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CHAPTER 21

CHAPTER 21. Real Estate Investment Trusts (REITs). Real Estate Investment Trusts. Creation of the IRS Pass-Through Entity: No corporate taxes Asset Requirements 75% Test Income Requirements Distribution Requirements 90% Rule. Real Estate Investment Trusts. Ownership Requirements

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CHAPTER 21

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  1. CHAPTER21 Real Estate Investment Trusts (REITs)

  2. Real Estate Investment Trusts • Creation of the IRS • 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 • Management Activity Restriction • 1986 Tax Reform Act • Vertically Integrated Operating Companies • 1991 Kimco Realty Offering • Taubman Realty Offering • Umbrella Partnership REIT

  4. Real Estate Investment Trusts • Tax Treatment • Accelerated Depreciation • 40-Year Asset Life • REIT Dividends • Usually Ordinary Income • Taxable REIT Subsidiaries • 1999 Real Estate Modernization Act

  5. Real Estate Investment Trusts • Equity Trusts • Specializations • Property Type • Trust Duration • Investment Appeal • Diversified Portfolio • Liquidity

  6. Real Estate Investment Trusts • Equity Trusts • Investment Appeal • Mutual Funds • Exchange Traded Funds • International REITS • Closed-End Funds

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

  8. Real Estate Investment Trusts • Private REITs • Targeted to institutional investors • Syndicated to investors • Incubator REITs • Mortgage Trusts • Hybrid Trusts

  9. Real Estate Investment Trusts • Funds from Operations (FFO) • REIT equivalent to earnings per share • Depreciation impact • Adjusted Funds from Operations • Funds Available for Distribution • Cash Available for Distribution

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

  11. Real Estate Investment Trusts • Growing Income • Existing Properties • Rental Income • Redevelopment • Acquisitions • Purchase properties with cash at positive spreads • Swap shares for property interests

  12. Real Estate Investment Trusts • Growing Income • Development • Provision of Services • Property management • Financial Engineering • Improve financing terms and lower capital costs

  13. 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

  14. Real Estate Investment Trusts • Additional Issues • Lease renewal options • Occupancy numbers: Occupied & leased space • Retail REITs: Sales per square foot • Costs of being a public company • Sarbanes-Oxley

  15. Real Estate Investment Trusts • Mortgage REITs • Does not own property; owns mortgage paper

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