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“The Proliferation of Real Estate Investment Trusts and How to Deal With Them” By Edward Hannon and Everett Ward

Following is an excerpt:

Over the past few years, many real estate professionals have seen significant expansion in the number of entities that are organized as real estate investment trusts (REITs). According to the National Association of Real Estate Investment Trusts, there are more than 40,000 properties across the United States that are owned by REITs. In light of this statistic, it is becoming more likely that many real estate professionals will find themselves involved in some type of transaction that involves at least one party that is a REIT. 

What Is a REIT? 

The allure of a REIT is that—if certain qualifications are met—it will not be subject to an entity level tax on its net income. In addition, a REIT is not a flow-through entity for income tax purposes. Thus, unlike a limited liability company that is taxed as a partnership, if the entity maintains its status as a REIT, the income tax liability arising from the REIT’s activities can be limited to the tax imposed on the REIT shareholders on the dividends received from the REIT. In order to obtain the special tax status afforded to REITs, the entity must satisfy certain organizational tests. In addition, throughout its existence as a REIT, the entity must satisfy various income tests and asset tests. The specific tax rules that apply to REITs, or the various circumstances in which a REIT will be subject to tax at the entity level, are beyond the scope of this article. However, as the number of properties owned by REITs expands, real estate professionals will need to obtain a basic understanding of how the tax rules that apply to REITs will affect how transactions are structured.