tax Treaty Issues for REITs and Shareholders
  • Current tax treaty issues for REITs are very
    different than the issues with respect to
    collective investment vehicles
  • The issue that has been addressed in the United
    States has been treaty treatment of dividends
    from REITs to REIT shareholders
  • Key question treatment like other dividends
    versus treatment like direct real estate income

13
U.S. Tax Treaty Policy for REIT Dividends
  • Pre-1988
  • Non-U.S. investors in U.S. REITs treated the same
    as investors in non-REITs
  • REIT dividends treated like all other dividends
  • 1988-1997
  • Non-U.S. individuals owning less that 10 of the
    REIT treated the same as investors in non-REITs
    and subject to 15 withholding tax rate
  • All other shareholders treated the same as direct
    RE investors and subject to 30 withholding tax
    rate (except as otherwise provided under U.S. tax
    code)

14
U.S. Tax Treaty Policy for REIT Dividends
  • 1997-today
  • Non-U.S. shareholders treated the same as
    investors in non-REITs and subject to 15
    withholding tax rate if
  • the shareholder owns 5 or less of the REIT and
    the REIT is listed
  • the shareholder owns 10 or less of the REIT and
    the REIT is diversified
  • the shareholder owns 10 or less of the REIT and
    the shareholder is an individual
  • Other shareholders treated the same as direct RE
    investors and subject to 30 withholding tax rate
    (except as otherwise provided under U.S. tax code)

15
Theory Underlying U.S. Tax Treaty Policy
  • Our new policy takes into account that portfolio
    investments in a REIT whether by individuals or
    institutional investors may be indistinguishable
    in intent and results from similar investments in
    other corporate securities and should be afforded
    similar tax consequences in appropriate
    circumstances.
  • - Statement of Department of the Treasury Joseph
    H. Guttentag, International Tax Counsel Before
    the Committee on Foreign Relations (October 7,
    1997)

16
Future Treaty Issues for REITs and Shareholders
  • As REITs become increasingly globalized, tax
    treaties can help facilitate this cross-border
    activity
  • Cross-border investment in REITs by non-residents
  • Tax treaties could provide rules to address the
    treatment of cross-border real estate investments
    of REITs
  • Tax treaties could provide rules to address the
    cross-border investment of one REIT in another
    REIT
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