How to Form a Real Estate Investment Trust (REIT) (2024)

The following offers a general summary of the basic tax law requirements applicable to REITs. To qualify as a REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements.

1. How must a real estate company be organized to qualify as a REIT?
2. How do REITs operate?
3. What are the dividend distribution requirements for a REIT?
4. What are the compliance rules for becoming a REIT?
5. Examples of Law Firms with REIT expertise
6. Examples of Accounting Firms with REIT expertise
7. Examples of Investment Banking Firms with REIT expertise
8. Other

1. How must a real estate company be organized to qualify as a REIT?

A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. It must be governed by directors or trustees and its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

To ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Due to the need to have 100 shareholders and the complexity of both of these tests, it is strongly recommended that tax and securities law counsel are consulted before forming a REIT.

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2. How do REITs operate?

A REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT's income and assets are derived from real estate sources.

At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. An additional 20% of the REIT's gross income must be from the above-listed sources or other forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT's income can be from non-qualifying sources, such as service fees or a non-real estate business.

Quarterly, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. A REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS) or a qualified REIT subsidiary (QRS). Nor can a REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of the stock comprises more than 5% of a REIT's assets. Finally, the value of the stock of all of a REIT's TRSs cannot comprise more than 20% of the value of the REIT's assets.

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3. What are the dividend distribution requirements for a REIT?

In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income. To the extent that the REIT retains income, it must pay taxes on such income just like any other corporation.

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1. How must a real estate company be organized to qualify as a REIT?

To qualify as a REIT, a real estate company must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. It needs to be governed by directors or trustees, with transferable shares. The entity must also meet ownership tests, including the 100 Shareholder Test and the 5/50 Test, starting from its second taxable year. Compliance with these tests often involves including percentage ownership limitations in organizational documents.

2. How do REITs operate?

REITs must satisfy two annual income tests and various quarterly asset tests. At least 75% of the REIT's annual gross income must come from real estate-related sources, such as rents and mortgage interest. An additional 20% can be from various income, including dividends and interest from non-real estate sources. Quarterly, at least 75% of a REIT's assets must consist of real estate assets. Ownership of voting securities in corporations and the value of stock in non-REIT entities is subject to limitations.

3. What are the dividend distribution requirements for a REIT?

For a real estate company to qualify as a REIT, it must distribute at least 90% of its taxable income. Retaining income beyond this threshold would result in the REIT being taxed like any other corporation.

4. What are the compliance rules for becoming a REIT?

To become a REIT, a company must make a REIT election by filing an income tax return on Form 1120-REIT. Compliance with various REIT tests is required during the first year, except for the 100 Shareholder Test and the 5/50 Test, which apply from the second taxable year. Annual letters to shareholders requesting details of beneficial ownership are mandatory, and failure to send them on time incurs significant penalties.

5. Examples of Law Firms with REIT expertise:

Alston & Bird LLP
Goodwin Procter LLP
Greenberg Traurig, LLP
Hogan Lovells
Jenner & Block LLP
Morrison Foerster
Sidley Austin LLP
Vinson & Elkins LLP

6. Examples of Accounting Firms with REIT expertise:

BDO USA, LLP
Deloitte LLP
EY
Grant Thornton
KPMG LLP
PricewaterhouseCoopers LLP

7. Examples of Investment Banking Firms with REIT expertise:

Bank of America Merrill Lynch
Barclays
BMO Capital Markets
Citi
Goldman Sachs & Co.
J.P. Morgan
Morgan Stanley
RBC Capital Markets
Wells Fargo Securities

8. Other:

Chatham Financial
Kroll Real Estate Advisory Group
Ferguson Partners, Ltd.
Green Street
Yardi

For any real estate company considering venturing into the realm of REITs, consulting with legal, accounting, and investment banking experts is crucial, as evidenced by the reputable firms listed above. Their expertise ensures adherence to complex regulatory requirements and maximizes the benefits of REIT status.