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How to Successfully Start a REIT: A Comprehensive Guide

CEO Khai Intela
Are you interested in venturing into the world of real estate investment trusts (REITs)? Forming and launching a REIT can be a complex process, but with the right knowledge and guidance, you can position yourself...

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Are you interested in venturing into the world of real estate investment trusts (REITs)? Forming and launching a REIT can be a complex process, but with the right knowledge and guidance, you can position yourself for success. In this article, we will delve into the key steps and requirements involved in starting a REIT. So, let's get started!

First Steps in Forming a REIT

Before a REIT is listed on a major stock exchange, it begins as a private business entity. The journey to becoming a publicly traded REIT entails adhering to various organizational and operational requirements. For instance, a REIT must have a minimum of 100 shareholders by the end of its second year, known as the "100 shareholder test." Additionally, no more than 50 percent of the company's shares can be held by five or fewer shareholders, as per the "5/50 test."

Moreover, a REIT must have a board of directors or trustees, and all shares must be transferable. To meet the shareholder requirement, you will need to attract private investors through a prospectus or private placement memorandum. This document plays a crucial role in gaining momentum and securing enough shareholders to achieve and maintain REIT status.

Your prospectus should tell an engaging story that highlights why investors should consider investing in your company, the amount of equity they will receive, the expertise of your management team, key market demographics, and the REIT's business model. It should also include a subscription agreement, which serves as the legally binding contract between the issuer and the investor.

Furthermore, it's worth noting that many REITs focus on specific sectors of commercial real estate, such as hospitality, retail shopping centers, or healthcare facilities. When writing your private placement memorandum, emphasize your team's extensive expertise in these areas and how it can potentially translate into value for shareholders.

IRS Compliance Requirements for REITs

To avoid taxation at the corporate level, REITs must file a Form 1120-REIT when submitting their tax returns. They are also required to send an annual letter to shareholders, detailing their ownership interests. This letter serves as a means for REIT managers to verify compliance with the 100 shareholder and 5/50 requirements.

Additionally, REITs must distribute a minimum of 90 percent of their taxable income back to shareholders as dividends to maintain their tax benefits. It's important for investors to understand how REIT dividends are taxed and to consider this when evaluating potential investments.

The Bottom Line

Forming a REIT is undoubtedly a complex endeavor, especially when it comes to shareholder ownership. If you are considering starting a REIT, seeking guidance from experienced professionals is highly recommended. Securities, tax, and banking experts can help ensure that you meet all the organizational, operational, and IRS requirements necessary for REIT status.

Remember, if writing is not your forte, it might be wise to enlist the help of professionals when crafting your prospectus. A well-structured and persuasive offering document can significantly impact your ability to attract serious investors.

Starting a REIT is an exciting opportunity to tap into the world of real estate investment. By following the steps outlined in this guide and seeking the right professional advice, you can set yourself on the path to success. Good luck!

Sources:

  1. Guide to Mortgage REIT Investing, Nareit, link
  2. REIT Industry Monthly Data, September 2021, Nareit, link
  3. Deadline For REIT Shareholder Demand Letters, Ernst & Young LLP, link

Disclaimer: This material is for general information and educational purposes only. It is based on data gathered from what we believe are reliable sources. Accuracy is not guaranteed, it may not be complete, and it should not be solely relied upon for investment decisions. Realized does not provide tax or legal advice. For advice tailored to your individual situation, consult a qualified professional. There are risks associated with REIT investments, including but not limited to the lack of a secondary market, difficulty in distinguishing between interest payments and principal repayment, fluctuation in share value, and potential economic and regulatory changes. This article is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.

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