In California, a real estate investment trust is “any unincorporated association or trust formed to engage in business and managed by, or under the direction of, one or more trustees for the benefit of the holders or owners of transferable shares of beneficial interest in the trust estate and (1) that formed for the purpose of engaging in business as a real estate investment trust under the Federal Internal Revenue Code, (2) the sale of the shares of which has been qualified at any time by the Commissioner of Business Oversight pursuant to the Corporate Securities Law of 1968, and (3) that in good faith has commenced business as a real estate investment trust.” (Cal. Corp. Code § 23000(a)-(b).) The Real Estate Investment Trust originated in 1960 with the Real Estate Investment Trust Act.
Generally, the real estate investment trust allows individual investors to invest in large-scale commercial real estate projects. However, there are certain requirements that the law imposes for a real estate investment trust to be valid. There are four different categories of requirements for a real estate investment trust imposed by the law; (1) organizational requirements; (2) asset requirements; (3) income requirements; and (4) distribution requirements.
At the Underwood Law Firm, our attorneys are more than familiar with real estate investment trusts and the requirements that need to be fulfilled to have a real estate investment trust.
Organizational Requirements
Under federal law, there are five organizational requirements for eligibility to be a real estate investment trust.
First, the trust must be organized as a business trust, association, or corporation. (26 U.S. Code § 856(a).) A business trust is a trust that delegates authority to control the beneficial interest of a business. Essentially, a business trust works similarly to a general trust, where the assets of a business are put within the control of the trustee, who has the responsibility of managing the trust. An association is a group of individuals that work together to carry out a joint venture. A corporation is an entity incorporated with the state compromising of a group of individuals or entities who conduct the corporation’s activities.
Second, the trust must be managed by one or more trustees or directors. (26 U.S. Code § 856(a)(1).)
Third, the trust must have beneficial ownership, and this beneficial ownership must be evidenced by transferable shares or transferable certificates of beneficial interest. (26 U.S. Code § 856(a)(2).) Transferable shares are shares that can be freely traded. A certificate of beneficial interest is a document that evidences a beneficial interest in a real estate investment trust, and that certificate is transferable when it can be freely traded.
Fourth, the trust must be taxable as a domestic corporation. (26 U.S. Code § 856(a)(3).)
Finally, the trust must be beneficially owned by 100 or more persons. (26 U.S. Code § 856(a)(5).)
Asset Requirements
Federal law has specific requirements regarding the assets of a real estate investment trust. The purpose of these asset requirements is to ensure that much of the assets of the real estate investment trust would be for the purpose of real estate investment. First, at the close of each quarter of the taxable year, at least 75% of the value of the trust’s total assets must be represented by real estate assets, cash and cash items, and government securities. (26 U.S. Code § 856(c)(4)(A).) Second, not more than 25% of the value of total assets can be represented by securities. (26 U.S. Code § 856(c)(4)(B)(i).) Third, not more than 20% of the value of total assets can be represented by securities of one or more taxable trust subsidiaries. (26 U.S. Code § 856(c)(4)(B)(ii).) Fourth, not more than 25% of the value of total assets can be represented by nonqualified, publicly offered real estate investment trust debt instruments. (26 U.S. Code § 856(c)(4)(B)(iii).) Finally, (1) not more than 5% of the value of total assets can be represented by securities of any one issuer; (2) the trust does not hold securities with more than 10% of the total voting power of the outstanding securities of any one issuer; and (3) the trust does not hold securities with a value of more than 10% of the total value of the outstanding securities of any one issuer. (26 U.S. Code § 856(c)(4)(B)(iv).)
Income Requirement
Federal law also imposes requirements on the income of a real estate investment trust. At least 75% of the trust’s gross income must be derived from (1) rents from real property; (2) interest on obligations secured by mortgages on real property or on interests in real property; (3) gain from the sale of real property that is not property held primarily for the sale to customers in the ordinary course of the trust’s business; (4) dividends on the gain from the sale of transferable shares in other real estate investment trusts; (5) abatements and refunds of taxes on real property; (6) income and gain derived from the foreclosure of property; (7) gains from the sale of real estate assets; and (8) qualified temporary investment income. (26 U.S. Code § 856(c)(3)(A)-(I).) The purpose of these income requirements is to guarantee that a majority of the real estate investment trust’s gross income is derived from real estate related investments.
Distribution Requirements
The last set of requirements necessary to be satisfied to obtain status as a real estate investment fund is distribution requirements. For every taxable year, the real estate investment trust must make a distribution of 90% of the trust’s taxable income for that taxable year. (26 U.S. Code § 857(a)(1)(A)(i).) The distribution must be in the form of dividends to the shareholders of the trust. (26 U.S. Code § 857(a)(1).)
How the Attorneys at the Underwood Law Firm Can Help
A real estate investment trust allows a group of individual investors to invest in more large scale real estate investments. However, to achieve status as a real estate investment trust, there are several requirements that need to be satisfied. The requirements are for the purpose of ensuring that much of the real estate investment trust’s assets and income are real estate related. As each case is unique, litigants would be well-served to seek experienced counsel familiar with the ins and outs of real estate investment trusts and the law surrounding them. At the Underwood Law Firm, our knowledgeable attorneys are here to help. If you believe you satisfy the requirements for a real estate investment trust, are worried about your ability to satisfy the requirements of a real estate investment trust, or if you just have questions, please do not hesitate to contact our office.
