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Forming a real estate investment trust

On Behalf of | Aug 8, 2022 | Business Law

Commercial real estate is a complex business, and sometimes it requires complex business structures. One fairly common way to organize a real estate business is through a real estate investment trust, or REIT.

An REIT owns and leases property, from which it collects the rent. The revenue is then distributed to shareholders.

Organizing the business

When forming an REIT in Florida, owners must register the business with the Florida Department of State Division of Corporations. For federal purposes, the REIT is taxed as a corporation.

The REIT must follow the guidelines of corporations, meaning that, among other requirements, it must be governed by a board of directors or trustees. It must issue shares, and these shares must be transferable.

Second-year tests

An REIT doesn’t have to do everything right away, but it does have to get moving on more requirements quickly. In the second taxable year of its operation, the REIT must meet two tests:

  • The 100 Shareholders Test: The REIT must have 100 or more shareholders.
  • The 5/50 Test: To comply with the law, the shares of the REIT must be relatively well-distributed among the shareholders. If five or fewer shareholders own more than 50% of the stock in the REIT, the organization will be out of compliance with regulations.

In order to satisfy these tests, many REITs impose limits on the number of shares any one party can own in the organization.

On top of these requirements, REITS must also meet certain income and asset tests. They must show that at least 75% of their assets are in the form of real estate. REITs are strictly limited in the number of shares they can own in other corporations that are not REITs.

Legal help with REITs

REITs offer many advantages for real estate owners and developers. They can also provide great opportunities for individual investors who want to own shares. However, as seen above, the legal requirements on REITs are highly complex. Anyone who is interested in forming an REIT should consider first thoroughly discussing the matter with experienced real estate attorneys.