What does it take to start a REIT?

What does it take to start a REIT?


Forming a REIT

It’s interesting that real estate crowdfunding have gotten quite some promotion lately. Especially when REITs have be around for so lengthy. Crowdfunding appeals to the notion that individuals with little investment funds can get a bit of the action. Well, the same can be said for REITs.

So the one thing new about real estate crowdfunding is that it allows project managers who’re conceptualizing these projects easier access to funds with lesser rules. This means that the secret to making a fortune with crowdsourcing isn’t in investing in projects, but to actually start them.
Investment trusts (REIT) are funds that own or operate income producing property. The types of commercial properties can include hospitals, resorts, departmental stores, warehouses, hotels, or even land rich in raw materials. Residential properties range from single family apartments to muiti-family buildings, etc.But the concept is straightforward.
You put your money in as an investor and be prepared to get returns on it. The fund and the properties is going to be managed by experts, specialists, and professionals.
Since most people first find out about REITs via the stock market, it is often associated with huge major corporations who list them on stock exchanges to focus on the public. So it might surprise a few to realize that REITs can be both publicly or privately held. This also means that you can set up and launch your own fund if you are confident enough to make it a success. Private funds don’t have the same disclosure requirements as public funds. So there are pros and cons of going the private route.

Draw upward a partnership agreement that designates the percent ownership, financial contributions and responsibilities of every partner in the REIT. Because a corporation requires a minimum of 100 investors after its first year of operation to be able to qualify as a REIT, most REITs begin as management businesses. A partnership agreement will help you and your partners avoid potentially costly mistakes and disagreements later on.

Incorporate your management company with the secretary of state within the state in which your REIT will operate. One requirement of REITs is that they’re taxed as corporations, so most management companies intent on getting REITs begin as limited liability corporations. A REIT must also be managed with a board of either directors or trustees, invest a minimum 75 percent of its total assets in property, and derive at least 95 percent of its gross earnings from those investments.

Draft an offering prospectus. An offering prospectus (sometimes referred to as a private placement memorandum, or PPM) includes information concerning the corporation’s principals, its investment strategies, and properties in which the REIT plans to get. It provides potential investors with important information they will need to be able to decide whether or not to invest their money with a person.

Forming REITs

Offer your prospectus to potential investors. If you don’t yet possess a track record, most people will not put money into your organization until after they meet with you and your partners and feel at ease investing with you. However, the prospectus is an important first step along the way of attracting investors to your REIT.

Amend your certificate of incorporation just you have obtained commitments from 100 investors. Once you have filed the amended certificate using the secretary of state’s office, your corporation will be recognized like a REIT, which allows it to avoid paying corporate taxes upon earnings.

File Form 1120 with the Internal Revenue Service (INTERNAL REVENUE SERVICE). If you continue to pay out at least 90 percent of the REIT’s earnings as dividends to investors each year and follow another rules as well, you will retain your REIT status in addition to its tax benefits.

8 Steps To Start Your Own Expense Fund

1) Decide what you are going after. An investment is more appealing when it’s more focused on a specific niche. A fund focused on shopping malls or hotel chains is more appealing than one that doesn’t have a clear investment focus. A niche would also appeal heavily to those who have a vested interest in it. Here are some ideas to obtain you started. Buildings targeted at senior citizens, retail properties within high traffic areas, location clusters that banks will not financial.
2) Decide on where to invest. When it involves real estate, most investors will feel that little bit more secure when the properties concerned are not half way world wide. Some will not even touch houses that are halfway in the united states. Well known locations that get frequent publicity will also gather interest. So unless you have a killer nationwide or worldwide idea, your best chance for success is to identify areas how the investors you have targeted can identify with.
3) Work out how much you have to raise. This is a game for big players. And because you have come this far, you might as well go for this. Anything below 10 million is a small amount. Heck! With regard to major corporations, anything below 100 million is not worth your time and effort. If the funding that you are seeking is small, you may even have trouble convincing stock brokers to sell your product for you personally. Because it more or less takes the same amount of effort to market a $100m and a $10m REIT, a high number means a higher incentive for the brokers.
4) Declaration associated with trust (DOT). This is something you have to organize that describes the REIT. You want this to be as detailed as you possibly can while keeping it as short as possible. It is as an executive summary of your activities and numbers involved. If within doubt, check with your legal team or your advisors.
5) Deliver the DOT to brokers. Unless you already have a big listing of potential investors to market your REIT to, you will need the aid of stock brokers to sell your product to their clientele by way of their marketing channels. Include a letter listing the features and benefits using the DOT so that readers can identify the key selling points by having an overview.
6) Welcome feedback. Remember that brokers want to market a good product and are experts in their own correct. So they may come back to you with ideas and suggestions about changes that would make your offer irresistible to their customers. Even though you might brush off their inputs as you assume they don’t know real estate, make a conscious effort to give this some thought. They are after all trying to help a person. Brokers know what their clients want and if you can fine tune your product to what the market wants, you need to give it serious consideration.
7) Hire a broker. In many markets, the brokerage house will not request for payment costs upfront. They get their payment from the proceeds of the offering as well as via a stake in the trust. The fees involved change from brokerage to brokerage. Have your lawyer scrutinize the contracts before placing your signature to anything.
8) Deliver on your promise. If you are to take the proceeds and don’t follow through on your promised activities, you are acting just like a fraudulent scammer. So do deliver on your objective and uses of funds as stated inside your DOT. REITs are highly regulated investment vehicles. So make sure you have a team which ensures that you are always compliant. Failure to adhere to regulations can not only mean a heavy fine, but a large hit on your reputation as well.
In essence, if you’ve got a big idea for real estate while not having the resources and expertise to make it a kind of success. You can hire a credible brokerage firm to handle every detail for you. Their job is to guide you through the entire process. Just remember that you are making use of other people’s investment funds and you have the effect of ethical usage of the funds to achieve business objectives.
There might be REITs within REITs. Here is a list of some common property types inside them.

