7.2.1 Structure and Funding of REITs
REITs acquire funds through either an IPO or by continually issuing new shares, depending on how they are set up. Thus, REITs may be closed-end, in which case they issue shares to the public once and issue additional shares only if current shareholders approve. Or they may be open-end, in which case they continually issue new shares and redeem shares at any time. REITs may trade on an exchange or over the counter.
A REIT must be set up as an entity that is taxable as a corporation (that is, a for-profit company). REITs are generally exempt from corporate taxation, however, as long as they distribute at least 90% of their income to their shareholders. REITs do face corporate taxation on any retained earnings, and therefore, most REITs pay out 100% of their taxable income as dividends. Thus, REITs pay out nice dividends and are suitable for investors who need regular income, and the dividends are not subject to double taxation like most corporate dividends.
There are three types of REITs. The first are REITs that trade on national securities exchanges, which are sometimes called listed REITs. The second are REITs that do not trade on a national securities exchange, which FINRA refers to as publicly registered non-exchange traded REITs. They may also be called non-listed REITs or non-traded REITs. The final type of REIT is a private placement REIT, which neither trades on an exchange nor is subject to the registration requirements of the Securities Act of 1933.
Both listed and non-listed public REITs are subject to the same IRS requirements described earlier. Additionally, both exchange-traded and non-listed REITs must register with the SEC and both are required to make regular SEC disclosures, including filing a prospectus, as well as both quarterly and annual reports. Filed financial reports must be made be available to the investing public via the SEC’s EDGAR database.
While these two types of REITs share n