The image below is the REIT Investment, Operations, and Five Revenue Schemes that I encapsulated in a flowchart diagram for quicker grasp.
REIT Law in the Philippines was only approved in December 2009, and its Implementing Rules and Regulation approved in May 2010, URL at http://www.sec.gov.ph/irr-reit-act/REIT%20IRR%20as%20approved%20on%20May%2013%202010.pdf
At the moment, there is like a gold rush in REIT and you don't want to be left behind the opportunities. Please don't hesitate to contact me if you need someone who can participate as honorary incorporator and think-tank on your REIT formation.
Please click the image to see the bigger picture.
Below are two interesting articles about REIT I would like to share to you.
SEC approves IRR for new REIT Law
By JAMES A. LOYOLA
May 12, 2010
Local property firms may organize and sell shares of real estate investment trusts by the end of June this year after the Securities and Exchange Commission (SEC) en banc committee approved the Implementing Rules and Regulations (IRR) of R.A. 9856, otherwise known as “The Real Estate Investment Trust (REIT) Act of 2009.”
In an interview, SEC commission secretary Gerard Lukban said they will have the IRR published and then sent to the University of the Philippines Law Center so it can take effect. He said the process will take about 45 days.
Lukban said the version approved by the SEC en banc committee contained no major changes from the draft earlier issued by the commission although there were some refinements of terms used.
He said the ony substantial change made from the draft was the raising of the minimum capitalization for fund managers tasked to handle the REITs to P100 million from the P10 million contained in the draft.
The IRR already include inputs from the Bureau of Internal Revenue on the tax aspects of the law since the REIT Law provides for tax incentives for companies putting up and selling shares of REITs to the investing public.
The IRR of RA 9856 shall make way for the full implementation of the REIT Act which seeks to promote the development of capital market and democratize wealth by broadening the participation of Filipinos in the ownership of real estate companies in the Philippines. The REIT law also aims to use the capital market as an instrument to help finance and develop infrastructure projects and protect the investing public.
With a minimum capitalization of P300 million, a REIT company may apply for registration of its securities with the SEC and avail of incentives as provided for by the law, such as favorable tax rates and lowered fees.
On the side of the investor, shareholders will be assured of steady income flow with the law requiring REIT companies to declare annually at least 90 percent of its distributable income as dividends to its shareholders.
How REITs Work
by Lee Ann Obringer, USA
REITs offer the benefit of owning real estate without having to be a landlord. See more real estate pictures.
Investing in income-generating real estate can be a great way to increase your net worth. But for many people, investing in real estate, particularly commercial real estate, is simply out of reach financially. But what if you could pool your resources with other small investors and invest in large-scale commercial real estate as a group? REITs (pronounced like "treats") allow you to do just that.
REIT stands for real estate investment trust and is sometimes called "real estate stock." Essentially, REITs are corporations that own and manage a portfolio of real estate properties and mortgages. Anyone can buy shares in a publicly traded REIT. They offer the benefits of real estate ownership without the headaches or expense of being a landlord.
Investing in some types of REITs also provides the important advantages of liquidity and diversity. Unlike actual real estate property, these shares can be quickly and easily sold. And because you're investing in a portfolio of properties rather than a single building, you face less financial risk.
REITs (in USA) came about in 1960, when Congress decided that smaller investors should also be able to invest in large-scale, income-producing real estate. It determined that the best way to do this was the follow the model of investing in other industries -- the purchase of equity.
A company must distribute at least 90 percent of its taxable income to its shareholders each year to qualify as a REIT. Most REITs pay out 100 percent of their taxable income. In order to maintain its status as a pass-through entity, a REIT deducts these dividends from its corporate taxable income. A pass-through entity does not have to pay corporate federal or state income tax -- it passes the responsibility of paying these taxes onto its shareholders. REITs cannot pass tax losses through to investors, however.
From the 1880s to the 1930s, a similar provision was in place that allowed investors to avoid double taxation -- paying taxes on both the corporate and individual level -- because trusts were not taxed at the corporate level if income was distributed to beneficiaries. This was reversed in the 1930s, when passive investments were taxed at both the corporate level and as part of individual income tax. REIT proponents were unable to persuade legislation to overturn this decision for 30 years. Because of the high demand for real estate funds, President Eisenhower signed the 1960 real estate investment trust tax provision qualifying REITs as pass-through entities.
A corporation must meet several other requirements to qualify as a REIT and gain pass-through entity status. They must:
* Be structured as corporation, business trust, or similar association
* Be managed by a board of directors or trustees
* Offer fully transferable shares
* Have at least 100 shareholders
* Pay dividends of at least 90 percent of the REIT's taxable income
* Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
* Hold at least 75 percent of total investment assets in real estate
* Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
* Derive at least 75 percent of gross income from rents or mortgage interest
At least 95 percent of a REIT's gross income must come from financial investments (in other words, it must pass the 95-percent income test). These include include rents, dividends, interest and capital gains. In addition, at least 75 percent of its income must come from certain real estate sources (the 75-percent income test), including rents from real property, gains from the sale or other disposition of real property, and income and gain derived from foreclosure of property.
We'll look at the different types of REITs next.