REITs and BDCs

Question 1

What is a REIT most similar to?

Answer 1

A closed end investment company, that invests in Real estate short term

Question 2

What are key components of a REIT?

Answer 2

• Investor gets diversification and liquidity
• Shares of beneficial interest are listed on OTC or exchange, and can be bought on margin/sold short
• Registered under 1933 act

Question 3

Are REITS leveraged or un-leveraged?

Answer 3

They are highly leveraged

Question 4

What is an Equity REIT?

Answer 4

Invest mainly in diversified properties (apartments, offices, etc.), and are not as highly leveraged as normal REITs. Additionally, prices tend to move in opposite direction of the market

Question 5

What is a mortgage REIT?

Answer 5

Invest in mortgages and construction loans. The interest rate earned is expected to exceed borrowing cost and give a positive spread

Question 6

How are REITs taxed?

Answer 6

Under subchapter M, so it doesn’t pay taxes on distributed income

Question 7

How are the dividends received from a REIT taxed for individuals receiving them?

Answer 7

Max rate of 39.6%. (The normal div. rate of 15-20% doesn’t apply to REITs

Question 8

What 4 categories must a REIT meet in order to qualify under Subchapter M taxation?

Answer 8

1. 75% of income must be related to RE
2. 75% of assets must be invested in RE
3. REIT is unincorporated entity managed by Trustee; negotiable securities required
4. At least 90% of NII distributed

Question 9

How are taxable gains on REIT’s taxed?

Answer 9

They are not distributed to shareholders, and the REIT must pay tax on capital gain amounts

Question 10

What are BDC’s?

Answer 10

Publicly traded investment companies that, instead of trading, make investments in private start-ups. Usually supply money in the form of debt that is convertible to equity. High risk, high reward

Question 11

How are BDC’s registered?

Answer 11

They are registered as investment companies and are exchange listed

Question 12

What is a Venture capital fund? (VC)

Answer 12

Also invest in private start-ups, but they are structured as Limited Partnerships (LP’s) instead of investment companies. They are sold as private placements only available to wealthy investors

Question 13

What are some characteristics of VC funds?

Answer 13

They are illiquid (about 10 year tie ups)

The investors can call for more capital if needed

Question 14

What is the common goal of both BDC’s and VC’s?

Answer 14

Income streams from interest loans made to company, and capital gains if the company is brought public

Question 15

Are BDC’s SEC registered?

Answer 15

Yes

Question 16

Are VC’s SEC registered?

Answer 16

No

Question 17

Which funds (of BDC and VC) are publicly traded, and have publicly available information, and can be invested in by the general public?

Answer 17

Only BDC’s are publicly traded and available to public investors. VC’s are private and are only available to wealhty individuals

Question 18

What are the liquidity differences between VC’s and BDC’s?

Answer 18

VC’s are illiquid, while BDC’s are highly liquid.

Question 19

Which is more risky, BDCs or VCs?

Answer 19

VC’s, but both are high risk