This week, MyNOI covered what a Real Estate Investment Trust is and some of the pros and cons of investing in them. Today, we’ll cover how REITs came into being.
REITs were created in 1960 as then President Dwight E. Eisenhower signed Public Law 86-779, which is also known as the Cigar Excise Tax Extension of 1960. The law sought to treat large-scale, diversified, income-producing real estate holdings in the same way that other asset classes are treated: purchased and sold as liquid securities.
By treating income producing real estate in the same manner as stock-based investment, it was hoped that the benefits of real estate investment could be brought to a larger segment of the investing population, thus democratizing a very valuable and reliable investment vehicle.
By encouraging investment in real estate through exempting REITs from corporate taxes (qualifying income from a REIT must be distributed as dividends), Eisenhower and the champions of the REIT regime in congress created a huge boon in real estate investment.
The first REITs were primarily focused around Mortgage Companies but later expanded in the late 60s and early 70’s in the form of land development and construction deals. In 1976, the Tax Reform act opened the door for REITs to be established as both business trusts and corporations. Between 1969 and 1974 total REIT industry assets increased from $1 billion to $21 billion.
Since the initial formation of the US REIT regime in 1960, more than 30 countries around the world have followed suit, establishing their own version of the REIT system.
In 1991, the first REIT reached $1 billion market cap, and in 1993 Bill Clinton signed into the law the “Five or Fewer” rule, which made it easier for pension plans to invest in REITs.
In 1992 the modern era of REITs began with Retail REIT Taubman Centers Inc. and the creation of the UPREIT. In an UPREIT, a new “operating partnership” is formed between the parties of an existing partnership and a REIT. In this arrangement the partners who contributed properties can exchange their operating partnership units for either cash or REIT shares, and the REIT is both the the majority owner of the operating partnership units and general partner (typically).
During the 2007 global financial crisis kicked in, listed REITs worked to deleverage and re-equitize their balance sheets, raising $37.5 billion as investors acted favorably to companies that were focused on strengthening their balance sheets during and post crisis.
Fast forward to now, as of Aug. 31, 2016, 189 REITs were listed on the New York Stock Exchange and have a combined equity market capitalization of $986 billion. The rise of the REIT has been a huge deal for investors and the real estate industry in the US, and around the world.