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REIT benefits
Tax-favored status
> Big tax benefit: the “dividends paid deduction”
> Subject to special tax rules to make sure just investing in real estate
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REIT benefits
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REIT benefits
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REIT benefits
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REIT benefits
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REIT benefits
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REIT benefits
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REIT benefits
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REIT benefits
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REIT structure and legal requirements
Pros
> Lower taxes = more cash to distribute to investors
> Good vehicle for certain investors to “block” US or taxable income
> Investors can contribute their properties tax-free
> Income not subject to self-employment taxes
> Investors can benefit from capital gain rates
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REIT structure and legal requirements
Cons
> More expensive: requires quarterly testing
> Limit to type of assets and fees
> Losses don’t pass to investors
> Allocations not flexible like a partnership
> Dividends are generally not “qualified”
> Dividends subject to net investment income tax
> Cannot make inside basis adjustments when stock is purchased
> Stock for services is generally taxable
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REIT structure and legal requirements
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Forming a REIT
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Advisor and compensation issues
Typical structure
Private/non-traded REIT
> External manager
> Provides asset management and top-side financial reporting
> May also provide development and property management, leasing, and
other transactional services
> Typically a related party
> Has no employees
Publicly traded REITs
> Transition to full integration with public offering
> Internalization
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Advisor and compensation issues
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Advisor and compensation issues
Carried interest
> Not common and a significant difference from typical real estate fund
structure
> Can be done/NASAA REIT considerations
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Advisor and compensation issues
Non-traded REITs
Special considerations
> Control by sponsor/advisor
> Perception
> Limited redemption programs
> Valuation
> Suitability concerns
> Current regulatory scrutiny by FINRA and states
> Access to capital
– Technical capital raising rules/compliance
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Significant “collateral” issues
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Significant “collateral” issues
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Significant “collateral” issues
Non-traded REITs
SEC requirements
> 2000 accredited/500 non-accredited investors
> $10M in assets
> Quarterly reporting
> SEC guidelines
> Sarbanes-Oxley compliance
> Jobs Act exemption
> Public float considerations
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Significant “collateral” issues
Non-traded REITs
Public offering
> S-11
– Investment policies
– Character of properties
– Operational data
– Management arrangements
– Guide 5 – past performance requirements
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Significant “collateral” issues
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Significant “collateral” issues
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Significant “collateral” issues
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Significant “collateral” issues
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Significant “collateral” issues
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UPREITs and DownREITs
UPREIT
> Allows property contributors to defer gain while participating in REIT
ownership
> Generally, at contribution, the taxpayer receives units in the UPREIT
partnership equal to the FMV of property contributed, less any cash
received in return
> The value of the unit “tracks” the value of the REIT stock, not the value
of the underlying assets
> At its option, the taxpayer is able to convert to REIT shares or receive
cash (both are taxable)
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UPREITs and DownREITs
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UPREITs and DownREITs
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UPREITs and DownREITs
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UPREITs and DownREITs
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UPREITs and DownREITs
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Disclaimer
Baker Tilly
The information provided here is of a general nature and is not intended to address the specific
circumstances of any individual or entity. In specific circumstances, the services of a
professional should be sought. Tax information, if any, contained in this communication was
not intended or written to be used by any person for the purpose of avoiding penalties, nor
should such information be construed as an opinion upon which any person may rely. The
intended recipients of this communication and any attachments are not subject to any limitation
on the disclosure of the tax treatment or tax structure of any transaction or matter that is the
subject of this communication and any attachments. Baker Tilly refers to Baker Tilly Virchow
Krause, LLP, an independently owned and managed member of Baker Tilly International..
© 2015 Baker Tilly Virchow Krause, LLP
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