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