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| From Few Projects done by TPS |
Sunday, November 29, 2009
Sunday, November 2, 2008
THE IMPORTANCE OF OWNING REAL ESTATE
It is no secret that the greatest wealth-builder in history has always been investment in
real estate. Real estate is more than just a fallback investment during a bear market. And
unlike the “paper” investments of the stock and bond markets, carefully selected income
properties have real long-term value secured by physical assets. Additionally, they are
not subject to the wide fluctuations common to stock markets and, when properly
managed, they can continue providing a steady return on investment excess of 10% per
annum even when the markets are flat.With mortgage rates near historic lows and
vacancy rates in prime areas hovering at 1.5%, investing in high-income properties has
never made more sense.
http://picasaweb.google.co.in/lh/photo/C2CYI7XpNv6c8MnFEnDoig?authkey=Gv1sRgCJ2C8J_0lrSbag&feat=directlink
So, why isn’t everyone investing in real estate?
In a sense,most people already are. Tenants pay monthly rents or leases to the owners of
income properties in exchange for the use of the space in which they live or conduct their
business. In addition to rent, the tenants may pay property management fees, financing
fees,mortgage fees, and a multitude of other fees for services that the owners choose to
provide in exchange for these fees. All of these tenants (and in the case of commercial
properties, all of the tenants’ clients) are trickling their money up (in the form of
monthly rent, lease payments, or maintenance and strata/condo fees, etc.) to provide a
return on the investments (R.O.I.) made by the owners of the property. So, although the
tenants are receiving benefits from occupying the property, they are not realizing any
residual income or tax-sheltering benefits from the ownership of the property itself.
ACASESTUDY
When asked what business McDonald’s is in, most people would immediately answer
“selling hamburgers.”And although it’s true that McDonald’s has successfully sold
billions of hamburgers for many many years, they are most definitely not just in the
hamburger business.
The McDonald’s Corporation owns a great deal of the most valuable and coveted
income properties all over the world. They in turn lease this property to their franchisees
at a price that produces a profit every month well in excess of their cost of financing and
maintaining the property, but not so much as to make leasing the property unattractive
to the occupier. These same franchisees not only paid for their rights to operate their store from McDonald’s, in most cases their franchise fees also pay for the investment real
estate that they are now leasing from McDonald’s as well.Wisely,McDonald’s doesn’t
stop there. They also receive profits from the wholesale sales of food to the franchisee, as
well as a portion of the profits of each location in the form of franchising, advertising,
and marketing fees.We should all be so smart.
BIGGERBUILDINGSBIGGERPROFITS
Just like McDonald’s restaurants, some of the most profitable income properties are
extremely large and expensive investments that are leased to other businesses.
Office buildings, shopping centres, industrial parks and warehouses, lodging facilities,
medical centres, and even power production facilities all fall under the category of
commercial real estate. Under the right management, all of these can become excellent
income properties.
A different form of large and lucrative income properties are occupied by residents
rather than businesses. Types of residential investment properties include
condominiums, rental apartment buildings, seniors’ housing, etc. The cost to build or
purchase desirable income properties like these can range from millions, to tens-ofmillions,and sometimes even hundreds-of-millions of dollars, and requires an expert
property management team to operate and maintain them profitably.
Indeed property management is something else again. It is one thing to have the funds
required to purchase or build large investment properties, it is quite another to keep them profitably occupied, maintained, and managed, year after year. For this reason,
many property owners choose to outsource their property management services to
firms that specialize in operating income properties profitably for their owners.With
the right mix of property, tenant, and property management, large income properties
can be extremely profitable and worry-free investments.
BARRIERS?WHATBARRIERS? As noted earlier, large profits usually come at the price of large investments. This is fine for the builder or developer who has continually built and sold his developments for a profit and re-invested his earnings into increasingly larger projects. But what about the individual private investor? How can an investor with limited skills in real estate development, or less than a million dollars in cash, get in on such an attractive investment? Are these highly
desirable opportunities reserved only for conglomerates, iSMALL INVESTMENTS
BIG OPPORTUNITIES
There are already mechanisms and legal frameworks in existence that allow like-minded
investors to band together to purchase and control substantial investment properties.
Of course, each carries its own advantages and disadvantages.
