Real_Estate_Investment_Trusts

Real_Estate_Investment_Trusts - Real Estate Investment...

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Click to edit Master subtitle style Real Estate Investment Trusts (REIT)
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22 Real Estate Investment Trusts Definition: A limited-liability single tax entity created by Congress in 1960 as a vehicle for pooling funds to make real estate investments. REITs typically hold real estate (Equity REITs), mortgages and mortgage backed securities (Mortgage REITs) or both (Hybrid REITs). Dividends: Dividends paid by REITs are deductible from its taxable income, so REITs usually pay no Federal income tax. They are therefore single tax entities because the tax liability falls only on the dividends paid to the shareholders
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33 Four Restrictions on REIT organization and income dispersal
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44 I. Asset Requirements At least 75 percent of the value of a REITs assets must consist of real estate assets, cash and government securities. Not more than 5 percent of the value of the assets may consist of the securities of any one issuer if the securities are not included under the 75 percent test. A REIT may not hold more than 10 percent of the outstanding voting securities of any one issuer if those are not includable under the 75 percent test. Not more than 25 percent of its assets can consist of stocks in taxable REIT subsidiaries.
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55 II. Income Requirements At least 95 percent of the entity’s gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets. At least 75 percent of gross income must be derived from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.
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66 III. Distribution Requirements Distributions to shareholders must equal or exceed the sum of 90 percent of REIT taxable income.
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77 IV. Stock and Ownership Requirements Be taxable as a corporation Be managed by a board of directors or trustees Have shares that are fully transferable Shares in a REIT must be transferable and must be held by a minimum of 100 persons No more than 50 percent of REIT shares may be held by five or fewer individuals during the last half of the taxable year.
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88 Prior to 1986 REITs were not a popular investment vehicle. WHY?
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99 Answer: REITs were a passive investment vehicle. Outside management and independent boards managed the properties.
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1010 What happened in 1986?
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1111 Answer: Tax Reform Act of 1986 released the management of REITs. REIT managers could manage their own properties: Kimco, big shopping center owner, was first Followed by Taubman (UPREIT)
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1212 Market Capitalization of Publicly Traded REITs
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Market Cap – $438B 12-31-06 Market Cap -- $192B 12-31-08 Factors Sub-prime fallout led to credit crunch No ability to refinance irrespective of operating performance. 1313
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Real_Estate_Investment_Trusts - Real Estate Investment...

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