Unit 11: Other Packaged Products

Question 1

What is a REIT?

Answer 1

Real estate investment trust (REIT) - manages a portfolio of real estate investment to earn profits and or income for its shareholders

Offer diversification

Question 2

What are the three types of REITs?

Answer 2

1. Equity REIT - Own commercial property (take an ownership position in the properties). They receive rental income and possible capital gains upon future sale of the properties
2. Mortgage REITS - Own mortgages on commercial property. Make real estate loans (mortgages). Earnings come from interest payments on those loans
3. Hybrid REITs - Own commercial property and own mortgages on comerricial property

Question 3

How are they organized? Are they redeemable?

Answer 3

REITs are organized as trusts. They are not redeemable. Price is based on supply and demand

Question 4

What are some of the benefits of REITs in a portfolio? What are risks?

Answer 4

Benefits
1. Allow investments in real estate without incurring the degree of liquidity risk historically associated with real estate since they trade on exchanges and OTC

2. Managed by professionals
3. Negative correlation to the stock market
4. Reasonable income and capital appreciation

Risks
1. No direct control over portfolio

2. Volatile

Question 5

What is the taxation of a REIT?

Answer 5

Shareholder is taxed only on the dividends and on the gains in disposition (shareholders only need to claim 80% of the dividend)

REIT is not subject to corporate tax if it distributes to shareholders if it receives 75% of income from real estate and distributing 90% of income

Losses at passed through

Question 6

Facts to know about REITs

Answer 6

Owner holds an undivided interest in pool of real estate investments

REITs are not investment companies

Not a DPP, does not offer flow-through losses

75% needs to come from real estate, 90% of profits need to be distributed

Dividends are taxed at ordinary income (not qualified)

Question 7

What is a direct participation program?

Answer 7

Investments that pass income, gains losses and tax benefits (depreciation, depletion, and tax credits) directly to the limited partners.

Question 8

What types of corporations can you set up as DPPs?

Answer 8

Limited Partners, S Corp, LLCs are the most common

Question 9

What is a limited partnership? How long should it live?

Answer 9

Unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its engages in trade, business, financial operation, or venture and divide its profits

Needs to not have continuity of life

Question 10

What document does a Limited Partnership create in a private scenario? What about public? Who can prepare it?

Answer 10

Private: Private placement memorandum - Receive investments from accredited investors for large sums of money

Public: Smaller contributions of capital ($1k-$5k)

Syndicator can prepare this and are limited to 10% of the gross fees

Question 11

What documents are needed for a limited partnership to exist?

Answer 11

Certificate of limited partnership

Partnership agreement - each partner receives this (describes role of GPs and LPs)

Subscription agreement - all LPs must complete a subscription agreement, basically appoints the GPs

Question 12

What are the additional characteristics of a REIT?

Answer 12

1. Subject to 1933 Act
2. Trade in secondary market; are marginable
3. Distributions don’t qualify for the dividend exclusion rule
4. Attractive for current income