A public newsletter published by BDO Seidman, LLP, Accountants and Consultants, asserts:
“The syndication process—aggregating capital froma group of investors to acquire property—is seeing new popularity as real estate increasingly is viewed as a fourth asset class in addition to stocks, bonds and cash. Real Estate Investment Trusts (REITs) are an attractive way to invest in real estate, but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically real estate limited partnerships (RELPs) or privately held REITs, are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed real estate. Finally, private syndicates offer some tax savings unavailable when investing in a public company.”
PRIVATESYNDICATIONS:
THEVEHICLEOFCHOICE
When you invest within a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of revenue property that is too much to handle singly or in a joint venture with just one or two others. Real estate syndicates own income-generating residential or commercial real estate and are secured by tangible assets as collateral. This characteristic is untrue of many other investments and provides added security for your investment. Additionally, investing in private real estate syndications provides the individual investor the ability to achieve higher profits with lower risk than the average equity investment.
REAL ESTATE INVESTMENTTRUSTS: ONE FORMOFGROUPOWNERSHIP
Although a syndication’s legal structure can take many forms, it is generally accepted that a “Private” Real Estate Investment Trust (or, REIT for short) is one of the best forms of group ownership of real estate investments.
Not to be confused with “Income Trusts”—which invest in businesses, not real
estate—REITs offer investors all the rewards of a long-term investment (capital
4nvestment banks, and powerful “old money” families? Thankfully, the answer is no.
SMALL INVESTMENTS
BIG OPPORTUNITIES
There are already mechanisms and legal frameworks in existence that allow like-minded
investors to band together to purchase and control substantial investment properties.
Of course, each carries its own advantages and disadvantages.
A public newsletter published by BDO Seidman, LLP, Accountants and Consultants, asserts: “The syndication process—aggregating capital froma group of investors to acquire property—is seeing new popularity as real estate increasingly is viewed as a fourth asset class in addition to stocks, bonds and cash. Real Estate Investment Trusts (REITs) are an attractive way to invest in real estate, but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically real estate limited partnerships (RELPs) or privately held REITs, are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed real estate. Finally, private syndicates offer some tax savings unavailable when investing in a public company.”
PRIVATESYNDICATIONS:
THEVEHICLEOFCHOICE
When you invest within a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of revenue property that is too much to handle singly or in a joint venture with just one or two others. Real estate syndicates own income-generating residential or commercial real estate and are secured by tangible assets as collateral. This characteristic is untrue of many other investments and provides added security for your investment. Additionally, investing in private real estate syndications provides the individual investor the ability to achieve higher profits with lower risk than the average equity investment.
REAL ESTATE INVESTMENTTRUSTS:
ONE FORMOFGROUPOWNERSHIP
Although a syndication’s legal structure can take many forms, it is generally accepted that a “Private” Real Estate Investment Trust (or, REIT for short) is one of the best forms of group ownership of real estate investments.
Not to be confused with “Income Trusts”—which invest in businesses, not real
estate—REITs offer investors all the rewards of a long-term investment (capital
HOWITWORKS
Basically, the setup is as follows: A REIT is established to allow a group of investors to
purchase and control a diverse array of real estate assets—such as shopping centres, office
buildings, apartment complexes, and warehouses—for the rental income they generate.
As vacancies are filled and rents increased, so does the amount of net income disbursed
to the unitholders.
In addition, each investor is entitled to his or her proportionate share of the equity that builds up as the values of the properties’ increase and mortgages are paid down.Whenever the REIT sells or re-finances any of the properties, the equity increases result in higher unit values.
No large investments are required, so each investor contributes what he or she wishes
toward the purchase, and receives Unit Certificates (which are registered with the various provincial securities commissions) documenting his or her proportion of ownership.
THE INVESTMENTLEADER
An Asset Manager provides executive leadership for the group. By virtue of his
expertise, he is granted all decision-making responsibility. This includes the hiring of property managers to look after the individual properties on a day-to-day basis;project managers to handle new construction and re-development; and teams of
acquisition specialists who keep the pool stocked with high-yield assets. The aim is to continually diversify the investment, increase cash flow, reduce expenses and tenant turn-over and, of course, increase the asset values—and thereby, increase unit values. Ideally, the Asset Manager is an experienced acquisition specialist. He knows the market and can locate and negotiate the right investments for the group. Through his negotiation with sellers, lenders, and tenants, as well as innovative reorganization of the properties’ uses—be it seeking re-zoning, or changes to the tenant mix—it is his responsibility to create extra value for the investors. This is most effective if his remuneration is tied to the investment’s performance.
