What Steps Are Involved in Creating a REIT?

Obviously, this question cannot be answered with one short, simple answer. The breadth of information on how to form a REIT from conception has basic tax considerations and requirements — ones that should be researched with a legal representative for the finer details. However, the elemental compliance regulations generally require these qualifications:

Organization — A Real Estate Investment Trust must be founded in one of the 50 United States or District of Columbia as a taxable entity for federal purposes as a corporation. The REIT should be supervised by directors or trustees. It’s shares must also be transferable. By the second taxable year, a REIT must meet two prerequisites before it can qualify: 1) must have at least 100 shareholders 2) five or less individuals cannot not own more than 50 percent of the value of the stock in Q3 or Q4 taxable year.

Operational — A REIT must fulfill two yearly income tests and a quarterly asset test to ensure that most the REIT’s income and assets are from real estate-specific sources. ¾ of the REIT’s annual gross income must come from real estate: rent from property or secured by real mortgage properties, with the exception of the 5 percent allowed for non-real estate service fees.

Additionally, a REIT cannot own more than 10 percent of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (“TRS”) or a qualified REIT subsidiary (“QRS”). Also, a REIT cannot own stock in another corporation (other than a REIT, TRS or QRS) in which the value of the stock equals more than 5 percent of a its assets. Lastly, the value of the stock of all of a REIT’s TRSs cannot comprise more than 25 percent of the value of the REIT’s entire portfolio.

Distribution — A REIT must disperse at least 90 percent of its taxable income and pay out its income to shareholders yearly in form of dividends.

Compliance — REITs must qualify with the IRS with an election form to qualify for a specific year. Most importantly, annual letters to shareholders its shareholders asking for information of the beneficial ownership shares or penalties will apply.

Due to the stringent stipulations of each “test”, a legal and tax securities expert should be consulted.

Photo credit: Money Crashers

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