res3400 final

book value per share

(assets-liabilities)/shares

REIT Income requirements

- at least 95% of the entities gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets. -at least 75% of gross income must be derived from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

Stock and ownership requirements

-The REIT must be taxable as a cooperation -REIT must be managed by a board of directors or trustees -Shares in REIT must be fully transferable -shares in REIT must be held by a minimum of 100 persons -no more than 50% of REIT shares may be held by five or fewer individuals during last half of taxable year

REIT asset requirements

-minimum of 75% of the value of REITs assets must consist of real estate, cash, and government securities. -not more than 5 percent of value of the assets may consist of the securities of any one issuer if the securities are not includable under the 75% test - a REIT may not hold more than 10% of outstanding voting securities of any one issuer -not more than 25% of its assets can consist of stocks in taxable REIT subsidiaries

National association of REIT classified types of private REITs

1. REITs targeted to instituional investors that take large financial positions 2. REITs syndicated to investors as part of a package offered by a financial consultant 3. "incubator" REITs that are funded by venture capitalists with the expectation that the REIT will develop a sufficient track record to launch a public offering in the future

five ways a REIT can grow income and increase funds

1. growing income from existing properties 2. growing income through acquisitions 3. growing income through development 4.growing income through provision of services 5.financial engenering

Two key financial relationships when analyzing an equity REIT

1. judgment of the investment performance and risk 2. the comparison of the prospective equity REIT with other REITs

dividend yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. Annual dividends per share ---------------------------------- price per share

accretive transaction

An accretive acquisition occurs when the value of the buyer increases as a resulting of acquiring a specific company.

blended capitalization rate

An interest rate charged on a loan, which is in between a previous rate and the new rate. Blended rates are usually offered through the refinancing of previous loans, and charge a rate that is higher than the old loan's rate but lower than the rate on a new loan.

Six criteria for treatment like a cooperation

Buisiness association, an objective to carry on the business and divide the gains therefrom, continuity of life, centralization of management, limited liability, and free transferability of interest. (a corporation must have more corporate than non corporate characteristics to be classified as a corporation for tax purposes)

Cash available for distribution

CAD treats recurring expenses as expenses rather than capital items, providing a more conservative estimate of the potential stream of income available for dividend purposes.

Equity Trust

Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Use of straight line rents and FFO

FFO estimate will be lower than the actual revenue in the later years of the lease

Cash retention per share

FFO- dividend per share

Safe harbor rules

IRS imposed guidelines that impose certain ownership and minimum capital requirements. For example: limited partners may not own more than 20% of corporate stock.

Mortgage REITs

Mortgage REITs do not own real property. rather, it owns mortgage paper secured by the underlying real property. income generated by the mortgage paper is affected by the interest rate on the mortgage note, the discount (or premium) at which the obligation is acquired, and the amount of funds outstanding on the loans.

S corporation

Must elect to be an S corp at time of incorporation and must have: no more than 100 shareholders, no corporations as shareholders, no nonresident investors, and no more than one class of stock. Allows pass though taxation. Limited liability for shareholders.

NAV formula

NAV= NOI/ blended cap rate

FFO formula

Net Income + Depreciation + Amortization - Gains on Sales of Property

FFO (funds from operations)

REIT equivalent of earnings in industrial stocks. Used by analysts and investors as a measure of the cash flow available to the REIT for dividends to shareholders.

Private REIT

REITs that are not listed on an exchange or trader over the counter. in many cases these REITs are actually public companies, but are not listed. typically sell subscriptions of shares through financial planners to investors at a fixed price.

Additional costs of being a public company

REITs typically have to purchase insurance for directors and officers, pay directors fees, pay for listings on stock exchanges, and file annual and quarterly reports with the SEC.

Gordon dividend discount model

Value= dividend to be paid in the next year/ (required rate of return- dividend growth rate)

Umbrella partnership REIT

a REIT that owns a controlling interest in a limited partnership that owns the real estate, as opposed to traditional structure where REIT directly owns the real estate. Done as a tax-differed mechanism

C corporation

a legal and taxable entity owned by one or more shareholders and managed by directors. limited liability for shareholders who can only loose their equity investment. No option for pass-through taxation

Limited liability partnership

a legal ownership made up of many limited partners. no definite term. each partner is responsible for business management.