To shield investors from liability, all decisions are at the sole discretion of the Asset Manager. He decides when to buy or sell, and negotiates the purchase or selling prices.Because he is bound by his fiduciary duty as well as the terms of the REIT’s Declaration of Trust and the Asset Management Agreement, advancing the group’s
interests is his highest priority.
THE INVESTORSANDINVESTMENTS
Investors in the group are called beneficiaries or unitholders, and their financial
obligation is limited only to their initial investment.
6Which raises the question, “What are the chances of an investor losing any capital?”
First, the likelihood of a properly selected and managed property going bad is
remote. REITs, are designed to succeed, and there are many safeguards—including
the REIT’s Declaration of Trust. This defines the obligations and restrictions adopted by the REIT, specifies the buying criteria for assets, and sets out the REIT’s maximum debt capacity. Furthermore, the REIT must adhere to stringent regulatory requirements set by the provincial securities commissions. These are designed to protect investors from loss due to misconduct or negligence, and to keep them informed of management decisions and results.
INVESTMENTSTABILITY
A REIT is designed to create diversity, which secures the investor’s capital and keeps the income steady. By combining a number of diverse properties in a single pool, the cash flow of each property is stabilized by the combined incomes of the other properties. Thus, one tenant moving out of one property has little impact when
spread among, say, twenty other properties.
INVESTMENTPERFORMANCE
It cannot be overstated that the Asset Manager’s motivation plays a key role in the
success of the REIT. If a REIT is properly structured, the manager’s compensation
will be tied directly to his performance. Thus, it is in his own best interest to make the venture as profitable as possible.
PROFITDISTRIBUTION
As established in the REIT’s trust declaration, the Asset Manager must distribute all
of the net income generated from rents, minus a prudent amount to maintain a
reserve fund, to keep the distributions stable and to accommodate tenant turn-over.
Because REITs must distribute so much of their earnings, they tend to pay yields
ranging from 5% to 10% derived from the properties’ cash flows alone. Additionally,
as the properties appreciate in value over time, they can be either sold or re-financed, and the profit from the extracted equity is reflected in every investor’s unit value.This increase in unit value is tax deferred until the units are sold—and at that time the profit is treated as a capital gain, and therefore 50% shielded from taxation.But that’s not all...
7TAXADVANTAGESFORTHE INVESTOR
One of the greatest advantages of any REIT—whether public or private—is its taxefficiency.Unlike stock-issuing corporations, where tax is paid on net income prior to distribution and again in the hands of the investor, REITs pay no tax on the income before distribution—which amounts to more being received by unitholders. Of course, t he income is eventually taxed in the hands of the unitholder, but (fortunately)it’s not just the profits that flow through to investors, the REIT’s special tax treatment does too.Regardless of the size of your investment, your marginal tax rate, your country of origin, or whether you pay tax as an employee or business owner, as a unitholder you enjoy favoured tax treatment on the income you receive from the REIT. As far as the Canada Revenue Agency is concerned, it’s just as if you owned the property solely.(The government calls trusts “flow-through entities” for that reason.) This means that individual unitholders are entitled to the same “flow-through” income benefits and tax deductions that direct owners of real estate enjoy—but without the drawbacks, such as liability for debt and litigation, and responsibility for day-to-day management of the properties.
Thus, if you are a unitholder of a private REIT, significantly more income will flow
through to you at each disbursement, and less will be taxed in your hands.
INVESTING:ACASESTUDY
For example, a unitholder who invests 10% of the capital needed to purchase the
property(ies) becomes a 10% owner of the REIT. Each month, she receives her
proportionate share (10%) of the total net distributable income.
For tax purposes, at the end of each year, she is issued a T3 Supplementary slip from
the accountant for the group. And, just as is the case with traditional property
ownership, she is able to shelter 40% or more of the income she receives by claiming
the Capital Cost Allowance (CCA) and deduct 10% of any of the REIT’s total cash
expense amounts attributed to her share of ownership (this is done automatically for
all unitholders). Thereby, significantly reducing her tax obligation.
