Meeting The REIT 100 Investor Test - Geraci Law Firm (2024)

• November 28, 2023

In the world of private lending, creating a Real Estate Investment Trust (REIT) can offer numerous advantages. However, one of the key requirements to maintain REIT status is to have at least 100 equity holders by January 30 of the following tax year in which REIT status is elected. This REIT 100 Investor Test is non-negotiable and is essential for compliance with REIT rules. While this may seem like a daunting task for some private lending entities, there is a silver lining – preferred equity can also qualify as equity holders.

Preferred Equity: A Valuable Asset in REIT Qualification

Preferred equity, often a staple in the private lending industry, can be a lifeline when it comes to meeting the REIT 100 Investor Test. This means that not only common shareholders, but preferred shareholders, also count toward the 100-investor requirement. This flexibility opens the door to an array of strategies, including the use of subsidiary REITs, to minimize disruptions to existing funds.

The Subsidiary REIT Strategy

In the private lending landscape, it is not uncommon for fund managers to adopt a subsidiary REIT strategy. This strategy entails establishing a subsidiary entity, which will act as the REIT. While this approach can help maintain the status quo for the existing fund, it does present a unique challenge – the need to manage another book of investors to meet the 100+ investor test.

The Role of REIT Shareholder Accommodators

To alleviate this challenge, many fund managers turn to REIT shareholder accommodators, affectionately known as “penguin” investors in the industry. These penguin investors are sourced through broker dealers and can be instrumental in ensuring that the REIT satisfies the 100-investor test without the sponsor having to acquire and manage 100+ investors directly.

How Penguin Investors Work

Here’s how the penguin investor strategy typically works: A broker-dealer is enlisted to help in this endeavor. The broker will assist in placing 125 preferred shareholders, each contributing $1,000, in exchange for a stated return. By doing so, the REIT can effectively meet the REIT 100 Investor Test without the need to seek out 100 individual investors directly.

Other Vital REIT Tests

While the REIT 100 Investor Test is a crucial requirement, it’s important to recognize that it’s not the only test a REIT must satisfy. The asset test, the 90% distribution test, and most significantly, the Closely Held test are all critical rules that a REIT must adhere to. The Closely Held test, in particular, examines the concentration of ownership within the REIT and is a fundamental component in maintaining REIT status.

Conclusion:

In the world of private lending, REITs can be a game-changer. It opens up new opportunities, tax advantages, and the ability to provide attractive returns to investors. However, the REIT 100 Investor Test is a vital requirement to keep in mind, and preferred equity is a valuable tool to meet this requirement. The subsidiary REIT strategy, with the assistance of penguin investors sourced through broker dealers, can offer a seamless solution for fund managers looking to maintain REIT status without the administrative burden of managing 100+ individual investors. But remember, while the 100-investor test is crucial, it’s just one piece of the puzzle. Other REIT tests, including the Closely Held test, must also be met to ensure ongoing compliance and success in the world of private lending.

If you have any further questions or need assistance with any other private lending topics, please don’t hesitate to reach out to the team at Geraci for expert guidance.

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