Investment Companies: REITs/BDCs

An investor has a $1,000,000 portfolio that is split evenly between "blue chip" stocks and Treasury securities. The current economic environment is characterized by low interest rates and flat stock prices - and this is expected to remain unchanged for a number of years. However, the residential and commercial real estate market is expected to be strong. The investor would like to diversify the portfolio and enhance returns without adding much additional risk. Which of the following investment purchase recommendations would help achieve this objective? A. Mortgage REITs B. Mortgage Bonds C. Equity REITs D. Fannie Mae Pass-Through Certificates

Equity REITs

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I. Net Rental Income II. Interest Income from mortgages III. real estate tax refunds IV. dividend income

Net Rental Income Interest Income from mortgages real estate tax refunds

All of the following statements are true regarding REITs EXCEPT: A. Mortgage REITs profit from the spread between interest on monies borrowed and mortgage investments made by the REIT B. REITs allow for flow through of gain and loss to the investor C. REITs are either Exchange listed or trade "over-the-counter" D. For an REIT to be regulated under Subchapter M, it must derive at least 75% of its income from real estate related activities

REITs allow for flow through of gain and loss to the investor REITs do not allow for flow through of loss - only net income flows through to shareholders under conduit tax treatment. The other statements about REITs are true - mortgage REITs profit from the spread between interest paid on funds borrowed and interest earned on mortgage investments; REITs are either exchange traded or trade over-the-counter; and for a REIT to be regulated, it must derive at least 75% of its income from real estate related activities.

All of the following statements are true about Real Estate Investment Trusts EXCEPT: A. REITs may be traded on stock exchange floors B. REITs may be traded on NASDAQ C. REITs are securities which are redeemable with the sponsor D. REITs are securities that are negotiable in the market

REITs are securities which are redeemable with the sponsor REITs issue shares of beneficial interest which trade like other stocks, either on stock exchanges or NASDAQ. These securities are not redeemable. To liquidate, they must be sold in the market at the current market price.

Which of the following statements are TRUE regarding REITs? I. REITs are similar to closed end investment companies II. REITs issue shares of beneficial interest representing an undivided interest in a pool of real estate investments III. REITs are similar to open end investment companies IV. REITs are registered under the Securities Act of 1933

REITs are similar to closed end investment companies REITs issue shares of beneficial interest representing an undivided interest in a pool of real estate investments REITs are registered under the Securities Act of 1933 REITs, though not defined as a type of investment company under the 1940 Act, are similar to closed end investment companies; not open end management companies. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC.

Which statements are TRUE regarding Real Estate Investment Trusts? I. Mortgage REITs can only invest in long term mortgages, but not short term loans II. To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholders III. Equity REIT income is derived from the difference between net rental income and interest paid on loans IV. REIT losses can be passed through to shareholders under the "conduit" rules

To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholders Equity REIT income is derived from the difference between net rental income and interest paid on loans

Which statements are TRUE when comparing VC Funds to BDCs? I. VC Funds are available to the general public II. VC Funds are only available to wealthy accredited investors III. BDCs are available to the general public IV. BDCs are only available to wealthy accredited investors

VC Funds are only available to wealthy accredited investors BDCs are available to the general public

Real Estate Investment Trusts are not suitable as tax advantaged investments because they: a. have too many corporate characteristics b. do not qualify for conduit tax treatment under subchapter M c. are not allowed to pass operating losses to shareholders d. are not allowed to pass capital gains to shareholders

are not allowed to pass operating losses to shareholders

REITs can distribute all of the following to their shareholders EXCEPT: a. capital gains b. capital losses c. cash dividends d. stock dividends

capital losses

What is the main objective of investing in Equity REITs a. income and growth b. capital appreciation and stability c. tax deductions and tax credits d. speculation and aggressive gains

income and growth

An equity REIT would most likely invest in all of the following EXCEPT: A. apartments B. office buildings C. shopping malls D. industrial parks

industrial parks An equity REIT invests in income producing real estate. These include apartment buildings, shopping centers, and office buildings. The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will not have a great impact on the income stream. Industrial parks usually have only a few large tenants, not a lot of smaller tenants.

REITs can invest in all of the following EXCEPT: A. mortgages B. real estate C. limited partnerships D. other REITs

limited partnerships REITs do not invest in limited partnerships, which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders. They invest primarily in real estate and mortgages (under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages). Any excess funds can be invested in securities, such as U.S. Governments and can also be invested in the shares of other REITs, though this rarely happens

Listed REITs offer all of the following benefits to purchasers EXCEPT: A. diversification of investments B. ready marketability of shares C. capital gains potential D. preferential taxation of dividends received

preferential taxation of dividends received REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15% or 20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 39.6%.

Which of the following statements are TRUE about REITs? I. to qualify under subchapter M, at least 75% of net investment income must be distributed to shareholders II. to qualify under subchapter M, at least 90% of net investment income must be distributed to shareholders III. to qualify under subchapter M, at least 75% of the assets must be in real estate IV. to qualify under subchapter M, at least 90% of assets must be in real estate

to qualify under subchapter M, at least 90% of net investment income must be distributed to shareholders to qualify under subchapter M, at least 75% of the assets must be in real estate

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I. Property rentals II. Interest from mortgages III. Capital gains on property sales IV. Real estate tax refunds

All of them

A client of yours has heard of private equity investing from some wealthy friends and asks you, the registered representative about it. This customer is age 51 and earns about $160,000 per year. He is willing to assume a moderate level of risk in pursuit of higher returns. This customer has a liquid net worth of $450,000 and has a diversified equity and bond portfolio. You should tell the customer that the best way to make a private equity investment is a(n): a. hedge fund b. VC Fund c. REIT d. BDC

BDC

Which statements are TRUE regarding BDCs? I. BDCs invest in securities of publicly traded companies II. BDCs make direct investments in privately-held companies III. BDCs are publicly traded IV. BDCs are not publicly traded

BDCs make direct investments in privately-held companies BDCs are publicly traded