In addition to her monthly income and flow-through deductions, she also enjoys a
separate and completely tax-deferred component of profit: the increase in the value
of the property owned by the REIT.When the values of the properties increase, so
does the value of her REIT units. This increase in unit value above the original
purchase price is un-taxed for as long as she holds her units.
The best scenario is to be a long-term investor, because if she never sells, the tax
obligation on this gain is deferred indefinitely. And, if some personal emergency
forced her to sell some of her units earlier than she planned, the percentage of the
8 income that was tax-deferred by claiming CCA is not treated as re-capture, but as
capital gains—so only 50% is taxed.In short, she has additional tax advantages over those of direct real estate ownership,and also benefits from higher yields, and greater diversity, stability, and security,combined with the advantages of a professionally selected and managed investment.
SELLINGYOURSHARE
REITs offer yet another benefit; they have redemption rights, which—unlike direct
real estate ownership—provide liquidity. To allow for this, the REIT sets aside a
prudent amount of cash on a period-by-period basis to buy back units if an investor
wishes to have them redeemed.
WHYCONSIDERGROUPINVESTMENTS?
There are two primary reasons for considering any group form of investing:
First, there’s no minimum investment requirement, so lone investors can take part in
large high-yield property investments that would be impossible by themselves. This
offers individuals with limited capital the opportunity to enjoy all the benefits of
owning real estate—like cash flow, and the potential for substantial capital
appreciation—as well as the preferential tax treatment, that is inaccessible to other
types of investments such as mutual funds and mortgages.The second reason for joining a larger group is to rid yourself of the task of locating,analyzing, purchasing and managing your real estate investment. The syndicate/REIT
does it all for you. And, since control is in the hands of the Asset Manager, the chance of painful disagreements among the investors is eliminated, and the overall stability of the investment is enhanced.Use this chapter as a background in the basics of real estate syndication, and REITs in particular. That’s all it was intended to be. Your accountant or lawyer, as well as the leader of the syndication, will be able to answer specific questions about how investment in a private REIT will benefit your portfolio.
real estate. Real estate is more than just a fallback investment during a bear market. And
unlike the “paper” investments of the stock and bond markets, carefully selected income
properties have real long-term value secured by physical assets. Additionally, they are
not subject to the wide fluctuations common to stock markets and, when properly
managed, they can continue providing a steady return on investment excess of 10% per
annum even when the markets are flat.With mortgage rates near historic lows and
vacancy rates in prime areas hovering at 1.5%, investing in high-income properties has
never made more sense.
http://picasaweb.google.co.in/lh/photo/C2CYI7XpNv6c8MnFEnDoig?authkey=Gv1sRgCJ2C8J_0lrSbag&feat=directlink
So, why isn’t everyone investing in real estate?
In a sense,most people already are. Tenants pay monthly rents or leases to the owners of
income properties in exchange for the use of the space in which they live or conduct their
business. In addition to rent, the tenants may pay property management fees, financing
fees,mortgage fees, and a multitude of other fees for services that the owners choose to
provide in exchange for these fees. All of these tenants (and in the case of commercial
properties, all of the tenants’ clients) are trickling their money up (in the form of
monthly rent, lease payments, or maintenance and strata/condo fees, etc.) to provide a
return on the investments (R.O.I.) made by the owners of the property. So, although the
tenants are receiving benefits from occupying the property, they are not realizing any
residual income or tax-sheltering benefits from the ownership of the property itself.
ACASESTUDY
When asked what business McDonald’s is in, most people would immediately answer
“selling hamburgers.”And although it’s true that McDonald’s has successfully sold
billions of hamburgers for many many years, they are most definitely not just in the
hamburger business.
The McDonald’s Corporation owns a great deal of the most valuable and coveted
income properties all over the world. They in turn lease this property to their franchisees
at a price that produces a profit every month well in excess of their cost of financing and
maintaining the property, but not so much as to make leasing the property unattractive
to the occupier. These same franchisees not only paid for their rights to operate their store from McDonald’s, in most cases their franchise fees also pay for the investment real
estate that they are now leasing from McDonald’s as well.Wisely,McDonald’s doesn’t
stop there. They also receive profits from the wholesale sales of food to the franchisee, as
well as a portion of the profits of each location in the form of franchising, advertising,
and marketing fees.We should all be so smart.