REIT

a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its taxable earnings in addition to any capital gains generated from the sale of disposition of its properties. (REIT DOES NOT PAY TAXES ON ITS EARNINGS)

REIT Modernization act

allows REITs to compete more effectively with other owners of commercial real estate. provides for the establishment of taxable REIT subsidiary that can be 100 percent owned by REIT.

special allocation

allows flexibility in the ability to allocate the benefits of a real estate investment between the general and limited partners

accredited investor

an investor with a special status under financial regulation laws. executives or high profile/money

IRR lookback

any cash flow remaing after each party has received capital equal to their initial investment will be split in a predetermined proportion, such as 50% to each party

REIT expansion and growth

because of the requirement that 90 percent of earnings be paid out as dividends, REITs have limited oppurtunity to retain cash flow or acquire additional real estate assets (very little free cash flow). REITs plan for expansion by reserving the right to issue additional stock at some future time. analysts may view eventual issuance of these shares as a potential source of dilution of future earnings.

Taxable REIT subsidiary (TRS)

can provide services to REIT tenants, pay any associated income tax, and pass the income up to the REIT as qualifying income

REIT distribution requirements

distributions to shareholders must equal or exceed the sum of 90 percent of REIT taxable income

Recovery of Capital

dividend per share- earnings per share

Self advised REIT

do not use external advisors in order to avoid conflicts of interest. disclose and identify specific managers, their responsibilities, compensation, and so on, thereby providing information that investors can use when evaluating the shares.

General partnership

each member is a general partner and has equal rights to share in management responsibilities. each partner has unlimited liability. title to properties held in name of partnership

Limited liability company

each member owns interest in llc but not property itself. flexible pass-through taxation, limited liability, and management structure made it very popular.

syndication

extends generally to any group of investors who have combined their financial resources with the expertise of a real estate professional for the common purpose of carry out a real estate project, may take any of the legal business forms, do not usually invest much of their own capital (more as agent managers)

private offering

for smaller projects that require limited number of investors

Joint ventures

formed by at least two parties with goal of achieving specific objective. once objective is reached the JV is usually terminated. Main attributes: risk sharing, combining expertise with capital, and speculative objectives. A JV is not a legal form of organization. The most common JV is a limited partnership.

noncumilative pari passu distribution

if developer contributes 10 percent of equity, he receives 10 percent of cash flow

cumulative distribution

if total funds in any given year are insufficient to give the investor-partner his preferred yield, the liability to do so carries over to the next year

financial engineering

includes a variety of accounting treatments and uses of leverage that tend to magnify the funds from operations, which many view as the best short term measure of the REITs income producing ability.

leased space

includes all space for which leases are signed, even if the lease does not go into effect for another 6-12 months

Net income from Operations

income before interest or depreciation deductions. Calculated by deducting operating expenses for the properties from the net revenue received from the properties.

preferred return

investor partnersrecive a preferred distribution of cash flow while developer-partners receive greater share of property appreciation

Investors liability (limited partner)

is limited to the initial contribution plus any unpaid contributions agreed to in the future

payout ratio

is the percentage of FFO or CAD that is used to pay out a dividend. Dividends ________ net income or Dividends per share ---------------------- earnings per share

Operating losses for REITS

losses must be carried forward to offset income in future periods. none can be passed through to investors.

Net Asset Value

market value of all a companies assets after subtracting all its liabilities and obligations. When the total value of these assets is added up, liabilities are subtracted and the remaining number is divided by the number of outstanding shares; the resulting value is referred to as the net asset value (NAV). The NAV represents the per-share price investors would spend to purchase a single share of the investment.

Earnings per share

net income / average outstanding common shares

Leasing commissions and related costs

omitting leasing costs as an operating expense reduces expenses and increases FFO.

Limited partnership

one general partner and one more limited partners. The general parters are responsible for management. limited partners are only liable for money they have at risk

IRR preference

one or more investors must receive cash flow that is sufficiently high to achieve a specified IRR on equity invested for the entire investment period before others share in cash in cash flows from sale.

sole proprietorship

ownership entity consisting of a single person. owner has unlimited liability. riskiest type

public syndicate

ownership interests will be sold to investors in many states

occupied space

quantifies the space for which tenants are now paying rent

tax reform act of 1986

removed many tax advantages associated with the use of limited partnerships. allowed REITs to eliminate need for outside independent contractor for property related functions. allowed vertical integration

capital account

represents the partners ownership equity in partnership assets. credit account for all cash contributed and income, debit for cash distributed. include everything but cash proceeds from sale of property.

Tenant improvements and free rents: effects on FFO

tenant improvements paid by the landlord are often capitalized then depreciated. thus, the cash flow are not included in FFO calculations because FFO represents earnings before depreciation.

preferred distribution

the developer partners receive a greater share in any property appreciation.

REIT taxation

the majority of REIT dividends are taxed as ordinary income at prevailing tax rates.

Finite life (self-liquidating) REIT

undertaken with the goal of disposing of its assets and distributing all proceeds to shareholders by a specified date.

substantial economic effect

what allocations must result in for the IRS to accept allocations as valid

promote

when developer/operators receive a greater percentage of cash flow than they invested after initial distribution

blind pool

when properties to be acquired are not identified while funds are raised