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