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Frequently Asked Questions About REITs | REIT.com

Frequently Asked Questions About REITs

A REIT, or real estate investment trust, is a company that owns or finances income-producing real estate. Below are answers to fundamental questions about REITs.

Why were REITs created?

Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors through the purchase of equity. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through real estate ownership.

 

How does a company qualify as a REIT?

To qualify as a REIT, a company must comply with certain provisions within the Internal Revenue Code.

 

What Types of REITs are there?

REITs often are classified in one of two categories: equity or mortgage. Equity REITs mostly own and operate income-producing real estate, such as shopping centers, health care facilities, apartments, warehouses, office buildings and hotels. Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities.

 

What types of properties do REITs own and manage?

REITs own and manage a variety of property types: shopping centers, health care facilities, apartments, warehouses, office buildings, hotels and others. Most REITs specialize in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or, in some cases, throughout the world. Others specialize in one region or even a single metropolitan area.

 

How many REITs are there?

The Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns.

As of Dec. 31, 2014, there were 216 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges—the majority on the NYSE. These REITs have a combined equity market capitalization of $907 billion.

 

Who invests in REITs?

Everyone. Individual investors of all ages, both in the U.S. and worldwide, invest in REITs. Other typical buyers of REITs include exchange-traded funds, pension funds, endowments, foundations, insurance companies and bank trust departments.

 

How do investors own REITs?

Investors own REITs directly or through REIT mutual funds.

The majority of REITs trade on major stock exchanges. Investors may invest in a publicly traded REIT by purchasing shares through a securities dealer. As with other publicly traded securities, investors may purchase common stock, preferred stock or debt securities.

REIT investors also can buy shares in a REIT mutual fund or exchange-traded fund.

 

What are the investment benefits of REITs?

REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Additionally, REITs offer liquidity, portfolio diversification and strong corporate governance.

 

What factors contribute to REIT earnings?

Growth in REIT earnings typically comes from several sources, including higher revenues, lower costs and new business opportunities.

 

How do REITs measure earnings?

The REIT industry uses net income as defined under Generally Accepted Accounting Principles (GAAP) as the primary operating performance measure. The REIT industry also uses funds from operations (FFO) as a supplemental measure of a REIT’s operating performance. NAREIT defines FFO as net income (computed in accordance with GAAP) excluding gains or losses from sales of most property and depreciation of real estate.

 

How do shareholders treat REIT dividends for tax purposes?

For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate.

 

What are the differences between stock exchange-listed REITs, public, non-listed REITs (PNLRs) and private REITs?

Stock exchange-listed REITs file with the Securities and Exchange Commission (SEC). Shares of their stock trade on national stock exchanges.

PNLRs file with the SEC. Shares of their stock do not trade on national stock exchanges.

Private REITs do not file with the SEC. Shares of their stock do not trade on national stock exchanges.

 

Do countries besides the United States have REITs?

Yes, a total of 31 countries currently have REITs. The majority of REIT laws around the world mirror the U.S. approach to REIT-based real estate investment.

 

via Frequently Asked Questions About REITs | REIT.com.

Types of REITs | REIT.com

 

Who manages a REIT?

Like other publicly traded companies, a REIT’s executive management team operates the company, deciding what properties it will own and manage. Management’s decisions are overseen by a board of directors that is responsible to the shareholders. As with other corporations, REIT directors are typically well-known and respected members of the real estate, business and professional communities. Many of today’s REITs became public companies within the past 20 to 25 years, often transforming to public ownership what previously had been private enterprises. In many cases, the majority owners of these private enterprises became the senior officers of the REIT and contributed their ownership positions to the REIT.

What types of properties do REITs own and manage?

REITs own and manage a variety of property types: shopping centers, health care facilities, apartments, warehouses, office buildings, hotels and others. Most REITs specialize in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or in some cases, throughout the world. Others specialize in one region only, or even in a single metropolitan area.

 

 

How are REITs different from partnerships?

REITs are not partnerships. Most publicly traded REITs are vertically integrated real estate companies that develop, own and actively manage commercial real estate. Shares in these companies are traded, the same as other stocks, on major exchanges, providing complete liquidity and market pricing. Publicly traded REITs are subject to the same financial disclosure requirements as other publicly traded companies. Independent corporate governance consultants have rated the REIT industry’s governance among the best of all U.S. industry groups.

 

 

How do REITs use partnerships?

Like other industries, the real estate industry, including REITs, often uses partnerships to co-venture with others. In addition, REITs are typically structured in one of three ways: the traditional REIT, the umbrella partnership REIT (UPREIT) and the DownREIT.

A traditional REIT is one that owns its assets directly rather than through an operating partnership.

In the typical UPREIT, a REIT partners with others, and the partnership is termed the “operating partnership.” In return for their respective contributions, the REIT as well as the other partners receive interests in the operating partnership called operating partnership units (OP units). The REIT typically is the general partner and the majority owner of the OP units. For the partners contributing property to the operating partnership, any capital gain tax liability is deferred until such time as the OP units are converted into common shares of the REIT.

After a period of time (often one year), the non-REIT partners may enjoy the same liquidity of the REIT shareholders by tendering their units for either cash or REIT shares (at the option of the REIT or operating partnership). This conversion may result in the partners incurring the tax liability that had been deferred at the UPREIT’s formation. However, the unitholders may tender their units over a period of time, thereby spreading out such tax. In addition, when a partner holds the units until death, the estate tax rules operate in such a way as to provide that the beneficiaries may tender the units for cash or REIT shares without paying income taxes.

A DownREIT is structured much like an UPREIT, but the REIT owns and operates properties other than its interest in a controlled partnership that owns and operates separate properties.

Characteristics of Publicly Traded, Non-Exhange Traded and Private REITs: Comparison Chart

via The Basics of REITs | REIT.com.