  • Hybrids REITs
  • Heath care facilities
  • Self storage faciities
  • Resorts
  • Home loan REITs
  • Apartments
  • Manufactured homes
  • Offices
  • Industrial properties
  • Shopping centers

 

The next offers a general summary of the basic tax law needs applicable to REITs. To qualify as a REIT, an entity must meet numerous organizational, operational, distribution and compliance requirements.

1. Organizational

REIT should be governed by directors or trustees and its shares must end up being transferable. Beginning with its second taxable year, a REIT should meet two ownership tests: it must have at least 100 shareholders (the “100 Shareholder Test”) and five or fewer individuals cannot own a lot more than 50 percent of the value of the REIT’s stock over the last half of its taxable year (the “5/50 Test”).

To make sure compliance with these tests, most REITs include percentage ownership limitations within their organizational documents. For example, many REITs do not permit just one shareholder to own more than 9. 8 percent of a REIT’s stock with no waiver from the board of directors. Due to the must have 100 shareholders and the complexity of both of these assessments, it is strongly recommended that legal and tax and securities a lawyer are consulted before forming a REIT.

2. Operational

The REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure most of the REIT’s income and assets are derived from real estate resources.

At least 75 percent of the REIT’s annual gross income should be from real estate-related income such as rents from real home and interest on obligations secured by mortgages on real home. An additional 20 percent of the REIT’s gross income should be from the above-listed sources or other forms of income for example dividends and interest from non-real estate sources (like financial institution deposit interest). No more than 5 percent of a REIT’s income could be from non-qualifying sources, such as service fees or a non-real property business.

Quarterly, at least 75 percent of a REIT’s assets must contain real estate assets such as real property or loans guaranteed by real property. A REIT cannot own, directly or not directly, more than 10 percent of the voting securities of any corporation besides another REIT, a taxable REIT subsidiary (“TRS”) or perhaps a qualified REIT subsidiary (“QRS”). Nor can a REIT own stock inside a corporation (other than a REIT, TRS or QRS) where the value of stock comprises more than 5 percent of the REIT’s assets. Finally, the value of the stock of all a REIT’s TRSs cannot comprise more than 25 percent from the value of the REIT’s assets.

3. Distribution

In order to qualify like a REIT, the REIT must distribute at least 90 percent of the sum of the its taxable income. To the extent that the REIT keeps income, it must pay taxes on such income just like every other corporation.

4. Compliance

In order to qualify as a REIT, a business must make a REIT election by filing an income taxes return on Form 1120-REIT. Since this form is not because of until March, the REIT does not make its election until following the end of its first year (or part-year) like a REIT. Nevertheless, if it desires to qualify as a REIT for your year, it must meet the various REIT tests during that year (except for the 100 Shareholder Test and the 5/50 Test, both which must be met beginning with the REIT’s second taxable 12 months. )#) Additionally, the REIT must mail annual letters to its shareholders requesting information on beneficial ownership of shares. Significant penalties will apply if a REIT does not mail these letters on time.

DISCLAIMER
Please note that the discussion established above is for informational purposes only and is not meant to constitute legal or tax advice. Since the formation and operation of the REIT involves many complex legal, securities, tax and accounting guidelines, we strongly advise you to seek professional advice from qualified attorneys, accountants and other advisors prior to beginning the procedure for forming a REIT. Since we are not providing legal advice through this Site, you should not rely upon any information contained herein for just about any purpose without seeking legal and/or tax and accounting advice from the duly licensed attorney or tax practitioner.

Leave a Reply

Your email address will not be published. Required fields are marked *