Finance Real Estate Investment Trust Analysis

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Economics

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1. Identify, study and compare three U.S. traded REITs.

2. Compare the REIT industry and the three REIT companies to the stock market and other sectors.

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SECURITIZED REAL ESTATE MARKETS TOPICS • REITS and Liquid Real Estate • REIT Market Performance Ch. 21/22 Ch. 24/26 1 REITs and Liquid Real Estate • REITs (Real Estate Investment Trusts) were created by Congress in 1960 to make investments in large scale, income producing real estate accessible to all investors • REITs were not a major force until the early 1990s, as banks, insurance companies, tax syndicates, and pension funds provided the bulk of capital for real estate. 2 C-Corps vs. REITs Structure Pros Cons C-Corp - Ca n reta i n more ca s h fl ow for growth - Si mpl er corpora te s tructure - No l i mi ta ti ons on the types of bus i nes s es performed - Pa y corpora te ta x REIT - No corpora te ta x - La rge Di vi dend pa yments - More dependent upon equi ty s peci a l i s ts to ra i s e growth ca pi ta l - Numerous opera ti ng res tri cti ons Partnerships - No corpora te ta x - Ta x l i a bi l i ty wi thout di s tri buti on - Cumbers ome governa nce s tructure 3 REIT vs. Publicly Traded Real Estate Companies • The REIT decision revolves around the gains from single taxation (estimated at 3-5% of the value of the assets) versus the costs of the operating restrictions. • If you believe more value is created by avoiding double taxation than is destroyed by the operating restrictions, you will select REIT status. • One reason why most private companies are not REITs, is that to qualify as a REIT you must have a least 100 shareholders, and no 5 shareholders taken together can control 50% of the equity. At least 90% of the taxable income has to be distributed as dividends. 4 Public Vs. Private • The decision to go public depends on the desire to access large pools of anonymous capital, versus the willingness to adhere to the rules imposed on public companies. • What are these rules? – They are many, including: reporting executive salaries; detailed audited financials; disclosing material information such as planned financings, developments, and major tenant lease expirations; describing material mistakes made in the course of business; and paying lawyers and accountants to create documents for the SEC. 5 Taxable REIT Subsidiary REITs can offer ancillary services as long as they do not become the company’s primary business, and as long as the REIT carves out the income from such services into a taxable subsidiary. Simply stated, “non-real estate” income cannot be sheltered from taxes by REIT status. – For example, a REIT can offer dry cleaning pick-up services to tenants via its taxable REIT subsidiary. 6 UPREIT Structure 7 Summary • The economic functions of secondary mortgage markets outweigh the risk. • Three types of risks involved in MBS are the default risk, prepayment risk, and interest rate risk. The risks can be separately measured. • CMBs tend to take the CMO or CDO structure with many rated tranches. • Real estate private equity funds are relatively new forces in the commercial real estate market. Some private funds are no longer “private” but they still serve the same goals. • REITs are the main sector of liquid real estate. They have been a stabilized industry since 1982. REITs provide public trading data to reflect the overall real estate market conditions. 8
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Real Estate Investment Trust (REIT) Outline
Thesis statement: A real estate investment trust (REIT) is an organization that mainly invests in
income-generating real estate and is purchased and sold like a stock.


Analyzing, studying and comparing three US traded REITs- Equity REITs, Mortgage
REITs, and Hybrid REITs.



Comparison between REIT industry and the three REIT companies to the stock market
and other sectors.


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Real Estate Investment Trust (REIT)

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Real Estate Investment Trust (REIT)
Identify, study and compare three U.S. traded REITs
A real estate investment trust (REIT) is an organization that mainly invests in incomegenerating real estate and is purchased and sold like a stock. In REIT, the real estate fund is a
mutual fund that mainly invests in funds or securities provided by public r...


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