| Royalty trusts, in Finance, are classic
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| | interest rates rise, prices of REIT's
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| flow-through investments vehicles. The
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| | drop thus causing yields to rise.For
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| trust, like a mutual fund, holds a
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| | example, when interest rates were pushed
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| portfolio of assets, which can be
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| | up by both the Federal Reserve Board and
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| anything from producing oil and gas wells
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| | the Bank of Canada all the way back in
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| to power generating stations to interests
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| | 2000, the typical REIT was yielding close
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| in land. The net cash flow, i.e. the
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| | to 14 percent as prices per share fell.
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| total cash flow minus revenues, is passed
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| | When interest rates subsequently dropped,
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| on to the unit-holders as
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| | yields fell to less than 10 percent as
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| distribution.The purpose of a Real Estate
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| | demand for REIT's increased thus pushing
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| Investment Trusts is to reduce or
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| | share prices higher.This is a very
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| eliminate corporate income taxes. In the
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| | important consideration to be kept in
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| United States, where they are generally
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| | mind when investing or otherwise trading
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| more widespread as investment vehicles,
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| | units involving this type of trusts. If
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| Real Estate Investment Trusts pay little
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| | interest rates appear to be poised to
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| or no federal income tax but are subject
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| | rise, investors may want to defer
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| to a number of special requirements set
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| | purchases, and those who own this type of
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| forth in the Internal Revenue Code, one
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| | shares already may consider reducing
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| of which is the requirement to distribute
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| | their exposure by selling and take in
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| annually at least 90 percent of their
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| | some profit.There are typically two
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| taxable income in the form of dividends
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| | catches with REIT's. The first is that
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| to shareholders.Real Estate Investment
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| | since investors are ‘unit-holders'
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| Trusts are, therefore, a special type of
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| | rather than shareholders, they are
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| royalty trust. They specialize in real
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| | potentially jointly and severally liable
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| property, anything from office buildings
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| | together with all other unit-holders
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| to long-term care facilities. For
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| | (plus the trust itself) in the
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| illiquid assets like real estate,
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| | eventuality of insolvency. Instead of
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| closed-end funds of this type make good
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| | limited liability, investors rely on the
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| sense. Open-end or ‘mutual' real
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| | REIT's management to have property,
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| estate funds are subject to new money and
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| | casualty and liability insurance, prudent
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| redemption problems, entirely absent in
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| | lending policies and other reasonable
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| closed-end trusts. The first Real Estate
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| | safeguards in place. Nevertheless there
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| Investment Trust was introduced in the
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| | is always the possibility of a problem -
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| United States in 1960. The vehicle was
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| | say a catastrophic fire or a building
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| designed to facilitate investments in
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| | collapse - that is not covered by
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| large-scale income-producing real estate
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| | insurance. This may have seemed like a
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| by smaller investors. The US model was
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| | very small matter prior to the attacks on
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| simple, enabling small investors to
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| | the World Trade Center in 2001. Since
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| acquire equity interests in vehicles
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| | then, however, it is something that has
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| holding large-scale commercial
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| | to be taken seriously.The second problem
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| property.But the birth of Real Estate
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| | with REIT's is less transparent. All real
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| Investments Trusts as a mass investment
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| | estate properties depreciate in value
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| vehicle can be traced directly to the
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| | over time (not the land, only the
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| liquidity crisis encountered by open-end
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| | buildings). Depreciation can be somewhat
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| real estate mutual funds all the way back
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| | slowed down by earmarking at times
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| to 1991-92, during the slowdown of real
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| | significant amounts of money for
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| estate that characterized those years.
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| | maintenance and renewal of facilities.
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| Faced with redemption demands on the part
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| | Since most of the REIT's income is being
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| of unit-holders, real estate mutual funds
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| | distributed and the capital cost
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| were presented with the unpalatable
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| | allowance is being allocated to
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| option of selling valuable real
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| | investors, investors are factually
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| properties into a distressed market to
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| | getting their own capital back over time.
