A real estate investment trust, or REIT, is a company that owns, and in most cases, operates income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Over nearly half a century, the U.S. real estate investment trust (REIT) industry has become an important segment of the U.S. economy and investment markets. U.S. REITs have seen their equity market capitalization soar from $90 billion to more than $300 billion in just the past 10 years. In the process, that growth has set the stage for the adoption of the REIT approach to securitized real estate investment across the globe.
Congress created REITs in the U.S. in 1960 as a way to make investment in large-scale, income-producing real estate accessible to all investors in the same way they typically invest otherwise—through the purchase and sale of liquid securities. Prior to the creation of listed real estate equities, access to the investment returns of commercial real estate equity as a core asset was available only to institutions and wealthy individuals having the financial wherewithal to undertake direct real estate investment.
In its early years, the industry was dominated by mortgage REITs, which provide debt financing for commercial or residential properties through their investments in mortgages and mortgage-backed securities. The market's interest in equity REITs, which today usually both own and manage commercial properties, initially was limited because the ownership and management of assets were required to remain separate. That restriction changed with the passage of the Tax Reform Act of 1986, which permitted REITs to both own and manage their properties as vertically integrated companies and helped set the stage for a secular wave of equity REIT IPOs in the mid-1990s. Currently, more than 90 percent of the nearly 200 publicly traded U.S. REITs are equity REITs that own and most often manage commercial real estate and derive most of their revenue and income from rents. In aggregate, these companies own properties across all major property sectors and all major geographic regions.
In order for a company to qualify as a REIT in the U.S., it must comply with certain ground rules specified in the Internal Revenue Code. These include: investing at least 75 percent of total assets in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of dividends.
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