BIGGERBUILDINGSBIGGERPROFITS
Just like McDonald’s restaurants, some of the most profitable income properties are
extremely large and expensive investments that are leased to other businesses.
Office buildings, shopping centres, industrial parks and warehouses, lodging facilities,
medical centres, and even power production facilities all fall under the category of
commercial real estate. Under the right management, all of these can become excellent
income properties.
A different form of large and lucrative income properties are occupied by residents
rather than businesses. Types of residential investment properties include
condominiums, rental apartment buildings, seniors’ housing, etc. The cost to build or
purchase desirable income properties like these can range from millions, to tens-ofmillions,and sometimes even hundreds-of-millions of dollars, and requires an expert
property management team to operate and maintain them profitably.
Indeed property management is something else again. It is one thing to have the funds
required to purchase or build large investment properties, it is quite another to keep them profitably occupied, maintained, and managed, year after year. For this reason,
many property owners choose to outsource their property management services to
firms that specialize in operating income properties profitably for their owners.With
the right mix of property, tenant, and property management, large income properties
can be extremely profitable and worry-free investments.
BARRIERS?WHATBARRIERS? As noted earlier, large profits usually come at the price of large investments. This is fine for the builder or developer who has continually built and sold his developments for a profit and re-invested his earnings into increasingly larger projects. But what about the individual private investor? How can an investor with limited skills in real estate development, or less than a million dollars in cash, get in on such an attractive investment? Are these highly
desirable opportunities reserved only for conglomerates, iSMALL INVESTMENTS
BIG OPPORTUNITIES
There are already mechanisms and legal frameworks in existence that allow like-minded
investors to band together to purchase and control substantial investment properties.
Of course, each carries its own advantages and disadvantages.
A public newsletter published by BDO Seidman, LLP, Accountants and Consultants, asserts:
“The syndication process—aggregating capital froma group of investors to acquire property—is seeing new popularity as real estate increasingly is viewed as a fourth asset class in addition to stocks, bonds and cash. Real Estate Investment Trusts (REITs) are an attractive way to invest in real estate, but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically real estate limited partnerships (RELPs) or privately held REITs, are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed real estate. Finally, private syndicates offer some tax savings unavailable when investing in a public company.”
PRIVATESYNDICATIONS:
THEVEHICLEOFCHOICE
When you invest within a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of revenue property that is too much to handle singly or in a joint venture with just one or two others. Real estate syndicates own income-generating residential or commercial real estate and are secured by tangible assets as collateral. This characteristic is untrue of many other investments and provides added security for your investment. Additionally, investing in private real estate syndications provides the individual investor the ability to achieve higher profits with lower risk than the average equity investment.
REAL ESTATE INVESTMENTTRUSTS: ONE FORMOFGROUPOWNERSHIP
Although a syndication’s legal structure can take many forms, it is generally accepted that a “Private” Real Estate Investment Trust (or, REIT for short) is one of the best forms of group ownership of real estate investments.
Not to be confused with “Income Trusts”—which invest in businesses, not real
estate—REITs offer investors all the rewards of a long-term investment (capital
4nvestment banks, and powerful “old money” families? Thankfully, the answer is no.
SMALL INVESTMENTS
BIG OPPORTUNITIES
There are already mechanisms and legal frameworks in existence that allow like-minded
investors to band together to purchase and control substantial investment properties.
Of course, each carries its own advantages and disadvantages.
A public newsletter published by BDO Seidman, LLP, Accountants and Consultants, asserts: “The syndication process—aggregating capital froma group of investors to acquire property—is seeing new popularity as real estate increasingly is viewed as a fourth asset class in addition to stocks, bonds and cash. Real Estate Investment Trusts (REITs) are an attractive way to invest in real estate, but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically real estate limited partnerships (RELPs) or privately held REITs, are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed real estate. Finally, private syndicates offer some tax savings unavailable when investing in a public company.”
