Real estate holding company vs REIT

[Deion Alaei]

Hey BP,

I wanted to ask the BP community a question regarding the difference between a real estate holding company and an REIT.

I've researched REITs and what the legal requirements are in order to be classified as one. Having said that, with the exception of a couple of legal formalities, I'm having difficulties seeing the difference between the two.

If you're a buy/hold commercial real estate investor and you acquire your properties via an LLC, is what you're doing that much different from an REIT?

Both structures own income producing real estate, and comprises the vast majority of their holdings - what am I missing?

The only answers I can come up with are things like some REITs are publicly traded, and REITs are required to have 100+ shareholders - aspects that real estate holding companies are not required to have/be.

If anybody can explain to me the differences between the two, I welcome and appreciate your responses/comments.

Thank you.

[Chris Martin]

The REIT tax laws are extensive and full compliance is necessary to retain the tax advantages of a REIT. REITs need to pay out 90% of income to share (actually 'unit') holders. There are rules on disposition of property from the trust... 'prohibited transactions' that don't impact LLCs. Investment trusts are nothing like a pass-through entity such as an LLC. And the 100 unit holder minimum is a big difference. Lots of people on BP seem to operate as single member (1 person) LLCs. Apples and Oranges.