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Chapter 21: Real Estate Investment Trusts (REITs)

Chapter 21: Real Estate Investment Trusts (REITs). Real Estate Investment Trusts. Creation of the Internal Revenue Code Pass-through entity: No corporate taxes Asset requirements 75% test Income requirements Distribution requirements 90% rule. Real Estate Investment Trusts.

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Chapter 21: Real Estate Investment Trusts (REITs)

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  1. Chapter 21: Real Estate Investment Trusts (REITs)

  2. Real Estate Investment Trusts Creation of the Internal Revenue Code Pass-through entity: No corporate taxes Asset requirements 75% test Income requirements Distribution requirements 90% rule

  3. Real Estate Investment Trusts Ownership requirements 100 person minimum Pre-1986: Management Activity Restriction 1986 Tax Reform Act relaxed the restriction and led to vertically integrated operating companies 1991 Kimco Realty Offering Taubman Realty Offering Umbrella Partnership REIT (“UPREIT”)

  4. Real Estate Investment Trusts Tax treatment Accelerated depreciation 40-Year asset life REIT dividends Taxed as ordinary income 1999 Real Estate Modernization Act “Usual and customary” provision of services. This was especially beneficial to REITs that owned hotels. Taxable REIT subsidiaries

  5. Exhibit 21-1

  6. Real Estate Investment Trusts Equity trusts Specializations Property type Trust duration Investment appeal Diversified portfolio Liquidity

  7. Real Estate Investment Trusts Equity trusts Investment appeal Mutual funds Exchange traded funds International REITs Closed-end funds

  8. Real Estate Investment Trusts Equity trusts Caveats Purchase of original property not arm’s length Conflicts of interest Safeguards Appraisals Sarbanes-Oxley

  9. Real Estate Investment Trusts Private REITs Targeted to institutional investors Syndicated to investors Incubator REITs Mortgage REITs Mortgage REITs have come back into favor again. The last time Mortgage REITs were popular was in the 1970’s. Hybrid REITs

  10. Real Estate Investment Trusts Funds from Operations (FFO) REIT equivalent to earnings per share Depreciation impact Adjusted Funds from Operations (AFFO) Funds Available for Distribution/Cash Available for Distribution (FAD/CAD) FAD/CAD is the amount of actual cash that is left over.

  11. Real Estate Investment Trusts Expansion & Growth Little Free Cash Flow Income distribution rules Secondary Stock Offering Dilution vs. accretion Debt Financing

  12. Real Estate Investment Trusts Growing income Existing properties Rental income Redevelopment Acquisitions Purchase properties with cash at positive spreads. Swap shares for property interests.

  13. Real Estate Investment Trusts Growing income Development Provision of services Property management, brokerage, development, etc. Financial engineering Improve financing terms and lower capital costs.

  14. Real Estate Investment Trusts Additional issues Tenant improvements & free rent Leasing commissions & costs Straight-line rents Income from managing other properties Types of mortgage debt Ground leases

  15. Real Estate Investment Trusts Additional issues Lease renewal options Occupancy numbers: occupied vs. leased space Retail REITs: Sales per square foot Costs of being a public company Sarbanes-Oxley

  16. Real Estate Investment Trusts Mortgage REITs Does not own real property. Does own mortgage paper.

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