REAL ESTATE INVESTMENT TRUSTS: AN OVERVIEW

The overiding characteristic of a real estate investment trust (REIT) is that it is a creature of the tax law. In legal form the REIT is simply another variation of the old Massachusetts Business Trust. The factor which makes it unique is imparted by Sections 856-858 of the Internal Revenue Code which provide, in substance, that so long as a qualified REIT distributes at least 90% of its ordinary taxable income, and meets the other qualifications and requirements oi the Code, it will not be taxed on that portion of its income which is so distributed. It is this characteristic which has created its enormous popularity. Through the REIT vehicle, the investing public can participate in real estate investments without the large capital commitment normally required and with investment liquidity and marketability. In this sense the REIT is properly compared with a registered investment company under the 1940 Act. There are, however, significant differences. In addition, there are highly important problem areas and areas of legal uncertainty which render the establishment and operation of a real estate investment trust a task which should be undertaken only by those thoroughly familiar with the pitfalls involved. The discussion which follows is intended to be a roadmap of sorts through some of the major problem areas.