Setup Prive REIT

Setting up a private REIT (Real Estate Investment Trust) involves a series of steps to ensure compliance with legal and operational requirements to qualify and maintain status as a REIT, which offers significant tax advantages. Here’s a detailed guide on how to establish a private REIT and its compliance requirements:

Steps to Setting Up a Private REIT

1. Form a Taxable Entity: Begin by creating a corporation, typically set up as a management company initially. This entity will eventually transition into a REIT.

2. Draft a Private Placement Memorandum (PPM): This document outlines the investment opportunity and includes:

   • The objective of the REIT.

   • Profiles and expertise of the management team.

   • Financial information and projections.

   • Description of how profits will be distributed.

   • Fees involved and rules for selling shares.

   • Potential risks and the agreement terms between the company and investors.

   Legal assistance is advisable to ensure all regulatory aspects are covered.

3. Find Investors: Attract at least 100 investors to meet IRS requirements for REIT status. Ensure that no five or fewer investors own more than 50% of the shares to avoid the REIT being taxed as a personal holding company.

4. Convert the Management Company into a REIT: Amend your corporation’s certificate of incorporation to officially form the REIT and change the company structure.

5. File IRS Form 1120-REIT: This form is used for the REIT to request tax treatment as a REIT and to demonstrate compliance with all IRS requirements.

Compliance and Organizational Requirements

• Board Governance: A REIT must be governed by a board of directors or trustees.

• Transferable Shares: Shares of the REIT must be transferable.

• Ownership Tests: Comply with the "100 Shareholder Test" by the second year and the "5/50 Test" to prevent more than 50% of shares being held by five or fewer individuals.

• Annual Letters to Shareholders: Issue annual letters to shareholders to verify the distribution of shares and compliance with the ownership tests.

Operational and Income Requirements

• Asset Composition: At least 75% of the REIT’s assets must be tied to real estate, including real property or real estate mortgages, on a quarterly basis.

• Income Sources: At least 75% of the REIT’s gross income must come from real estate-related activities such as rents or mortgage interest. A further 20% can come from real estate and other approved sources, with no more than 5% from unrelated business activities.

• Dividend Distribution: The REIT must distribute at least 90% of its taxable income to shareholders as dividends annually.

Additional Considerations

• Securities Law Compliance: Due to the complex rules governing share ownership and distribution, it is crucial to consult with tax and securities law experts when setting up a REIT.

• Ongoing Compliance: Maintaining REIT status requires continuous adherence to income, asset, and dividend payout requirements. Failure to comply can result in significant tax implications and penalties.