In 1960 the United States government created the Real Estate Investment Trust (REIT) so consumers could purchase equity in commercial large-scale, income-producing real estate without having to purchase the physical property themselves. REITs differ from other real estate companies as these trusts are required to not only acquire, but also develop and operate these acquisitioned properties.
REITs run the gambit from privately held to publicly traded companies on national exchanges, most notably the New York Stock Exchange. There are also Non-Exchange traded REITs that file with the SEC but do not trade on any stock exchange. While an investor may obviously purchase shares of a publicly traded REIT, one may also buy into a non-exchange traded one through redemption programs, each specific to the company.
There are three types of REITs: Equity, Mortgage and Hybrid.
- An Equity REIT owns and operates income-producing real estate. They are usually vertically integrated property operating companies that include the leasing, maintenance and development of real property and tenant services.
- A Mortgage REIT mostly lends money directly to real estate owners and operators or extends credit indirectly through the acquisition of loans or mortgage-backed securities. Currently this extension of mortgage credit is mostly done on existing properties. Although non-toxic mortgage-backed securities are few, they did once serve a legitimate purpose. This did add to the “downturn of 2008/2009” but was one cog in a giant flawed mechanism.
- Hybrid, like it implies, is a mix of equity and mortgage.
REITs can also vary in investments. Some may be real-estate type specific (i.e. shopping center, warehouse, office, apartment, etc.) or geographically constrained (i.e. in the greater [insert city name here] market, state specific, etc.).
In order for a company to qualify as a REIT, it must comply with certain provisions within the Internal Revenue Code. As required by the Tax Code, a REIT must:
• Be an entity that is taxable as a corporation
• Be managed by a board of directors or trustees
• Have shares that are fully transferable
• Have a minimum of 100 shareholders
• Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
• Invest at least 75 percent of its total assets in real estate assets
• Derive at least 75 percent of its gross income from rents from real property or interest on mortgages financing real property
• Have no more than 25 percent of its assets consist of stock in taxable REIT subsidiaries
• Pay annually at least 90 percent of its taxable income in the form of shareholder dividends
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