PRIVATESYNDICATIONS:
THEVEHICLEOFCHOICE
When you invest within a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of revenue property that is too much to handle singly or in a joint venture with just one or two others. Real estate syndicates own income-generating residential or commercial real estate and are secured by tangible assets as collateral. This characteristic is untrue of many other investments and provides added security for your investment. Additionally, investing in private real estate syndications provides the individual investor the ability to achieve higher profits with lower risk than the average equity investment.
REAL ESTATE INVESTMENTTRUSTS:
ONE FORMOFGROUPOWNERSHIP
Although a syndication’s legal structure can take many forms, it is generally accepted that a “Private” Real Estate Investment Trust (or, REIT for short) is one of the best forms of group ownership of real estate investments.
Not to be confused with “Income Trusts”—which invest in businesses, not real
estate—REITs offer investors all the rewards of a long-term investment (capital
HOWITWORKS
Basically, the setup is as follows: A REIT is established to allow a group of investors to
purchase and control a diverse array of real estate assets—such as shopping centres, office
buildings, apartment complexes, and warehouses—for the rental income they generate.
As vacancies are filled and rents increased, so does the amount of net income disbursed
to the unitholders.
In addition, each investor is entitled to his or her proportionate share of the equity that builds up as the values of the properties’ increase and mortgages are paid down.Whenever the REIT sells or re-finances any of the properties, the equity increases result in higher unit values.
No large investments are required, so each investor contributes what he or she wishes
toward the purchase, and receives Unit Certificates (which are registered with the various provincial securities commissions) documenting his or her proportion of ownership.
THE INVESTMENTLEADER
An Asset Manager provides executive leadership for the group. By virtue of his
expertise, he is granted all decision-making responsibility. This includes the hiring of property managers to look after the individual properties on a day-to-day basis;project managers to handle new construction and re-development; and teams of
acquisition specialists who keep the pool stocked with high-yield assets. The aim is to continually diversify the investment, increase cash flow, reduce expenses and tenant turn-over and, of course, increase the asset values—and thereby, increase unit values. Ideally, the Asset Manager is an experienced acquisition specialist. He knows the market and can locate and negotiate the right investments for the group. Through his negotiation with sellers, lenders, and tenants, as well as innovative reorganization of the properties’ uses—be it seeking re-zoning, or changes to the tenant mix—it is his responsibility to create extra value for the investors. This is most effective if his remuneration is tied to the investment’s performance.
To shield investors from liability, all decisions are at the sole discretion of the Asset Manager. He decides when to buy or sell, and negotiates the purchase or selling prices.Because he is bound by his fiduciary duty as well as the terms of the REIT’s Declaration of Trust and the Asset Management Agreement, advancing the group’s
interests is his highest priority.
THE INVESTORSANDINVESTMENTS
Investors in the group are called beneficiaries or unitholders, and their financial
obligation is limited only to their initial investment.
6Which raises the question, “What are the chances of an investor losing any capital?”
First, the likelihood of a properly selected and managed property going bad is
remote. REITs, are designed to succeed, and there are many safeguards—including
the REIT’s Declaration of Trust. This defines the obligations and restrictions adopted by the REIT, specifies the buying criteria for assets, and sets out the REIT’s maximum debt capacity. Furthermore, the REIT must adhere to stringent regulatory requirements set by the provincial securities commissions. These are designed to protect investors from loss due to misconduct or negligence, and to keep them informed of management decisions and results.
INVESTMENTSTABILITY
A REIT is designed to create diversity, which secures the investor’s capital and keeps the income steady. By combining a number of diverse properties in a single pool, the cash flow of each property is stabilized by the combined incomes of the other properties. Thus, one tenant moving out of one property has little impact when
spread among, say, twenty other properties.
INVESTMENTPERFORMANCE
It cannot be overstated that the Asset Manager’s motivation plays a key role in the
success of the REIT. If a REIT is properly structured, the manager’s compensation
will be tied directly to his performance. Thus, it is in his own best interest to make the venture as profitable as possible.
PROFITDISTRIBUTION
As established in the REIT’s trust declaration, the Asset Manager must distribute all
of the net income generated from rents, minus a prudent amount to maintain a
reserve fund, to keep the distributions stable and to accommodate tenant turn-over.
