Real Estate Investment Trust Law and Legal Definition
A real estate investment trust (REIT) is a corporation whose primary business is owning, developing, and managing real estate properties, such as apartment buildings, office buildings, hotels, warehouses, health care facilities, shopping malls or golf courses. While many REITs invest directly in these properties, some types of REITS can also invest in real estate related loans, such as mortgages. A hybrid type of REIT can invest in a combination of real properties and mortgages. Structurally, a REIT is set up as a company, shares of which may be purchased by investors. REITs allow shareholders to invest in a professionally-managed portfolio of real estate properties.
REITs qualify as pass-through entities, companies who are able distribute the majority of income cash flows to investors without taxation at the corporate level (providing that certain conditions are met). As pass-through entities, whose main function is to pass profits on to investors, a REIT's business activities are generally restricted to generation of property rental income. REITS are a relatively liquid investment since its shares are primarily traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell properties in private markets. REITs also receive special tax considerations, and typically offer investors high yields. An additional benefit to investing in REITs is that many have dividend reinvestment plans (DRIPs) available.
There are various types of REITS, including the following:
Equity REITs: Equity REITS invest in and own properties. Their revenues come principally from their properties' rents.
Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
Hybrid REITs: Hybrid REITs combine the characteristics of Equity REITs and Mortgage REITs by investing in both properties and mortgages.