Fixed UTIs / REITs / BDCs

Which statements are TRUE regarding Real Estate Investment Trusts? I REITs must distribute at least 90% of Net Investment Income to shareholders II REITs must invest at least 90% of assets in other REIT securities III Interest expense paid by REITs is deductible to the REIT IV REITs are registered as investment companies under the Investment Company Act of 1940

A I and III To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. REITs can invest in other REIT securities, but this can be no more than 25% of assets. Interest expense paid is tax deductible. Finally, REITs are not registered as investment companies because they are primarily investing in real estate assets, whereas investment companies invest in securities

Real Estate Investment Trusts are: I traded on stock exchanges II traded in the over-the-counter market III securities which are redeemable with the sponsor

B I and II REITs issue shares of beneficial interest which trade like other stocks, either on stock exchanges or over-the-counter. These securities are not redeemable. To liquidate, they must be sold in the market at the current market price.

Which of the following securities CANNOT be sold by an individual holding an investment companies/variable annuities registered representative's (Series 6) license? I Municipal Investment Trusts II Real Estate Investment Trusts III Municipal Bond Funds IV Revenue Bonds

B II and IV only A person holding an investment companies/variable annuities (Series 6) license is only allowed to sell mutual funds, unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, options etc., the broader Series 7 general securities license is required.

REITs can distribute all of the following to their shareholders EXCEPT:

B capital losses REITs can distribute net income to shareholders in the form of dividends; and can distribute capital gains under the "conduit" taxation rules of Subchapter M. They cannot distribute capital losses.

Which statement is FALSE about a fixed UIT?

C A professional manager can change the portfolio composition in response to a changing outlook for the underlying investments

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?

C Equity REITs During periods when financial assets such as stocks and bonds are not doing well, "hard" assets such as real estate and artwork tend to do better (since investors reallocate their investments away from financial assets into housing, etc.) A way that investors can participate in this is by investing in equity REITs. Since equity REITs own real estate, the share price movement of the REIT parallels the value of the real estate owned. Mortgage REITs invest in mortgages (essentially the same as investing in a bond) and thus are not the best choice when interest rates are low, since the yield is meager. And, if market interest rates rise, the value of the mortgages held drops. The same would be true for investments in mortgage bonds and Fannie Mae Pass-Through certificates.

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

C II and III A BDC is a Business Development Company. It is a registered investment company under the 1940 Act that is listed and trades like any other stock. Instead of investing in securities, it makes "private equity" investments in privately-held start-up companies. Because the investments are "start-up" companies that may never "make it," these are fairly risky investments, but they potentially offer a superior return in compensation for this.

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

C II and III Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M.

When comparing Real Estate Investment Trusts (REITs) to Real Estate Limited Partnerships(RELPs), all of the following statements are true EXCEPT:

C REITs allow for flow through of loss REITs do not allow for flow through of loss - only net income flows through to shareholders under conduit tax treatment. On the other hand, Real Estate Limited Partnerships are a tax sheltered investment that allow both gain and loss to flow through to the partnership investors.

REITs can invest in all of the following EXCEPT:

C 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.

REITs may be organized as:

C trusts Usually, REITs are formed as "Trusts," which is why they are called "Real Estate Investment Trusts." However, they trade on an exchange or OTC; and are similar in manner to closed end investment companies

All of the following sources of REIT income are counted towards the 75% test required by Subchapter M EXCEPT:

D dividend income from investments To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).

An equity REIT would most likely invest in all of the following EXCEPT:

D 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.