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A real estate investment
trust is a private or public corporation (or trust) that enjoys a
special status under the U.S. tax code that allows it to pay no or
little corporate income tax so long as its activities meet statutory tests
that restrict its business to certain commercial real estate
activities. Most states honor this federal treatment and do not
require REITs to pay state income tax. By law, REITs must pay out 90%
of their taxable income in the form of dividends.
The REIT structure was designed to
provide a similar structure for investment in real estate as mutual
funds provide for investment in stocks.
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Equity REITs: Equity REITs invest in and
own properties (thus responsible for the equity or value of
their real estate assets). Their revenues come principally
from their properties' rents.
Mortgage REITs: Mortgage REITs deal in investment and
ownership of property mortgages. These REITs loan money for
mortgages to owners of real estate, or purchase existing
mortgages or mortgage-backed securities. Their revenues are
generated primarily by the interest that they earn on the
mortgage loans.
Hybrid REITs: Hybrid REITs combine the investment
strategies of equity REITs and mortgage REITs by investing in
both properties and mortgages. |
The key-statistics to look at in REIT are
its NAV (Net Asset Value) and AFFO (Adjusted Funds From Operations) /
CAD (Cash At Disposal).
Some large companies, such as Wal-Mart,
had used this favorable tax treatment to create their own REIT's,
thereby creating substantial tax savings. Many of those are now being
challenged by the states. To meet the ownership of 100 persons or
more, WalMart used their executives as owners and compensated them
extra to cover their personal taxes.
To be valid as a REIT, it must:
- Be structured as corporation, trust, or association
- Be managed by a board of directors or trustees
- Have transferable shares or transferable certificates of
interest
- Otherwise be taxable as a domestic corporation
- Not be a financial institution or an insurance company
- Be jointly owned by 100 persons or more
- Have 95 percent of its income derived from dividends, interest,
and property income
- Pay dividends of at least 90% of REIT's taxable income
- No more than 50% of the shares can be held by five or fewer
individuals during the last half of each taxable year
- At least 75% of total investment assets must be in real estate
- Derive at least 75% of gross income from rents or mortgage
interest
- Have no more than 20% of its assets consist of stocks in taxable
REIT subsidiaries.
INVESTING IN REITS
While not suitable for all investors,
investing in quality REITS over a period of time may produce favorable
results. The simpliest way to invest in REITs is to invest in REIT
Mutual Funds. A REIT Mutual fund invests in a number of REITS, thereby
spreading the risk among different individual REITS and possibly even
types of properties.
For Terms used in the industry: See: Terms
used in the Real Estate Investment Trust Industry.
Additional Sources of Information Include the following:
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