As a follow up to my last post noting that hard assets, such as real estate, tend to be good inflation hedges, I wanted to provide some basics on real estate investment trusts (“REITs”). A REIT is an investment vehicle that owns either mortgage notes, real estate or a hybrid that both mortgage notes and real estate.
REITs came into being in 1960. Most REITs at that time were mortgage REITS – they owned mortgage notes on real estate assets. However, today, real estate and hybrid REITS are common. Via securities, a REIT allows one to invest in large, income-producing real property. That said, REITs come in a variety of flavors and can be sliced and diced a number of ways.
In the United States, three types of REITs as securities exist. Publicly-traded REITs register with the U.S. Securities and Exchange Commission (the “SEC”) and trade on national stock exchanges. The are also non-exchange-traded REITs, which also register with the SEC, but which don’t trade on a stock exchange. Finally, private REITS neither register with the SEC nor trade on a stock exchange.
Additionally, REITs may be distinguished by the type of real estate they invest in. This can be either broad or narrowly-focused. For example, there are office REITs, multifamily property REITs, hotel REITs, shopping center REITs, warehouse REITS and storage facility REITs.
Another way a REIT may differentiate itself is for it to focus on a specific state or geographical region.
Companies must qualify to be classified as a REIT. To do so, they must meet specific requirements of the Internal Revenue Code. These requirements include the following:
* The REIT must be managed by a Board of Trustees or a Board of Directors.
* The REIT must be taxable as a corporation.
* The REIT must have 100 different shareholders.
* No more than 50% of the REITs shares may be held by five or fewer individuals.
* REIT shares must be fully transferable.
* At least 75% of the REIT’s gross income must be real estate-related, such as from rents or mortgage interest.
* At least 75% of the REIT’s total assets must be real estate assets.
* The REIT’s stock in its taxable subsidiaries may not be more than 20% of its total assets.
* A REIT must distribute at least 90% of its taxable income to shareholders as dividends.
These are some, but not all, of the main limiting characteristics of a REIT. A good book on real estate syndication in general, including REITs, is Samuel K. Freshman’s Principles of Real Estate Syndication.