WHAT IS REIT?
The REIT Story
Although Congress created real estate investment trusts
(REITs) in 1960, REITs played a relatively limited role
in real estate investment for more than three
decades. Since 1992, however, the REIT marketplace
has grown dramatically. Why is this happening,
and what does it mean for investors and the economy?
What is a REIT?
Simply stated, a REIT.is a company dedicated to owning
and, in most cases, operating income-producing real estate,
such as apartments, shopping centers, offices and warehouses.
Some REITs also are engaged in financing real estate. Most
importantly, to be a REIT, a company is legally required
to pay virtually all of its taxable income (90 percent)
to its shareholders every year.
In short, so long as:
- The company’s assets are primarily composed of
real estate held for the long term
- The company’s income is mainly derived from real
estate, and
- The company pays out at least 90 percent of its taxable
income to its shareholders.
A REIT may deduct the dividends
paid to the shareholders from its corporate tax
bill. The net benefit of being a REIT: one level
of taxation. The net cost of being a REIT: little
or no retained earnings generated to expand the
business plan.
Capital for growth must come principally from
one of two ways. A company can sell existing assets
to fund further development and/or a company can
raise money raised in the investment marketplace
from investors who have confidence in the REIT’s
future prospects and business plan.
Why did Congress create REITs in 1960?
Congress created REITs in 1960 to enable small
investors to make investments in large-scale,
significant income-producing real estate. Drawing
in part from the example of mutual funds, Congress
decided that the only way for the average investor
to access investments in larger-scale commercial
properties was through pooling arrangements. As
a result, Congress designed REITs to unite the
capital of many into a single economic enterprise.
That enterprise is geared to the production of
income through commercial real estate ownership
and finance.
Why are REITs growing so fast now?
Investor interest has sparked REIT growth. The
real estate cycle has been on the upswing for
the past five years, and investors want to be
part of it.
In addition:
- Since REITs must be widely held, they are
ideal candidates to be public companies
- Because REITs must distribute almost all their
taxable income as dividends to shareholders, they
instill confidence in a marketplace somewhat
skeptical about real estate investment in the wake
of the early 1990’s.
- Because the managers of a modern REIT also have
a meaningful ownership stake in the company, investors
are increasingly comfortable with the structure.
Source: National
Association of Real Estate Investment Trusts