Many people interested in making business and earning big money, become more and more interested in the real estate market. We can find many possibilities in earning thanks to real estate. For example, it is possible to create a REIT. A Real Estate Investment Trust is a company specialized in investments and operations in the real estate assets market. These types of corporations are good for individual investors who are afraid of risk. REITs allow for having shares of properties that generate income. Real Estate Investment Trusts invest in office buildings, shopping centers, hotels or residential apartments and members of these Trusts do not need to buy these assets on their own. It is good to mention that a REIT pays out at least 90% of its annual taxable income for its shareholders in the form of dividends, so shareholders do not have to be worried about a corporate income tax.
Setting up a REIT
The first important step in the process of creating a REIT is drawing up a special partnership agreement. This document designates the percent ownership, responsibilities of REIT partners and financial contributions. A corporation needs to have at least 100 investors after the first year of its existence, so most REITs start as management companies. They do it to qualify as a REIT. Having a good partnership agreement is a very good idea because this document helps to avoid costly mistakes or disagreements.
The next important task is incorporating a management company with the secretary of the state in which a REIT will operate. REITs are taxed as corporations, so most management firms that want to become REITs begin their adventure as limited liability corporations. Another important thing is the fact that a Real Estate Investment Trust has to be managed by a board of directors or trustees. It also has to invest at least 75% of its assets in real estate and generate a minimum of 95% of income from investments of this type.
An offering prospectus (or private placement memorandum or PPM) is another thing that you have to remember about when setting up a REIT. It provides information about the main principals of a corporation. It also informs about investment strategies and plans. Thanks to this PPM, potential investors receive useful information and they can decide to join this REIT or to look for another one. Of course, this prospectus has to be offered to potential investors.
After reaching 100 investors, it is important to amend the certificate of incorporation, so it will become a REIT, so you will avoid paying corporate taxes on earnings.
Remember to file Form 1120 with Internal Revenue Service. If you want to keep your REIT status and its tax benefits, you have to pay a minimum of 90% of the REIT earnings as dividends to your investors each year and follow other important rules.
Is there any help required?
Keep in mind that legal requirements associated with creating a REIT change very often, so it is good to consult or hire a lawyer. Thanks to this solution, you can be sure that you complete the appropriate steps according to the current law.