Because REITs must distribute so much of their earnings, they tend to pay yields
ranging from 5% to 10% derived from the properties’ cash flows alone. Additionally,
as the properties appreciate in value over time, they can be either sold or re-financed, and the profit from the extracted equity is reflected in every investor’s unit value.This increase in unit value is tax deferred until the units are sold—and at that time the profit is treated as a capital gain, and therefore 50% shielded from taxation.But that’s not all...
7TAXADVANTAGESFORTHE INVESTOR
One of the greatest advantages of any REIT—whether public or private—is its taxefficiency.Unlike stock-issuing corporations, where tax is paid on net income prior to distribution and again in the hands of the investor, REITs pay no tax on the income before distribution—which amounts to more being received by unitholders. Of course, t he income is eventually taxed in the hands of the unitholder, but (fortunately)it’s not just the profits that flow through to investors, the REIT’s special tax treatment does too.Regardless of the size of your investment, your marginal tax rate, your country of origin, or whether you pay tax as an employee or business owner, as a unitholder you enjoy favoured tax treatment on the income you receive from the REIT. As far as the Canada Revenue Agency is concerned, it’s just as if you owned the property solely.(The government calls trusts “flow-through entities” for that reason.) This means that individual unitholders are entitled to the same “flow-through” income benefits and tax deductions that direct owners of real estate enjoy—but without the drawbacks, such as liability for debt and litigation, and responsibility for day-to-day management of the properties.
Thus, if you are a unitholder of a private REIT, significantly more income will flow
through to you at each disbursement, and less will be taxed in your hands.
INVESTING:ACASESTUDY
For example, a unitholder who invests 10% of the capital needed to purchase the
property(ies) becomes a 10% owner of the REIT. Each month, she receives her
proportionate share (10%) of the total net distributable income.
For tax purposes, at the end of each year, she is issued a T3 Supplementary slip from
the accountant for the group. And, just as is the case with traditional property
ownership, she is able to shelter 40% or more of the income she receives by claiming
the Capital Cost Allowance (CCA) and deduct 10% of any of the REIT’s total cash
expense amounts attributed to her share of ownership (this is done automatically for
all unitholders). Thereby, significantly reducing her tax obligation.
In addition to her monthly income and flow-through deductions, she also enjoys a
separate and completely tax-deferred component of profit: the increase in the value
of the property owned by the REIT.When the values of the properties increase, so
does the value of her REIT units. This increase in unit value above the original
purchase price is un-taxed for as long as she holds her units.
The best scenario is to be a long-term investor, because if she never sells, the tax
obligation on this gain is deferred indefinitely. And, if some personal emergency
forced her to sell some of her units earlier than she planned, the percentage of the
8 income that was tax-deferred by claiming CCA is not treated as re-capture, but as
capital gains—so only 50% is taxed.In short, she has additional tax advantages over those of direct real estate ownership,and also benefits from higher yields, and greater diversity, stability, and security,combined with the advantages of a professionally selected and managed investment.
SELLINGYOURSHARE
REITs offer yet another benefit; they have redemption rights, which—unlike direct
real estate ownership—provide liquidity. To allow for this, the REIT sets aside a
prudent amount of cash on a period-by-period basis to buy back units if an investor
wishes to have them redeemed.
WHYCONSIDERGROUPINVESTMENTS?
There are two primary reasons for considering any group form of investing:
First, there’s no minimum investment requirement, so lone investors can take part in
large high-yield property investments that would be impossible by themselves. This
offers individuals with limited capital the opportunity to enjoy all the benefits of
owning real estate—like cash flow, and the potential for substantial capital
appreciation—as well as the preferential tax treatment, that is inaccessible to other
types of investments such as mutual funds and mortgages.The second reason for joining a larger group is to rid yourself of the task of locating,analyzing, purchasing and managing your real estate investment. The syndicate/REIT
does it all for you. And, since control is in the hands of the Asset Manager, the chance of painful disagreements among the investors is eliminated, and the overall stability of the investment is enhanced.Use this chapter as a background in the basics of real estate syndication, and REITs in particular. That’s all it was intended to be. Your accountant or lawyer, as well as the leader of the syndication, will be able to answer specific questions about how investment in a private REIT will benefit your portfolio.
Friday, October 31, 2008
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