REIT - Real Estate Investment Trust
John Vanhara Norm Brodsky in INC.com writes about his ideas for REIT. It is really interesting concept how to get cash from your existing business, and diversify at the same time. When reading this, I would like to start similar concept. I think this is really good idea… If anybody has some experience in starting REIT please let me know.
A REIT, or a real estate investment trust, is essentially a mutual fund that owns real estate rather than stock. Investors buy stock in the REIT, which acquires the properties and — by law — pays out in dividends most of the rental income they produce. Initially, we thought we might sell our real estate to an established REIT, taking so-called partnership units in payment rather than cash. Because we’d be swapping the REIT’s partnership units for our own, we could continue to defer the taxes we owed on the money we’d taken out when we’d refinanced our property. We wouldn’t have to pay them until we decided to cash out, at which point we’d turn our REIT units into REIT stock and sell it like any other security. Meanwhile, we’d be earning those dividends.
Beyond such considerations, REIT stock has one big advantage over actual real estate — it’s extremely liquid. It’s also true that property generally sells for a higher multiple of cash flow than a business does. By spinning off the property and selling it to a REIT, you can take advantage of that higher multiple.
To the REIT, the value of property depends on the rental income it generates. Suppose a REIT was buying property at 10 times the annual rental income. If your business was paying a low market rent of $2 million a year, you could trade the real estate for $20 million in REIT partnership units, readily convertible to stock. Or you could agree to pay a higher market rent of, say, $3 million a year, in which case you could get partnership units (and hence stock) worth $30 million. To be sure, the increase in the rent would diminish the value of the business by reducing its earnings, but you’d be getting the cash out at a higher multiple and diversifying your holdings. On top of all that, selling to a REIT lets you dispose of the personal guarantees that banks insist you sign when you take out a mortgage or a building loan.
The deal sounded perfect for someone like me. It sounded so good, in fact, that I couldn’t help thinking there must be other people in my situation — owners of records storage companies who weren’t yet ready to sell their businesses but who were seeking diversification. And so my partner Sam and I began exploring the possibility of setting up our own REIT. If all goes well, Archive Storage Realty Trust Inc. will be my next business.