REITS

Is a REIT the right structure for your REAL ESTATE OPPORTUNITY? Real Estate Investment Trusts were approved by Congress in the 1960s to allow the general public a means to access the benefits of ownership of commercial real estate.  But are they the right route for you to take?

REITS ARE EXPENSIVE.  An offering document for a Regulation D private placement might run $50,000 to $150,000, depending on the law firm and the complexity of the transaction. To file a fully registered REIT, assume your costs will exceed $1,000,000 for legal and accounting and printing. There are middle ground positions.  You might consider development of a private REIT, where REIT tax status is accomplished for a real estate firm where they raise their capital via a Regulation D offering.  We are hearing of firms considering the new Regulation A vehicle as an option.  Please factor in the cost of accessing capital, typically $3 – $5 million of net expense in the initial year for a non traded but fully registered REIT. If you wish to have your REIT listed, many analysts will tell you to wait until you control over $1 billion in assets. For a NYSE REIT, you may be facing auditing fees around $1 million/year.  Remember to have form FOLLOW substance. A REIT is but a form, which works exceptionally well for some situations, but it is simply not the answer to all real estate companies.

REITS ARE COMPETITIVE. The REIT market has grown significantly over the last ten years.  There are hundreds of traded REITs, but those that don’t excel are nudged toward sale or merger. Win big or go home! In the non-traded REIT world, if a NTREIT does not raise and invest over $5 million/month by the end of its initial 18 month existence, it is unlikely they will ever grow to cover their dividend and hence they will collapse from distributing capital they are not earning. The top 10 NTREITs – of 45 in the market – raise over 80% of the capital available. If you don’t win big, you will end up being eliminated from the business, and your will be sent home.

REITS CAN BE WONDERFUL.  When the world was still in shock from the deep recession, and traditional capital sources were not to be found, traded REITs with a sound balance sheet had access to almost unlimited debt and equity.  This pattern was first observed in the late 1980s/early 1990s, where after a collapse in the real estate market following the 1986 tax act, traded REITs with a sound balance sheet were the first to effectively tap sources for debt and equity. At the end of the day, potential easier access to capital is the reason why real estate owners flock to REITs. It is important to also understand the limits which come with REITs.

If you have an interest in developing a REIT, please contact us (rick@chesslawfirm.com) and we will find a time for a free 20 minute consultation.  You may also want to consider reading the article below.

REIT Boards – Are they doing their job?