Real Estate Investment Trusts

1
Chapter 23

• Real Estate Investment Trusts

2
REIT Regulations

• REITS are organized as corporations or trusts
  each REIT is chartered in the state in which it
  is headquartered and is subject to regulations
  and statutes of that state

3
REIT Regulations

• REITS are subject to provisions of IRS code,
  which specify minimum conditions under which they
  will be granted the special income tax status to
  which they owe their popularity with investors

4
REIT Regulations--IRS

• Shares must be held by at least 100 persons, and
  five or fewer shareholders cannot own 50 percent
  or more of the shares during the last half of any
  tax year
• REIT must be a passive investor rather than
  active participant in property operations
• At least 75 percent of assets must consist of
  real estate, mortgage notes, cash, cash items, or
  government securities, and at least 75 percent of
  gross income must come from rents, mortgage
  investment income, and gains on the sale of real
  estate
• At least 90 percent of ordinary income must be
  distributed to shareholders

5
REIT Ownership

• Shareholders have approximately same rights as
  stockholders in any other corporation
• Shareholders elect trustees or directors to
  conduct REIT investment and business activities
• Trustees and directors hire managers to conduct
  general affairs

6
REIT Management

• Some REITs hire internal managers, or external
  advisors
• Advisors may select property managers to oversee
  operation of rental property
• North American Securities Administrators
  Association, in a Statement of Policy on Real
  Estate Investment Trusts that was adopted April
  28, 1981, provides guidelines for setting
  advisory fees

7
REIT Assets

• Equities accounted for approximately 72 percent
  of total REIT assets in 2001 mortgage loans
  accounted for about 11 percent balance held as
  cash or miscellaneous other assets
• Equity REITs invest primarily in real estate
  equities mortgage REITs invest primarily in
  mortgage secured loans hybrid REITs favor a
  balance between equities and mortgage loans

8
REIT as Investment Vehicles

• Shareholders benefit from
• Limited liability
• Centralized management
• Continuity of entity life
• Free transferability of interests
• Tax consequences of REIT investment
• Shareholders are taxed directly on distributed
  earningsno double taxation as with corporations
• Losses do not flow through to shareholders
• REITs permit diversification on limited budget
• REITs low-cost way to benefit from professional
  management

9
REIT as Investment Vehicles

• REIT ownership entails the risk associated with
  stock market fluctuations

10
REIT as Investment Vehicles

• REIT Mutual Funds permit investors to hold a
  diversified portfolio with a relatively modest
  total investment