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Healthcare REIT Laws – What You Need to Know

By: Amanda Bhikhari

There has been much talk about the future of health care real estate investment trusts (REIT) and the evolution of the real estate market, as well as the way patient care is being provided in today’s world. With greater demand for outpatient and ambulatory surgical centers, the healthcare REIT market is forecasted to be a bullish market. Additional reasons for positive forecasts include an aging population with greater demand, a track record of high performance, and cost of equity capital. Investing in income-generating real estate can be a great way to increase net worth. For many, investing in real estate, particularly commercial real estate, seems to be out of reach financially. However, with the right partnerships and guidance, it is possible. REITs (pronounced “reets”) allow mall investors today to pool their resources with other small investors in order to invest in large-scale commercial real estate as a group.

So, what exactly is a REIT?

REIT stands for real estate investment trust, otherwise known as a “real estate stock.” Essentially, REITs are corporations that own and manage a portfolio of real estate properties and mortgages. If the REIT is publicly traded, anyone can buy shares and they will offer the same benefits of real estate ownership without the overhead or operational stresses that come with being a landlord.

Unlike actual real estate property, investors can quickly sell shares in a REIT, which creates an advantage of liquidity. In addition, since your investment does not solely lie in one piece of property, but a portfolio of properties, a REIT creates much less financial risk.

In order to qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders each year. In 1960, President Eisenhower signed the real estate investment trust tax provision which qualified REITs as pass-through entities because there was a high demand for real estate funds.

A corporation must meet several other requirements to abide by health care REIT laws, qualify as a REIT and gain pass-through entity status. They must:

  • Structure themselves as corporation, business trust, or similar association
  • Be managed by a board of directors or trustees. The board of directors or trustee must have bylaws and an operating agreement which governs the behavior and actions of the board.
  • Offer fully transferable shares
  • Have at least 100 shareholders
  • Pay dividends of at least 90 percent of the REIT’s taxable income
  • Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
  • Hold at least 75 percent of total investment assets in real estate
  • Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
  • Derive at least 75 percent of gross income from rents or mortgage interest

In order to qualify as a REIT, at least 95 percent of the gross income must come from financial investments such as rents, dividends, interest and capital gains. At least 75% must come from real estate sources such as rents, proceeds/gains from sale or disposition of property and any income gained from foreclosure on property.

REITs are part of an extremely complex and diverse industry, but they are also very profitable.

Not only are there different categories of REITs, many different property types and classifications can comprise them.

Let’s start with the three REIT categories: equity, mortgage and hybrid.

Stay tuned for our next article which breaks down the types of REITS and health care REIT laws.