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Real Estate Investment Trusts

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Shareholders have approximately same rights as stockholders in any other corporation ... Equities accounted for approximately 72 percent of total REIT assets in 2001; ... – PowerPoint PPT presentation

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Title: Real Estate Investment Trusts


1
Chapter 23
  • Real Estate Investment Trusts

2
REIT Regulations
  • REITS are organized as corporations or trusts
    each REIT is chartered in the state in which it
    is headquartered and is subject to regulations
    and statutes of that state

3
REIT Regulations
  • REITS are subject to provisions of IRS code,
    which specify minimum conditions under which they
    will be granted the special income tax status to
    which they owe their popularity with investors

4
REIT Regulations--IRS
  • Shares must be held by at least 100 persons, and
    five or fewer shareholders cannot own 50 percent
    or more of the shares during the last half of any
    tax year
  • REIT must be a passive investor rather than
    active participant in property operations
  • At least 75 percent of assets must consist of
    real estate, mortgage notes, cash, cash items, or
    government securities, and at least 75 percent of
    gross income must come from rents, mortgage
    investment income, and gains on the sale of real
    estate
  • At least 90 percent of ordinary income must be
    distributed to shareholders

5
REIT Ownership
  • Shareholders have approximately same rights as
    stockholders in any other corporation
  • Shareholders elect trustees or directors to
    conduct REIT investment and business activities
  • Trustees and directors hire managers to conduct
    general affairs

6
REIT Management
  • Some REITs hire internal managers, or external
    advisors
  • Advisors may select property managers to oversee
    operation of rental property
  • North American Securities Administrators
    Association, in a Statement of Policy on Real
    Estate Investment Trusts that was adopted April
    28, 1981, provides guidelines for setting
    advisory fees

7
REIT Assets
  • Equities accounted for approximately 72 percent
    of total REIT assets in 2001 mortgage loans
    accounted for about 11 percent balance held as
    cash or miscellaneous other assets
  • Equity REITs invest primarily in real estate
    equities mortgage REITs invest primarily in
    mortgage secured loans hybrid REITs favor a
    balance between equities and mortgage loans

8
REIT as Investment Vehicles
  • Shareholders benefit from
  • Limited liability
  • Centralized management
  • Continuity of entity life
  • Free transferability of interests
  • Tax consequences of REIT investment
  • Shareholders are taxed directly on distributed
    earningsno double taxation as with corporations
  • Losses do not flow through to shareholders
  • REITs permit diversification on limited budget
  • REITs low-cost way to benefit from professional
    management

9
REIT as Investment Vehicles
  • REIT ownership entails the risk associated with
    stock market fluctuations

10
REIT as Investment Vehicles
  • REIT Mutual Funds permit investors to hold a
    diversified portfolio with a relatively modest
    total investment
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