NEW DELHI: The securities and exchange board of India (SEBI) has amended the regulations applicable to small and medium REITs (SM REITs) under Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2024.
The amendments has been made to 2014 regulations and will come into force on the date of their publication in the official gazette.
Real Estate Investment Trust (REIT) means a person that pools Rs 50 crore or more for the purpose of issuing units to at least 200 investors so as to acquire and manage real estate asset(s) or property(ies), that would entitle such investors to receive the income generated therefrom without giving them the day-to-day control over the management and operation of such real estate asset(s) or property(ies).
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Investment manager
An application for grant of certificate of registration as SM REIT must be made by the investment manager on behalf of the Trust. The investment manager has a net worth of not less than Rs 20 crore. The investment manager should have at least two years’ experience in the real estate industry or real estate fund management.
Not less than half of the directors of the investment manager should be independent and should not be directors of the manager or investment manager of another REIT or SM REIT.
The trustee should not be an associate of the investment manager.
The investment manager will identify the real estate assets or properties it proposes to acquire or provide the features of the real estate assets or properties including location or such other details for the particular scheme in the draft scheme offer document. The minimum price of each unit of the scheme of the SM REIT shall be Rs 10 lakh.
The board may, in order to protect the interests of investors, appoint any person to take charge of records, documents of the SM REIT.
No unit holder of the scheme of the SM REIT enjoys superior voting or any other rights over another unit holder in the same scheme and there are no multiple classes of units of scheme of the SM REIT.
If the SM REIT fails to make an initial offer of a scheme within three years from the date of registration with the Board, it shall surrender its certificate of registration to the Board and cease to operate as an SM REIT.
Each scheme of the SM REIT shall be identified by a separate name, which shall not be misleading and shall not portray any guaranteed returns to the investors.
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No offer of units by a scheme of the SM REIT shall be made unless the size of the asset proposed to be acquired in a scheme of the SM REIT is at least Rs 50 crore and less than Rs 500 crore and the minimum number of unitholders of the scheme of the SM REIT other than the investment manager, its related parties and associates of the SM REIT are not less than 200 investors.SEBI
The minimum offer and allotment to the public in each scheme of SM REIT shall be at least 25 per cent. of the total outstanding units of such scheme.
The SM REITs shall not enter into any transaction with related parties including transactions for facility management and property management.
Investment conditions
The SPV shall directly and solely own all assets that are acquired or proposed to be acquired by the scheme of the SM REIT, of which SPV is the wholly owned subsidiary.
The scheme of the SM REIT shall invest at least 95 per cent. of the value of the schemes’ assets for each of its schemes in completed and revenue generating properties and shall not invest in under-construction or non-revenue generating real estate assets.
The SPV shall raise capital only from equity investment from the scheme of SM REIT. The SPV may raise funds by way of borrowings from the scheme of SM REIT.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.
Return a minimum of 90% of taxable income in the form of shareholder dividends each year. This is a big draw for investor interest in REITs. Invest at least 75% of total assets in real estate or cash.
REITs must distribute at least 90% of their Net Investment Income to be "regulated" under Subchapter M and thus qualify for conduit tax treatment. In addition, 75% of the REIT's assets must be invested in real estate related activities and 75% of its income must come from real estate related activities.
A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments. If a REIT is concentrated in a particular sector (e.g. hotels) and that sector is negatively impacted (e.g. by a pandemic), you can see amplified losses.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
If the REIT held the property for more than one year, long-term capital gains rates apply; investors in the 10% or 15% tax brackets pay no long-term capital gains taxes, while those in all but the highest income bracket will pay 15%.
If the REIT fails to inquire about ownership of a stockholder and the REIT is closely held, it can lose REIT status and cannot elect to be treated as a REIT for five years (IRCаза856(g)). Pay a $25,000 to $100,000 penalty (IRCаза857(f)). This is in addition to any penalty for failing to satisfy the closely held test.
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.
In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.
To qualify each year as a REIT for IRS purposes, REITs must pay their common and preferred shareholders dividends that equal at least 90 percent of what would otherwise be taxable income. If a REIT pays out only 90 percent of its taxable income, it will owe corporate taxes on the 10 percent it retains.
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