1. McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 21: Real Estate Investment Trusts (REITs)

2. 21-2 Real Estate Investment Trusts  Creation of the Internal Revenue Code  Pass-through entity: No corporate taxes  Distribution requirements –Must distribute at least 90% of taxable income

3. 21-3 Asset requirements At least 75% of the value of a REIT’s assets must consist of real estate assets, cash, and government securities. No more than 5% of value of assets may consist of the securities of any one issuer if the securities are not included in the 75% rule. A REIT may not hold more than 10% of the outstanding voting shares of any one issuer if those securities are not included under the 75% rule. No more than 25% of assets may consist of stock in taxable REITs.

4. 21-4 Income requirements At least 95% of gross income must be derived from dividends, interest, rent, or gains from the sale of certain assets. At least 75% of gross income must be derived from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

5. 21-5 Real 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 – IPO of first modern REIT  Taubman Realty Offering –Umbrella Partnership REIT (“UPREIT”)

6. 21-6 Real 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

7. 21-7 Exhibit 21-1

8. 21-8 Real Estate Investment Trusts  Equity trusts –Specializations  Property type  Trust duration –Investment appeal  Diversified portfolio  Liquidity

9. 21-9 Real Estate Investment Trusts  Equity trusts –Investment appeal  Mutual funds  Exchange traded funds  International REITs  Closed-end funds

10. 21-10 Real Estate Investment Trusts  Equity trusts –Caveats  Purchase of original property not arm’s length  Conflicts of interest –Safeguards  Appraisals  Sarbanes-Oxley

11. 21-11 Real 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

12. 21-12 Real Estate Investment Trusts  Funds from Operations (FFO) –REIT equivalent to earnings per share –Depreciation impact

13. 21-13 Real Estate Investment Trusts  Expansion & Growth –Little Free Cash Flow  Income distribution rules –Secondary Stock Offering  Dilution vs. accretion –Debt Financing

14. 21-14 Real Estate Investment Trusts  Growing income –Existing properties  Rental income  Redevelopment –Acquisitions  Purchase properties with cash at positive spreads.  Swap shares for property interests.

15. 21-15 Real Estate Investment Trusts  Growing income –Development –Provision of services  Property management, brokerage, development, etc. –Financial engineering  Improve financing terms and lower capital costs.