Understanding the REIT Structure
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. To qualify as a REIT under federal tax law, the entity must meet specific requirements-such as distributing at least 90% of taxable income to shareholders. A real estate attorney is often involved in the early stages of this process, but their role is one piece of a larger puzzle.
The Attorney’s Role in Formation
A real estate attorney provides critical legal groundwork for a REIT:
- Entity Selection and Documentation: They help choose the right legal structure (e.g., corporation or LLC) and draft the formation documents, such as the articles of incorporation or operating agreement.
- Property Analysis and Due Diligence: They review title, zoning, and land use issues for any properties the REIT intends to acquire, identifying potential liabilities early.
- Contract Drafting and Review: They prepare or review purchase agreements, leases, and financing documents related to the REIT’s portfolio.
However, this work alone does not address all regulatory and tax requirements.
Where Specialized Expertise Is Required
Setting up a REIT involves more than real estate law. Key areas outside a typical real estate attorney’s practice include:
- Securities Law Compliance: Most REITs offer shares to the public, which triggers federal and state securities registration or exemption filings. A securities attorney is essential.
- Tax Qualification: The IRS imposes strict tests on asset composition, income sources, and distribution policies. A tax attorney or CPA who specializes in REITs must confirm compliance.
- Investment Advice: The financial strategy-what properties to buy, how to raise capital, and how to structure returns-requires a qualified investment advisor or financial planner.
A real estate attorney should never be expected to provide tax or securities advice without the proper credentials and experience.
Practical Steps for Investors
- Assemble a team early: Include a real estate attorney, a securities attorney, and a tax specialist familiar with REITs.
- Use the attorney for due diligence: They can spot red flags in property titles, leases, or zoning that might disqualify a REIT.
- Confirm the attorney’s scope: Ask directly whether they handle securities filings or tax qualification-and if not, ask for referrals.
Balanced Perspective
A real estate attorney adds genuine value by vetting properties and structuring real estate transactions within the REIT. But relying solely on their counsel to set up a compliant, tax-advantaged REIT would be a mistake. Always consult a multidisciplinary team-including a qualified securities and tax attorney-and verify that every state and federal rule is met for your specific investment strategy.