Real estate holding company vs REIT

8 Replies

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.

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.

Buy and hold is vastly different than a REIT.

As Chris mentioned there are significant tax related issues and securities issues with a REIT.

If you are the typical buy and hold investor, a REIT is definitely not the way to go.

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@Duncan Taylor - are you saying the buy/hold style is different from what an REIT does? reason im asking for clarification on that is because to my understanding, REITs commonly generate their income through holding their properties for the cash flow like buy/hold investors do - one of the laws of an REIT is to have 95 percent of its income derived from dividends, interest, and property income - which indicates a buy/hold strategy - maybe I misinterpreted your words though, which is why I asked for clarification

I could be wrong but I believe on discussion on here before setting up a REIT could cost 500,000 or more.

A PPM or other structure for a smaller operation could go from 15,000 to 50,000 to start .

REIT is for really growing huge and tax advantages. Some smaller non-traded REIT's go slow until they time the public offerings just right. It's a very involved and expensive process that must be timed right to do correctly from my talks with companies that are doing this in infancy stages. Sometimes they will try to talk a property owner into exchanging the property and equity for an UPREIT stake into their company.

Originally posted by @Deion Alaei :
@Duncan Taylor - are you saying the buy/hold style is different from what an REIT does? reason im asking for clarification on that is because to my understanding, REITs commonly generate their income through holding their properties for the cash flow like buy/hold investors do - one of the laws of an REIT is to have 95 percent of its income derived from dividends, interest, and property income - which indicates a buy/hold strategy - maybe I misinterpreted your words though, which is why I asked for clarification

I probably wasn't clear. Being a buy and hold investor is not the same as forming a REIT.

A REIT is a security offering, it comes with a lot of regulation and compliance overhead.

@Duncan Taylor Oh ok, now I understand. Thank you for clearing that up for me. I initially thought you were referring to the operational differences, but now I understand that you were referring more to the process and legal differences. I'm glad we discussed it.

@Joel Owens That makes a lot of sense. I was aware that there are legal differences as far as requirements etc. and its nice to get an answer with a different perspective/aspect of it - it makes it easier for me to understand the real differences. Thank you Joel, I appreciate your response.

Overall - I understand there are differences between the two as far as legally and compliance-wise, but my question was more in regards to what are the operational/strategy differences - a buy/hold investors holds his properties for the cash flow, and so does an REIT for the most part - and my question was more about is there really any difference between the 2 other than legal formalities. Thank you guys for your responses - I appreciate it very sincerely

@Deion Alaei here's a link to an example REIT financial filing with the SEC. http://www.sec.gov/Archives/edgar/data/1562401/000119312513366794/d585267ds11.htm

The REIT says: "Our objective is to generate attractive, risk-adjusted returns for our shareholders through dividends and capital appreciation." You won't find the word "cash flow" or "income" under 'Our Competitive Strengths' or under 'Our Business and Growth Strategies' sections. Cash flow only matters for their payouts to Series C Convertible Units. This is a Wall Street REIT and is completely different from a holding company that produces income. It's all about getting fees, paying management, and doing the IPO to get paid more.

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