REITs have long been valued because of their ability to obtain a deduction for dividends paid to shareholders in order to avoid double taxation of C companies. In the past, the REIT structure has been favored by exempt and foreign investors because of the tax efficiency of this type of investor. U.S. individuals were less likely to be interested because of the loss of passport tax that was available in partnerships. As a result of recent changes in tax legislation, REITs have become attractive investment vehicles and also offer individual investors opportunities for tax savings. The demand for REITs in the market continues to grow, with different investors waiting for them and even demanding them in some structures. However, due to the complexity of the requirements, REITs must ensure continued compliance in order to maintain REIT status and maximize the tax benefits that their investors can possibly obtain. In order to ensure compliance with the above-mentioned rules, REITs must issue an annual shareholder credentials to a number of reit shareholders. The number of letters of credence sent is based on the number of REIT shareholders. These letters must be sent to shareholders within 30 days of the end of the REIT fiscal year. The letter of credence confirms by shareholders that a U.S. RSP must be created in one of the 50 states or in the District of Columbia as an entity taxable for federal purposes as a capital corporation.
It must be managed by directors or agents and its shares must be transferable. From its second fiscal year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer people must not hold more than 50% of the value of the shares of the REIT (the 5/50 test) in the last half of its fiscal year. A RSP must issue transferable shares or transferable economic interest allowances to support its ownership. This requirement must be met at the time of creation, unlike the 100-shareholder test. There are some scenarios in which portability restrictions do not violate this rule. Some of these scenarios are: in addition, the REIT must send annual letters to its shareholders in which it gives details about the economic ownership of the shares. Significant penalties are imposed if a REFORET does not send these letters on time. The 100-shareholder test is generally not a problem for actively traded public REITS or for non-negotiated REITs (listed but little negotiated REITS). Private REITs, often used in real estate private equity structures, would however struggle to perform this test if there were no REIT shareholder shelters that would help secure shareholders for the REIT. . . .