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| raise cash. Many of them, therefore,
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| | As such, the book value of the underlying
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| chose to close off redemptions and
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| | real properties will be steadily
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| converted into Real Estate Investment
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| | depleting.Obviously, if real estate
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| Trusts, since then most commonly known as
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| | markets are on the upswing the
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| REIT's. Only a few open-end real estate
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| | depreciation factor will not be overly
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| mutual funds continue to own real estate
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| | important, since it will be offset by the
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| directly. Most now invest in shares of
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| | appreciation of the underlying assets.
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| real estate-related companies.The typical
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| | But in essence, the point is that the
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| REIT usually distributes about 85 to 95
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| | long-term income stream is quite
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| percent of its income (rental income from
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| | variable, certainly more variable than
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| properties) to the shareholders, usually
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| | some managers would have investors
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| on a quarterly basis. This income gets a
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| | believe.As stated above, the inverse
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| special tax break, because REIT's
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| | relationship between interest rates and
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| shareholders are entitled to a deduction
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| | prices of REIT's shares plays an
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| for the pro-rata share of capital cost
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| | important role. On average, it is safe to
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| allowance (depreciation on the real
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| | assume that interest rate increases are
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| properties). As a result, a high
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| | likely to be met by REIT's price declines
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| percentage of the distributions are
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| | in the Stock Exchange, because increasing
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| normally tax-deferred. However, the
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| | rates correspond to a slowdown in the
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| amount will vary from year to year and
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| | economic growth and less demand. But out
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| will differ depending on the particular
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| | of the context of the frantic buy and
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| REIT.As with royalty trust, the value of
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| | sell of Wall Street, even a slowdown in
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| tax-deferred income will reduce the
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| | the market for single-family houses can
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| adjusted cost base of the shares owned.
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| | actually benefit REIT's. This is so,
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| For example, if an investor purchases
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| | because even though real property prices
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| 1,000 units at $15.50 per unit, receives
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| | are in decline, it is still cheaper to
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| $3,000 ($3.00 per share) in aggregate
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| | rent than to own, especially during a
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| tax-deferred distribution over time, and
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| | period of rising interest rates. And
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| the sells the shares for $17.50 each, the
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| | REIT's thrive on rentals. In fact, no
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| capital gain will be calculated as
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| | city is a better environment for REIT's
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| follows:[1,000 x ($17.50 - $15.50 +
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| | to operate in than New York City, where
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| $3.00)] = $5,000 before adjustments for
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| | some 70 percent of residents rent.Luigi
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| commissions. In Canada, this gain will be
| |
| | FrascatiLuigi Frascati is a Real Estate
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| subjected to capital gain treatment, so
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| | Agent based in Vancouver, British
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| only 50 percent or $2,500 will be
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| | Columbia. He holds a Bachelor Degree in
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| included in income and taxed accordingly.
| |
| | Economics and maintains a weblog entitled
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| In fact, Canada allows preferential tax
| |
| | the Real Estate Chronicle where you can
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| treatment to REIT's by making them
| |
| | find the full collection of his articles
|
| RRSP-eligible and by not considering them
| |
| | on Real Estate Economics and Finance.
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| foreign property (which would taxed at a
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| | Luigi is associated with the Sutton
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| higher rate), so long as the real estate
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| | Group, the largest real estate
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| portfolio does not contain non-Canadian
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| | organization in Canada, and is based with
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| property in excess of the allowable
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| | Sutton-Centre Realty in Burnaby, BC.Luigi
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| limit.REIT's yields and the market price
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| | is very proud to be an EzineArticles
|
| of units tend to be strongly influenced
| |
| | Platinum Expert Author. Your rating at
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| by interest rates movements. As rates
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| | the footer of this Article is very much
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| drop, prices of REIT's rise thus causing
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| | appreciated. Thank you.
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| yields to drop. On the other hand, when
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| |
|
