Friday, February 27, 2009

What are REITs?

About REITs: Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) were created in the 1960s so that all investors would have access to income-producing real estate through the purchase and sale of liquid securities. Before REITs were created access to investment returns of commercial real estate equity was only available to institutions and wealthy individuals.
For over half a century, REITs have become an important part of the US economy and investment markets. US REITs have grown from $90 billion to over $300 billion in the past decade and they have gained popularity all over the world.
During their early years, mortgage REITs dominated the industry, providing debt financing for commercial or residential properties through investments in mortgages and mortgage-backed securities. Interest in equity REITs which own and manage commercial properties was limited because of the requirements that ownership and management of assets remain separate. This restriction was lifted with the passage of the Tax Reform Act of 1986 which allowed REITs to both own and manage properties. Now, more than 90% of publicly traded US REiTs are equity REITs that own and manage commercial real estate. Most of their income is derived from rents owned by companies across the nation.
There are certain guidelines in place that must be followed in order for a company to qualify as a REIT in the US. The internal Revenue Code requires at least 75% of total assets be invested in real estate which realize at least 75% of its gross income from rents from real property or interest from mortgages. They must also distribute at least 90% of taxable income to shareholders annually in the form of dividends.

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