December 15, 2017
By Terry Painter, Mortgage Banker
Member of the Forbes Real Estate Council
At Apartment Loan Store, some of our funds for permanent and bridge loans for financing apartment buildings come from REITS. These loans have great rates and reasonable terms with one to 10 year fixed rates and usually a 25 – 30 year amortization.
REIT stands for Real Estate Investment Trust. REITS are companies owning and usually operating real estate that produces income. There are quite a few kinds of commercial realty that REITS own. These include multifamily complexes, office buildings, hospitals, golf courses, shopping centers, and hotels.
There are some REITS that are involved in real estate financing. In 1960, a law was enacted by United States Congress to give a real estate structure for investment that is similar to the investment vehicle of mutual funds in how they provide for people to make stock investments. Pension funds sometimes invest in REITS.
A real estate investment trust (REIT) is a vehicle for producing income that is viable. This viability is because REITs do not have to pay US income tax to the US Government. Generally an REIT has to pay 90% or more of their income from US income tax to shareholders in dividends.
How Are REITS Traded
- On major exchanges they are publicly traded.
- They can be publicly traded but not listed
- Or they can be privately traded or privately held and not traded
Three Key Statistics for the Operation and Financial Position of REIT’s
- (NAV) Net Asset Value
- (FFO) Funds from Operations
- (AFFO) Adjusted Funds from Operations
Two Types of REIT’s
There are two main kinds of REITS. There are Mortgage REITS and Equity REITS. In November of the year 2014, Equity REITS were distinguished as its own asset class. This was by the indices of S and P Dow Jones, Industry Classification Standard, as well as MSCI.
What is a Mortgage REIT?
A Mortgage REIT is involved with both the investment and the ownership of mortgages of property. There are two things Mortgage REITs do:
1. They are in the business of lending money to realty owners for their mortgages.
2. Or they do something different – they buy existing mortgages or a type of security called a mortgage backed security.
How do Mortgage REITs get paid? The principal way they get paid is through interest earnings from mortgage lending. Less than ten percent of REITs happen to be Mortgage REITs. This type of REIT lends with the assurance of it being secured by realty. And it is important to note that they usually don’t have ownership of realty nor operate realty.
What are Equity REITS?
An Equity REIT exists for the purpose of investing in properties, and also has ownership of properties. This means that it is responsible for the value (equity) of the REITs realty assets. The income from Equity REITS is derived primarily from the rents of the properties they own. The operations of realty is what the majority of REITs are focused on. And this is the hard asset side of operations. Most often when you read about REITs, you are reading about Equity REITs. When you invest in Equity REITs, you will see that each REIT usually specializes in owning certain kinds of buildings including office buildings, malls, facilities for lodging, and multifamily complexes. Some kinds of REITS are diversified (owning multiple kinds of buildings), while some of them are specialized—owning one type of building, such as an REIT of Apartment Complexes.
I hope this article was helpful. Call one of our friendly loan specialists to discuss your financing needs, your future goals and strategies to determine the right loan program for you:
By Bruce Painter/ Apartment Loan Store and Business Loan Store