1 real estate investment trusts (reits) & real estate operating companies (reocs)

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  • Slide 1
  • 1 Real Estate Investment Trusts (REITs) & Real Estate Operating Companies (REOCs)
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  • 2 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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  • 3 What is a REIT? Securitized real estate investment Ownership form created by IRS code
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  • 4 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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  • 5 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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  • 6 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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  • 7 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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  • 8 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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  • 9 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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  • 10 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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  • 11 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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  • 12 REIT Types Equity Mortgage Hybrid
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  • 13 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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  • 14 Equity REITs Leveraged v. Unleveraged Finite-life v. Nonfinite-life finite-life is self-liquidating
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  • 15 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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  • 16 Equity REITs Developmental-Joint Venture funds construction costs lower cost of capital for developer
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  • 17 Mortgage REITs Invests in mortgages earn the spread between costs of funds and mortgage loan rates
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  • 18 REIT Benefits invest in a diversified RE portfolio managed by professionals higher liquidity
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  • 19 REIT Disadvantages possible conflicts of interests between sponsor and REIT shareholders
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  • 20 REITs for Tax-Exempt Investors Unrelated business taxable income (UBTI) REIT structure allows tax-exempt entities to leverage their investments without being subject to income tax from UBTI Eligible investors no restrictions on eligible investors Limited liability Transferability
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  • 22 UPREIT REIT formed by consolidating limited- partnerships partnerships allocated REIT shares based on appraised value of partnership property
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  • 23 Taubman UPREIT Taubman Realty Group (TRG) Partnership owns 19 shopping malls Taubman 75% ownership Affiliates 25% ownership GM Pension Trust Convertible debt


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