Real Estate Investment Trusts can be good for small investors
Vail, CO, Colorado
A Real Estate Investment Trust, or “REIT,” is a financial device created for the purpose of acquiring and owing real estate. As the name implies, a REIT is a kind of trust in which investors purchase shares similar to the shares of a corporation. These trusts, though, are dedicated exclusively to real estate ventures.
To fully understand REITs, you must first have a basic understanding of what constitutes a trust. A trust is a right of property held by one party for the benefit of another. The person managing property is the “trustee.” The person who benefits is the beneficiary.
A key advantage of a Real Estate Investment Trust is that it may limit potential liability. Additionally, a REIT can provide all of the corporate attributes of centralized management, continuity of life and free transferability of interests. In some cases, it may escape “double” corporate tax as well.
Not only are the potential tax advantages attractive to potential investors, but so is the transferability of interests, which is accomplished in much the same way as the transfer of shares held in a publicly traded corporation. Additionally, a potential investor in a REIT may find comfort in the fact that the real estate investments are acquired by real estate professionals and, once acquired, are professionally managed to enhance their value.
REITs were created in 1960 when Congress adopted laws to allow investors in certain large real estate ventures to avoid the double corporate tax, putting those investors on similar footing to those investing in securities through mutual funds.
In order to qualify for the special federal tax treatment, a Real Estate Investment Trust must meet a series of arduous requirements. The trusts must be managed by trustees who hold legal title to the real estate. Also, ownership of the trust must be by transferable shares or certificates. Further, at least 75 percent of the trust’s gross income must be generated from real estate, and it must distribute at least 95 percent of its taxable income (not including capital gains) to its beneficial owners.
“Real property” may not include mineral, oil or gas royalty interests and “rent” from real property. What this means is that “passive” investment income based on a percentage of profits (as distinguished from percentage of sales) does not qualify.
Real Estate Investment Trusts are an attractive vehicle for ownership by the relatively small investor in large, diversified holdings in real property. They afford the “little guy” the opportunity of owning a portion of many diversified investments, rather than placing all of his or her eggs in one basket and may also offer the kind geographical diversity to provide a “hedge” bet against a downturn in one local real estate economy or another. In some circumstances, REITs’ return on investment at a rate better than the market.
REITs are not for everyone or for every circumstance. They are suited for large, publicly owned real estate syndicates, operating almost exclusively in large metropolitan areas. For smaller transactions, a land trust is often a more suitable form to avoid the double corporate tax, obtain anonymity, enjoy continuity of life and convenient transferability of interests.
As in any investment, there is no substitute for careful research and the counsel of trusted and experienced investment and legal counsel.
Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices in the Vail Valley. He is a member of the Colorado State Bar Association Legal Ethics Committee and is a former adjunct professor of law. Robbins lectures for continuing legal education for attorneys in the areas of real estate, business law and legal ethics. He may be heard on Wednesday nights at 7 p.m. on KZYR radio (97.7 FM) as host of “Community Focus”. Robbins may be reached at 970/926.4461 or at his e-mail address: email@example.com
Support Local Journalism
Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.
User Legend: Moderator Trusted User