Typical Structure of a REIT
By Tam Ging Wien
Most REITs operate on a simple business model, i.e. they acquire real estate and lease out the space, hence generating recurring rental or income on its real estate. The income generated is then distributed back to shareholders (or unitholders) in the form of dividends.
REITs utilise a trust structure to safeguard investor's interests.
Trusts are legal agreements established and governed by a Trust Deed where the ownership of one’s assets is transferred to an entrusted group (Trustees) to manage the assets and act in the best interest of 3rd party Beneficiaries (Shareholders or Unitholders) and in accordance to the provisions of the Trust Deed.
Additionally, REITs further segregates the duties of the Trustee and Manager.
As a result of this trust structure, the legal and beneficial ownership of assets are separated. The Trustee is the legal owner of the real estate assets while these assets are professionally managed by the Manager. Both the Trustee and Manager have the fiduciary duty to always put the interests of the Beneficiaries above their own.
REITs achieve separation of powers and duties by segregating the roles of ownership and management of the REIT assets between the Trustee and REIT Manager.
The Trustee is responsible for the ownership and safe custody of the REIT’s assets. They act on behalf of unitholders to ensure the REIT Manager complies with applicable laws and performs its requisite duties as laid out in the Trust Deed.
The REIT Manager, on the other hand, is appointed to manage the REIT in the best interests of the unitholders, which includes setting strategic direction, managing assets and liabilities, as well as providing recommendations to the Trustee on the acquisition, divestment or enhancement of assets in accordance with the REIT’s stated investment mandate.
In short, the REIT Manager acts as an investment portfolio manager, and is usually paid a base fee for its service, as well as bonus fees should its performance exceed expectations.
The REIT Manager in turn has the authority to appoint Property Managers for each property managed by the REIT, whose role is to manage the day to day operations and maintenance of the property. The Property Manager is paid a fee for its services.
Most REITs have sponsors (typically but not necessarily property developers) which provide backing to the REIT by injecting their own properties into the REIT during listing. These sponsors continue to support the growth of the REIT by providing the REIT rights to acquire the sponsor’s future pipeline of properties. These sponsors may sometimes themselves be a major unitholder of the REIT they sponsor.
Properties that are tenanted out provide a steady stream of income to the REIT. Income from the properties are first used to pay the expenses of operating the REIT, such as interest payments, manager and trustee fees, whilst the remaining balance can be kept in reserve and/or distributed to unitholders. As per tax transparency laws in most jurisdictions, a REIT must pay out at least 90% of their taxable income.