🠈 Real Estate Investment Trust 🠊
Real Estate Investment Trust
A real estate investment trust (REIT) is a class of investment that was created by the US government in 1960. The legislation was attached to the Cigar Excise Tax (public law 86-779). The primary proponent of the bill was Virginia Representative Joel Broyhill (R). It was signed by President Dwight D. Eisenhower.
The National Association of Real Estate Investment Trusts (NAREIT) is a Washington-DC based association that promotes the development of REITs. It was formed the day after the signing of the Cigar Act (A trillion dollar industry was created as an amendment to a Cigar Tax bill. There is something tremendously wrong going on here!)
The goal of the REIT legislation was to give investors an opportunity to invest in income producing property. REITs have different taxation rules. For example the rules require that the REITs pay out a large portion of the income in the form of dividends.
REITs respond to economic cycles differently than stocks and bonds. Financial advisors suggest that investors include REITs into their portfolios as a hedge.
mREITs (Mortgage REITS) are designed to earn money from mortgage payments and invest in Mortgage Backed Securities. mREITs grew substantially after the economic collapse.
Common Uses of REITs
REITs are designed for investing in income producing real estate. REITs are common in any industry where income is produced by property. REITS are used for developing apartments, shopping centers, warehouses, hospitals, hotels and timberland.
REIT-type investment structures are available in 30 different nations. There are now many international REITs.
REITs and Local Communities
REITs were designed to invest in income producing properties. REITs have tremendous impacts on local communities because REITs properties that produce income are extremely important to local communities.
Notable, REITs were used to develop the nationwide network of shopping centers and Shopping Malls. Shopping malls tend to be filled with national retailers. REITs would create a strange structure where the primary shopping district in a community was owned by an investment firm in NY. The mall was filled with shops owned by large corporations in Chicago or San Francisco.
REITs always form around those properties which produce tangible income. The income from these valuable properties flow out of the community and into the REIT.
REITs have no interest in property that does not produce. For example: Roads are valuable things but they do not produce income. Local communities are saddled with all the unproductive properties, but are at a loss because the income that used to flow from the productive properties are now going to an investment firm in NYC.
REITs are a primary instrument in the system dissolution of local ownership throughout our nation.
A key component of ownership is "say-so." By "say-so," I mean the ability to affect what is going on. So, let's say you invest $100,000 in the billion dollar REITs that owns the Mall; You have zero "say-so" in what goes on at the Mall. There is a very small number of people in a far away place that control the mall. You are as powerless as the the workers in the mall in determining what happens at the mall.
REITs and False Economies
Like everything else in our society, REITs are highly regulated. Reading through reit.com I come across interesting tidbits such as the claim that tax policies regulate how income is distributed through REITs. Another page notes that REITs cannot pass through tax losses to capital investors.
It would take several years to discover all the false economies created by REITs. We can see an example in the storage industry. Self-Storage companies are usually organized as REITs. Companies have started creating these movable storage containers (pods).
This new "pod" industry is all about moving pods around and is less about the real estate. Since the finances of the storage industry is regulated by REIT legislation, these strange regulations appear to be hampering the evolution of the pod industry.
Conclusion
I think it is great to come up with innovative ways to invest and finance properties. The REIT industry appears to have a negative affect on local communities and it appears to create false economies.
The big financiers behind REITs love the structure. The REITs structure appears to have created several billionaires. Here is a video by Nareits:
References:
- Wikipedia - REITs (Drawn 12/12/2017)