1 Real Estate Investment Trusts (REITs) & Real Estate Operating Companies (REOCs)
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Transcript of 1 Real Estate Investment Trusts (REITs) & Real Estate Operating Companies (REOCs)
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What is a REOC?
• A company that derives its income from real estate investment.
• A company that lists its primary business as real estate.
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Requirements
• Assets– 75% of assets must be real estate, cash, and
govt. securities• other REIT shares are considered real estate assets
– not more than 5% of assets can be from 1 issuer if not covered under above test
– may not have more than 10% of voting securities of 1 issuer if not covered under 1st test
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Requirements
• Income– 95% of gross income must be from dividends,
interest, rents, or gains from sale of certain assets (real estate, cash, or govt securities).
– 75% of gross income must be derived from rents, interest on mortgages, gains from sale of certain assets, or income from other REITs
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Requirements
• Income– No more than 30% of gross income can be
derived from• sale or disposition of securities held less than 6
months
• sale or disposition of real estate held for less than 4 years, except those involving foreclosures.
• properties held for sale in the normal course of business (anti-dealer provision)
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Requirements
• REIT Modernization Act of 1999 (effective 2001)– REITs allowed to own 100% of a Taxable
REIT Subsidiary (TRS). TRS can provide services to REIT tenants and others (previously, this was not allowed). Debt and rental payments from TRS to REIT are limited to ensure that the TRS actually pays income taxes.
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Requirements
• Distribution– must distribute 90% of all taxable income to
investors• mandates fairly low retained earnings policy
• has important implications for firm size
– Note: prior to 2001, minimum distribution requirement was 95%.
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Requirements
• Management– REIT managers must be passive
• REIT trustees, directors or employees may not actively engage in managing or operating REIT properties (includes providing service and collecting rents from tenants).
• Managers may set policy: rental terms, choose tenants, sign leases, make decisions about properties.
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Requirements
• Anti-concentration rule– 5 or fewer entities may not own 50% or more
of the outstanding shares– Exceptions:
• ‘look-through’ provision for US pension funds
• UPREIT structure (umbrella partnership)
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Tax Treatment
• Accelerated depreciation is allowed for determining taxable income
• 40 year asset life required for calculating income available for distribution to investors
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Equity REITs
• Blank Check– does not disclose investments to shareholders prior to
acquisition.
• Specified Trusts– purchase a specific property (Rockerfeller Center
Properties)
• Mixed Trusts– invests in both blank check and specific properties
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Equity REITs
• Leveraged v. Unleveraged
• Finite-life v. Nonfinite-life– finite-life is self-liquidating
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Equity REITs
• Closed-End v. Open-End– closed-end protect shareholders from future
dilution
• Exchange Trusts– tax-free exchange of property for shares in the
REIT
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Equity REITs
• Developmental-Joint Venture – funds construction costs– lower cost of capital for developer
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Mortgage REITs
• Invests in mortgages– earn the spread between costs of funds and
mortgage loan rates
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REIT Market Capitalization
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
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0
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Market Cap
Equity REITs
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UPREIT
• REIT formed by consolidating limited-partnerships
• partnerships allocated REIT shares based on appraised value of partnership property