chapter 21: real estate investment trusts (reits)
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McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 21: Real Estate Investment Trusts
(REITs)
21-2
Real Estate Investment TrustsReal Estate Investment Trusts Creation of the Internal Revenue Code Pass-through entity: No corporate taxes Asset requirements
– 75% test
Income requirements Distribution requirements
– 90% rule
21-3
Real Estate Investment TrustsReal Estate Investment Trusts
Ownership requirements– 100 person minimum
Pre-1986: Management Activity Restriction 1986 Tax Reform Act relaxed the
restriction and led to vertically integrated operating companies
1991 Kimco Realty Offering Taubman Realty Offering
– Umbrella Partnership REIT (“UPREIT”)
21-4
Real Estate Investment TrustsReal Estate Investment Trusts
Tax treatment– Accelerated depreciation– 40-Year asset life– REIT dividends
Taxed as ordinary income
1999 Real Estate Modernization Act– “Usual and customary” provision of services.
This was especially beneficial to REITs that owned hotels.
– Taxable REIT subsidiaries
21-5
Exhibit 21-1Exhibit 21-1
21-6
Real Estate Investment TrustsReal Estate Investment Trusts
Equity trusts– Specializations
Property typeTrust duration
– Investment appealDiversified portfolioLiquidity
21-7
Real Estate Investment TrustsReal Estate Investment Trusts
Equity trusts– Investment appeal
Mutual fundsExchange traded funds International REITsClosed-end funds
21-8
Real Estate Investment TrustsReal Estate Investment Trusts
Equity trusts– Caveats
Purchase of original property not arm’s lengthConflicts of interest
– SafeguardsAppraisalsSarbanes-Oxley
21-9
Real Estate Investment TrustsReal Estate Investment Trusts
Private REITs– Targeted to institutional investors– Syndicated to investors– Incubator REITs
Mortgage REITs– Mortgage REITs have come back into favor
again. The last time Mortgage REITs were popular was in the 1970’s.
Hybrid REITs
21-10
Real Estate Investment TrustsReal Estate Investment Trusts
Funds from Operations (FFO)– REIT equivalent to earnings per share– Depreciation impact
Adjusted Funds from Operations (AFFO) Funds Available for Distribution/Cash
Available for Distribution (FAD/CAD)– FAD/CAD is the amount of actual cash that is
left over.
21-11
Real Estate Investment TrustsReal Estate Investment Trusts
Expansion & Growth– Little Free Cash Flow
Income distribution rules
– Secondary Stock OfferingDilution vs. accretion
– Debt Financing
21-12
Real Estate Investment TrustsReal Estate Investment Trusts
Growing income– Existing properties
Rental incomeRedevelopment
– AcquisitionsPurchase properties with cash at positive spreads.Swap shares for property interests.
21-13
Real Estate Investment TrustsReal Estate Investment Trusts
Growing income– Development– Provision of services
Property management, brokerage, development, etc.
– Financial engineering Improve financing terms and lower capital costs.
21-14
Real Estate Investment TrustsReal Estate Investment Trusts
Additional issues– Tenant improvements & free rent– Leasing commissions & costs– Straight-line rents– Income from managing other properties– Types of mortgage debt– Ground leases
21-15
Real Estate Investment TrustsReal Estate Investment Trusts
Additional issues– Lease renewal options– Occupancy numbers: occupied vs. leased
space– Retail REITs: Sales per square foot– Costs of being a public company
Sarbanes-Oxley
21-16
Real Estate Investment TrustsReal Estate Investment Trusts
Mortgage REITs– Does not own real property. Does own
mortgage paper.
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