See Real Estate Investment Trust.


Frequently Asked Questions about Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a real estate mutual fund allowed by tax law to avoid corporate income tax by distributing the majority of its income to shareholders. A REIT sells ownership shares and must invest in real estate or mortgage loans, meeting requirements such as dispersed ownership and income tests.

REITs must distribute at least 90% of their taxable income to shareholders, which avoids taxation at the corporate level. However, dividends received by shareholders are taxable at the individual level.

REIT shares can be publicly traded on major stock exchanges or privately held, depending on the structure and target investor base.

Unique performance metrics used for REITs include Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO). These metrics adjust for non-cash items like depreciation and account for recurring capital expenditures.

FFO is calculated by adding depreciation and amortization back to net income and excluding gains or losses from property sales. For example, if net income is $1.8M and depreciation is $0.6M, FFO equals $2.4M.

AFFO adjusts FFO for recurring capital expenditures and other operational costs. It gives a more accurate picture of the cash available for distribution to shareholders. For example, if FFO is $2.4M and capex is $0.2M, AFFO equals $2.2M.

REITs typically distribute 90–95% of AFFO to shareholders. In a sample case, a REIT distributing $2.09M over 10 million shares would pay $0.209 per share.

REITs allow investors to access large-scale real estate investments with the benefit of regular income through dividends, without facing corporate-level taxation.



Click here to get this CRE Glossary in an eBook (PDF) format.