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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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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4. What are the compliance rules for becoming a REIT?
In order to qualify as a REIT, a company must make a REIT election by filing an income tax return on Form 1120-REIT. Since this form is not due until March, the REIT does not make its election until after the end of its first year (or part-year) as a REIT. Nevertheless, if it desires to qualify as a REIT for that year, it must meet the various REIT tests during that year (except for the 100 Shareholder Test and the 5/50 Test, both of which must be met beginning with the REIT's second taxable year).
Additionally, the REIT must mail annual letters to its shareholders requesting details of beneficial ownership of shares. Significant penalties will apply if a REIT fails to mail these letters on time.
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5. Examples of Law Firms with REIT expertise:
Alston & Bird LLP
Donald Hammett
donald.hammett@alston.com
Goodwin Procter LLP
Ettore A. Santucci
esantucci@goodwinprocter.com
Greenberg Traurig, LLP
Joseph Herz
herzj@gtlaw.com
Hogan Lovells
David W. Bonser
david.bonser@hoganlovells.com
Sidley Austin LLP
Sonia G. Barros
sbarros@sidley.com
Vinson & Elkins LLP
Daniel M. LeBey
dlebey@velaw.com
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6. Examples of Accounting Firms with REIT expertise:
Deloitte LLP
Jeffrey J. Smith
jefsmith@deloitte.com
EY
Robyn Werner
robyn.werner@ey.com
Grant Thornton
Greg Ross
greg.ross@us.gt.com
KPMG LLP
Gregory Williams
gregorylwilliams@kpmg.com
PricewaterhouseCoopers LLP
Thomas Wilkin
tom.wilkin@pwc.com
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7. Examples of Investment Banking Firms with REIT expertise
Bank of America Merrill Lynch
Jeffrey D. Horowitz
jeff.horowitz@baml.com
Barclays
Scott Schaevitz
scott.schaevitz@barclays.com
BMO Capital Markets
Stephan Richford
Stephan.richford@bmo.com
Citi
Matt Greenberger
matthew.greenberger@citi.com
Goldman Sachs & Co.
Michael Graziano
mike.graziano@gs.com
J.P. Morgan
Thomas A. Grier
thomas.grier@jpmorgan.com
KeyBanc Capital Markets
David Gorden
dgorden@key.com
Mizuho
Noel Purcell
Noel.Purcell@mizuhogroup.com
Morgan Stanley
Seth Weintrob
seth.weintrob@morganstanley.com
Raymond James
Bradley Butcher
brad.butcher@raymondjames.com
RBC Capital Markets
Asad Kazim
asad.kazim@rbccm.com
Scotiabank
Ross T. Nussbaum
ross.nussbaum@scotiabank.com
SMBC
John C. Bolger
jbolger@smbcnikko-si.com
Stifel
Chad Gorsuch
cmgorsuch@stifel.com
TD Securities
Michael D. Coster
Michael.coster@tdsecurities.com
Wells Fargo Securities
Raymond G. Williamson, Jr
randy.williamson@wellsfargo.com
Chatham Financial
Gavin Duckworth
gduckworth@chathamfinancial.com
Ferguson Partners, Ltd.
GWilliam Ferguson
wferguson@fergusonpartners.com
Green Street
Cedrik Lachance
clachance@greenstreet.com
Yardi
Brian Sutherland
Brian.sutherland@yardi.com
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