A Real Estate Investment Trust (REIT) is an investment partnership that invests in income-generating real estate assets. REITs invest in a wide range of real estate assets, including residential apartment buildings and condominiums, commercial office space and shopping malls. REITs enjoy a number of advantages relative to other types of investment partnerships. REITs do not pay corporate income tax on their earnings as long as 90 per cent of earnings are paid out to investors.
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Draft a partnership agreement between you and the partners with whom you will be forming the REIT. Stipulate the breakdown in financial contributions, ownership and management responsibilities between you and your partners. A partnership agreement will help avoid costly disputes in the future.
Structure your investment partnership as a management company, which is a specific type of limited liability corporation. You cannot legally structure your investment partnership as a REIT until you have at least 100 investors, so many start-up REITs are initially structured as management companies. File a certificate of incorporation with the secretary of state in the jurisdiction where the REIT will be located. You will likely have to pay a filing fee, depending upon the jurisdiction.
Draft a private placement memorandum (PPM) for your REIT. The PPM is the key tool you will use to solicit funds from investors. Include information on your REIT's strategy, what types of properties you will invest in and the investment track records of you and your partners.
Distribute the PPM to potential investors. Most investors will want to meet with you and your partners after reviewing the PPM. Be prepared to discuss your background and how your REIT differs from other REITs in the market.
Once you have obtained investment commitments from 100 investors, change the structure of your partnership from a management company to a REIT. Amend your previously-filed certificate of incorporation with the secretary of state; there is generally no fee for doing this.
File Form 1120 with the IRS, which will allow you to avoid paying corporate taxes on the REIT's earnings. You must pay out at least 90 per cent of the REIT's earnings in the form of dividends in order to maintain tax-free status. Begin investing in real estate assets.
Tips and warnings
- Once REITs reach a certain size, many REIT managers sell shares in the REIT to public investors through an initial public offering. REIT managers are increasingly taking their REITs public on international exchanges, such as the London Stock Exchange, in order to avoid costly Sarbanes-Oxley compliance. Should you decide to take your REIT public, consult your legal and financial advisers to determine if you should do so on an international exchange.
- You do not need to wait until you have converted your partnership from a management company to a REIT to begin making investments. However, you will not enjoy tax-free status until you have structured the partnership as a REIT.
- The legal requirements for starting a REIT change frequently. Be sure to consult a lawyer to make sure you are completing the proper steps to legally structure your partnership as a REIT.
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