REIT status: Overview, definition, and example
What is REIT status?
REIT status refers to the designation of a Real Estate Investment Trust (REIT), a company that owns, operates, or finances income-generating real estate while benefiting from special tax advantages. To maintain REIT status, a company must meet specific IRS requirements, including distributing at least 90% of taxable income to shareholders and deriving most of its revenue from real estate-related activities.
For example, in a commercial real estate investment, a company structured as a REIT allows investors to earn income from rental properties without directly managing them. Similarly, in a mortgage REIT, the company finances property loans and distributes interest income to shareholders.
Why is REIT status important?
REIT status provides tax benefits, investor protections, and regulatory compliance requirements for companies specializing in real estate. Maintaining this status allows exemptions from corporate income tax, provided that the REIT follows the required distribution and income rules.
For businesses, a REIT status clause in agreements helps ensure compliance with tax regulations, protect shareholder benefits, and define operational restrictions. It also clarifies that the company will take necessary actions to maintain REIT eligibility.
Understanding REIT status through an example
Imagine a real estate investment company that qualifies as a REIT. To maintain its REIT status, the company distributes 90% of its income from rental properties to shareholders annually. This allows the company to avoid paying corporate income tax while ensuring investor returns.
In another scenario, a REIT specializing in healthcare properties signs a financing agreement. The contract includes a REIT status clause, requiring the company to comply with IRS REIT regulations, such as limiting investments to qualifying real estate assets.
Example of a REIT status clause
Here's an example of a REIT status clause:
“The Company shall maintain its status as a Real Estate Investment Trust (REIT) under applicable tax laws and regulations. The Company agrees to comply with all REIT qualification requirements, including the distribution of at least 90% of its taxable income to shareholders. Any actions that may jeopardize the Company's REIT status shall require prior approval from the Board of Directors.”
Conclusion
REIT status clauses ensure compliance with tax laws, protect investor benefits, and establish operational guidelines for real estate investment trusts. They help define income distribution requirements, restrict non-qualifying activities, and maintain eligibility for tax advantages.
By including a REIT status clause in agreements, businesses can protect their tax-exempt status, ensure compliance with regulatory requirements, and safeguard investor returns.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.