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Real Estate
Investment Trusts
(REITs)
©2008 The McGraw-Hill Companies,
All Rights Reserved
McGraw-Hill/Irwin
Real Estate Investment Trusts
• Creation of the IRS
• Pass-Through Entity: No corporate taxes
• Asset Requirements
 75% Test
• Income Requirements
• Distribution Requirements
 90% Rule
21-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Ownership Requirements
 100 Person Minimum
• Management Activity Restriction
• 1986 Tax Reform Act
 Vertically Integrated Operating Companies
• 1991 Kimco Realty Offering
• Taubman Realty Offering
 Umbrella Partnership REIT
21-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Tax Treatment
 Accelerated Depreciation
 40-Year Asset Life
 REIT Dividends
• Usually Ordinary Income
• Taxable REIT Subsidiaries
 1999 Real Estate Modernization Act
21-4
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Equity Trusts
 Specializations
• Property Type
• Trust Duration
 Investment Appeal
• Diversified Portfolio
• Liquidity
21-5
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Equity Trusts
 Investment Appeal
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Mutual Funds
Exchange Traded Funds
International REITS
Closed-End Funds
21-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Equity Trusts
 Caveats
• Purchase of original property not arm’s length
• Conflicts of interest
 Safeguards
• Appraisals
• Sarbanes-Oxley
21-7
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Private REITs
 Targeted to institutional investors
 Syndicated to investors
 Incubator REITs
• Mortgage Trusts
• Hybrid Trusts
21-8
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Funds from Operations (FFO)
 REIT equivalent to earnings per share
 Depreciation impact
• Adjusted Funds from Operations
• Funds Available for Distribution
• Cash Available for Distribution
21-9
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Expansion & Growth
 Little Free Cash Flow
• Income distribution rules
 Secondary Stock Offering
• Dilution vs. Accretion
 Debt Financing
21-10
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Growing Income
 Existing Properties
• Rental Income
• Redevelopment
 Acquisitions
• Purchase properties with cash at positive spreads
• Swap shares for property interests
21-11
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Growing Income
 Development
 Provision of Services
• Property management
 Financial Engineering
• Improve financing terms and lower capital costs
21-12
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Additional Issues
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Tenant improvements & free rent
Leasing commissions & costs
Straight-line rents
Income from managing other properties
Types of mortgage debt
Ground leases
21-13
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Additional Issues
 Lease renewal options
 Occupancy numbers: Occupied & leased
space
 Retail REITs: Sales per square foot
 Costs of being a public company
 Sarbanes-Oxley
21-14
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Real Estate Investment Trusts
• Mortgage REITs
 Does not own property; owns mortgage paper
21-15
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved