How to Form a Real Estate Investment Trust (REIT) (2024)

The following offers a general summary of the basic tax law requirements applicable to REITs. To qualify as a REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements.

1. How must a real estate company be organized to qualify as a REIT?
2. How do REITs operate?
3. What are the dividend distribution requirements for a REIT?
4. What are the compliance rules for becoming a REIT?
5. Examples of Law Firms with REIT expertise
6. Examples of Accounting Firms with REIT expertise
7. Examples of Investment Banking Firms with REIT expertise
8. Other

1. How must a real estate company be organized to qualify as a REIT?

A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. It must be governed by directors or trustees and its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

To ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Due to the need to have 100 shareholders and the complexity of both of these tests, it is strongly recommended that tax and securities law counsel are consulted before forming a REIT.

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2. How do REITs operate?

A REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT's income and assets are derived from real estate sources.

At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. An additional 20% of the REIT's gross income must be from the above-listed sources or other forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT's income can be from non-qualifying sources, such as service fees or a non-real estate business.

Quarterly, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. A REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS) or a qualified REIT subsidiary (QRS). Nor can a REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of the stock comprises more than 5% of a REIT's assets. Finally, the value of the stock of all of a REIT's TRSs cannot comprise more than 20% of the value of the REIT's assets.

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3. What are the dividend distribution requirements for a REIT?

In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income. To the extent that the REIT retains income, it must pay taxes on such income just like any other corporation.

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4. What are the compliance rules for becoming a REIT?

1. Organizational Requirements for REIT Qualification:

To qualify as a REIT, a real estate company must be organized in one of the 50 states or the District of Columbia as a corporation taxable for federal purposes. It must be governed by directors or trustees, and its shares must be transferable. The entity must adhere to ownership tests, including the 100 Shareholder Test and the 5/50 Test from the second taxable year onwards.

2. Operational Guidelines for REITs:

REITs must satisfy annual income tests and quarterly asset tests. At least 75% of their annual gross income must be from real estate-related sources, and an additional 20% can be from various income forms, such as dividends and interest from non-real estate sources. Quarterly, at least 75% of a REIT's assets must consist of real estate assets, and there are limitations on ownership of voting securities in other corporations.

3. Dividend Distribution Requirements:

For a company to qualify as a REIT, it must distribute at least 90% of its taxable income. Retained income is subject to taxation like any other corporation.

4. Compliance Rules for REIT Qualification:

To become a REIT, a company must make a REIT election by filing an income tax return on Form 1120-REIT. Compliance with various REIT tests during the first year is crucial, and annual letters requesting details of beneficial ownership of shares must be mailed to shareholders on time.

5-8. Expertise from Law Firms, Accounting Firms, and Investment Banking Firms:

The article provides a list of reputable law firms, accounting firms, and investment banking firms with expertise in REITs. These firms include Alston & Bird LLP, BDO USA, LLP, Bank of America Merrill Lynch, and many others. The individuals listed are key contacts within these firms who specialize in REIT-related matters.

8. Other Entities with REIT Expertise:

Beyond law, accounting, and investment banking firms, the article mentions other entities like Chatham Financial, Kroll Real Estate Advisory Group, Ferguson Partners, Ltd., Green Street, and Yardi, each contributing to the broader landscape of REIT expertise.

In conclusion, the comprehensive overview provided here demonstrates a deep understanding of the intricacies involved in establishing, operating, and maintaining compliance for Real Estate Investment Trusts. If you have further inquiries or seek more detailed insights, feel free to inquire.

How to Form a Real Estate Investment Trust (REIT) (2024)

FAQs

Can I form my own REIT? ›

Your company will need at least 100 investors to be classified as a REIT. You don't necessarily need to get all 100 up front, since the IRS only requires you to meet that threshold by the beginning of the REIT's second tax year.

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How do you structure a REIT? ›

Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

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How easy is it to start a REIT? ›

According to IRS requirements, your company must have at least 100 shareholders by its second tax year to qualify as a REIT. This means you can start your operations with two or more shareholders if you reach the requirement a year later.

What are the requirements for a REIT? ›

To qualify as a REIT a company must: Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate.

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Can an LLC be a REIT? ›

The acronym R.E.I.T stands for “Real Estate Investment Trust,” however, a REIT does not necessarily need to be formed as a trust. In fact, many REITs are formed as corporations and nothing precludes a REIT from being formed as a partnership or LLC.

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How much does it cost to start REIT? ›

The Cheapest Option: REITs—$1,000 to $25,000 or more

A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is. Moreover, you can start small with a little bit of cash.

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How do REIT owners make money? ›

REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.

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What is the 5 50 rule? ›

A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

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Is REIT income taxable? ›

Real Estate Investment Trusts (REITs) have become an interesting option for income investors due to their income payouts and capital appreciation potential. Distributions from REITs can provide income flow, but the income is considered taxable in the eyes of the IRS.

What is a disadvantage of a REIT? ›

Key Takeaways

One risk of non-traded REITs (those that aren't publicly traded on an exchange) is that it can be difficult for investors to research them. Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them.

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What is the minimum ownership of a REIT? ›

A REIT must have at least 100 shareholders (the “100 shareholder test”) for at least 335 days of a 12-month taxable year or during a proportionate part of a taxable year that is less than 12 months.

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How to invest in REITs for beginners? ›

As referenced earlier, you can purchase shares in a REIT that's listed on major stock exchanges. You can also buy shares in a REIT mutual fund or exchange-traded fund (ETF). To do so, you must open a brokerage account. Or, if your workplace retirement plan offers REIT investments, you might invest with that option.

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Does a REIT have to be public? ›

Public REIT s are listed on a public stock exchange and their units can generally be purchased through an investment dealer. Private REIT s are not listed on public stock exchanges; therefore, they are considered private investments. Their units are purchased through the exempt market.

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Does a REIT need a board? ›

Do Investors have Control with Private REITs? Investors generally re-elect directors. Not required other than the Internal Revenue Code's requirement that a REIT needs to have a board of directors or board of trustees.

How do REITs pay out? ›

The common denominator among all REITs is that they pay dividends consisting of rental income and capital gains. To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends.

Can a non profit own a REIT? ›

The Housing Partnership Equity Trust, which includes Denver-based Mercy Housing, LINC Housing Corp. in Long Beach, and Las Vegas-based Nevada HAND, is the country's first REIT to be owned and operated by nonprofits and the second to focus on affordable housing.

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Is owning REIT same as owning real estate? ›

Many investors who want to tap into the real estate sector compare REITs to actual, tangible real estate. REITs—or real estate investment trusts—are corporations that act like mutual funds for real estate investing. You can invest in a REIT without having to own or manage any property yourself.

What is the 5 50 rule for REITs? ›

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