In our “Law 101″ posts, we define terms, phrases, or concepts with the goal of conveying core information in order to set the stage for more involved and complex discussions.
- What is a REIT?
A trust relationship is one in which one person, the trustee, holds property or a property interest for the benefit of another person, the beneficiary. Real Estate Investment Trusts (“REITs”) are a type of trust: REITs are companies that own and operate different types of commercial properties such as multifamily, office, retail, and industrial on behalf of their investors. There are also REITs that engage in financing by extending credit or loaning money to real-estate owners and operators.
- Why do REITs exist?
REITs exist to make money for their investors. They allow investors to take a more passive role in real estate. Investors purchase subscriptions or shares in a REIT that itself holds various properties. The investors themselves aren’t burdened with everyday management issues like collecting rent, responding to maintenance requests, filling tenant vacancies, and the like. REITs effectively allow people—who individually may not be able to afford it—to collectively purchase interests in real estate. REITs may offer tax and other benefits, too.
- Who dictates REIT rights and obligations?
State and federal laws govern the formation, offering, management, operation, taxation, and termination of REITs. For example, the Internal Revenue Code has several requirements that must be fulfilled in order for an entity to be treated as a REIT. The U.S. Securities and Exchange Commission may enforce regulations directed toward publicly traded REITs. Subscription agreements also impose legal rights and obligations. And, on top of all of this, other statutes, regulations, and case law may impose rights and duties on those who form, offer, manage, operate, and/or invest in REITs, too.
- Where can you learn more about REITs?
- When should you consult with professionals about your REIT investments?
You may consider consulting with an accountant, financial adviser, and lawyer, among others, before making a REIT investment. Of course, you may consult with these and other professionals after your investment as well.