REITs or Real Estate Investment Trusts are defined as “companies that buy, develop, manage and sell real estate properties”.
REITs are considered “pass-through entities,” meaning that as long as certain conditions are met set forth by the Internal Revenue Code, they are not subject to corporate income taxes and in many cases state taxes as well.
The main condition that REITs must meet to qualify for corporate tax exemption is that it must pay 90% of its taxable income out in dividends.
Some other conditions that must be met include: must be managed by a board of directors or trustees, must have at least 100 shareholders, must have shares that are fully transferable, and the company must obtain at least 75% of its gross income from rents or interest on rental property mortgages.
Congress created REITs so that average investors could profit and participate in the commercial real estate boom. The bill was signed by President Eisenhower in 1960.
There are three categories of REITs which are “equity” (invest in and own properties making revenues mainly from rent), “mortgage” (dealing mainly with property mortgages, revenues come primarily through interest on loans) and “hybrid” (a combination of tactics from both equity and mortgage styles).
REITs can invest in all kinds of commercial real estate, but typically they specialize in one category like apartments, shopping centers, hospitals, storage facilities, hotels, etc. Others choose to focus their specialization to a certain geographical location.
There are roughly 190 REITs registered with the Securities and Exchange Commission in the United States.
REITs are desirable investments because they typically offer stable, solid returns and are considered low risk.