Satisfying the 100-shareholder requirement for a private REIT
Your tax advisers may recommend a private REIT -- or your investors may insist upon one. Whatever the reason, once a sponsor decides to use a private REIT, the first question will likely be, “How do I satisfy the 100-shareholder requirement to qualify as a REIT?” Typically, a private REIT will sell one preferred share at $1,000 to each of 110-125 investors. The offering is made as a private placement to accredited investors under Regulation D of the Securities and Exchange Commission. In some cases, the sponsor’s counsel will advise the REIT to sell shares only to “qualified purchasers” in order to avoid being classified as an “investment company.”
Outsourcing these tasks to us and our affiliate A5 REIT Services LLC, the sponsor puts the transaction into the hands of highly-qualified, experienced professional and allows its executives to spend their time on the core business. For the sponsor, the expense of preferred dividend, placement fee and servicing fee for the preferred shares are a minor cost to achieve an attractive tax structure.
Benefits of a Private REIT
The shareholder of a REIT generally receives dividend income from the REIT rather than a flow-though of the underlying rental income, interest income or gain, and the REIT avoids federal tax on the income it distributes to its shareholders. A sale of the REIT shares is treated as a sale of stock in a corporation. As a result, a REIT provides tax advantages to many investors over a partnership.
Common reasons for using a private REIT include, --
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tax benefits for international investors,
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obtaining the 20% deduction for "qualified business income" under the 2017 tax legislation -- especially attractive for mortgage-related income.
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minimizing state and local taxes,
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avoiding the expense of filing state tax returns in each state where the REIT operates,
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minimizing the unrelated business income tax (UBIT) imposed on pension funds, foundations or other tax-exempts,
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avoiding taxable mortgage pool (TMP) status when leveraging investments in mortgages.