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I'm working in a real estate investment group this summer, and I'm looking for some background reading/material on REITs. I figured I would ask here before hitting the Google machine.

Not sure what real estate investment work entails, but this post could be helpful: http://www.top-law-schools.com/forums/v ... 5#p7651610.

Real estate practitioner here. Have not dealt with one REIT issue in my entire career. Private equity funds are far more likely than REITs to engage big firms due to cost issues. Confirm your firm does REIT work before you bark up that tree.

Thanks for the quick responses. The group I'm going into actually specializes in REITs; their main focus is on taking real estate companies public and also helping structure their financing.

REITs are, in a sense, like private equity or venture capital funds. They raise capital from outside investors, sometimes/to some extent they lever up, and then they deploy their capital in investments with the hope of selling off those investments (or generating rent) over the life of the fund to get a return on that investment. The difference being, of course, that REITs aren't buying and selling equity in companies, they're buying real estate (though, of course, they do that through entities, which tend to be LPs or LLCs or sometimes S-corps, so on a certain level they are dealing with equity).

That means there are two (main) parts to REIT work: raising the money and utilizing the money. Raising the money involves forming the entity that will constitute the fund, negotiating the terms of the fund with the investors (such as how money is distributed when the fund is finished) and getting everyone to sign the partnership agreement. There is a lot of tax work to be done here because investors are often non-profits (think university endowments) or foreign investors who need specialized tax treatment (necessitating "blocker" entities), and ERISA work as well because pension funds are also investors. Much of this part is fairly similar to other forms of fund formation, but because REITs have a special tax status, there are some quirks thrown in there (I'm not a tax guy, I just take their word on it).

The next stage is deploying the money. Basically, you have a client with a big pool of money they need to use to buy and sell real estate to generate a return on investment. Sometimes this is buying and selling existing real estate, and different REITs often have different focuses, such as suburban commercial real estate or urban multifamily residential; others are less picky.

Often investments are made by working with developers though a joint venture (a "JV") to build a new development. The REIT will supply, say, 70% of the money, while the developer puts in 10% (the rest is a borrowed from a bank or other lender, and sometimes there's junior debt too) and does all the work. The lawyers get involved to negotiate the terms of the JV and draft the documents that bind the parties to that deal. How will profits be split is one question; it won't just be pro rate based on who put in money because you have to put some value on the developers work in building the project. Other questions involve who gets decisions on running the development: How does rent get paid, back to the investors or re-invested? Who gets to approve new tenants? What if one party wants to sell and the other doesn't? What if there are cost overruns, should the two parties pay pro rata based on their initial investment percentages, or should the developer put more in because it's his job to run things? These are business decisions but lawyers will draft the agreements.

Involved in all this is the standard real estate work: purchase and sales agreements, deeds, title insurance, etc. It's just usually larger, more complicated deals that are focused on returning investment over a certain period of time and thus need to be structured differently.

REITs are also like other companies: they can get merged, they can go public, etc. Doing diligence on REIT mergers is notorious drudgery for junior associates; you'll be reading through maybe hundreds of leases for change of control provisions or other key terms to make sure your client is buying what they thing they're buying.

To add on to that great summary, from an agreement standpoint, the agreements have to be drafted a particular way as well because of the special tax status of REITs. It's very particular as to how payments are structured and identified, and what monies they can receive when they invest in a property.

JusticeHarlan wrote:REITs are, in a sense, like private equity or venture capital funds. They raise capital from outside investors, sometimes/to some extent they lever up, and then they deploy their capital in investments with the hope of selling off those investments (or generating rent) over the life of the fund to get a return on that investment. The difference being, of course, that REITs aren't buying and selling equity in companies, they're buying real estate (though, of course, they do that through entities, which tend to be LPs or LLCs or sometimes S-corps, so on a certain level they are dealing with equity).

That means there are two (main) parts to REIT work: raising the money and utilizing the money. Raising the money involves forming the entity that will constitute the fund, negotiating the terms of the fund with the investors (such as how money is distributed when the fund is finished) and getting everyone to sign the partnership agreement. There is a lot of tax work to be done here because investors are often non-profits (think university endowments) or foreign investors who need specialized tax treatment (necessitating "blocker" entities), and ERISA work as well because pension funds are also investors. Much of this part is fairly similar to other forms of fund formation, but because REITs have a special tax status, there are some quirks thrown in there (I'm not a tax guy, I just take their word on it).

The next stage is deploying the money. Basically, you have a client with a big pool of money they need to use to buy and sell real estate to generate a return on investment. Sometimes this is buying and selling existing real estate, and different REITs often have different focuses, such as suburban commercial real estate or urban multifamily residential; others are less picky.

Often investments are made by working with developers though a joint venture (a "JV") to build a new development. The REIT will supply, say, 70% of the money, while the developer puts in 10% (the rest is a borrowed from a bank or other lender, and sometimes there's junior debt too) and does all the work. The lawyers get involved to negotiate the terms of the JV and draft the documents that bind the parties to that deal. How will profits be split is one question; it won't just be pro rate based on who put in money because you have to put some value on the developers work in building the project. Other questions involve who gets decisions on running the development: How does rent get paid, back to the investors or re-invested? Who gets to approve new tenants? What if one party wants to sell and the other doesn't? What if there are cost overruns, should the two parties pay pro rata based on their initial investment percentages, or should the developer put more in because it's his job to run things? These are business decisions but lawyers will draft the agreements.

Involved in all this is the standard real estate work: purchase and sales agreements, deeds, title insurance, etc. It's just usually larger, more complicated deals that are focused on returning investment over a certain period of time and thus need to be structured differently.

REITs are also like other companies: they can get merged, they can go public, etc. Doing diligence on REIT mergers is notorious drudgery for junior associates; you'll be reading through maybe hundreds of leases for change of control provisions or other key terms to make sure your client is buying what they thing they're buying.

Thanks for this wonderful summary!

JusticeHarlan wrote:REITs are, in a sense, like private equity or venture capital funds. They raise capital from outside investors, sometimes/to some extent they lever up, and then they deploy their capital in investments with the hope of selling off those investments (or generating rent) over the life of the fund to get a return on that investment. The difference being, of course, that REITs aren't buying and selling equity in companies, they're buying real estate (though, of course, they do that through entities, which tend to be LPs or LLCs or sometimes S-corps, so on a certain level they are dealing with equity).

That means there are two (main) parts to REIT work: raising the money and utilizing the money. Raising the money involves forming the entity that will constitute the fund, negotiating the terms of the fund with the investors (such as how money is distributed when the fund is finished) and getting everyone to sign the partnership agreement. There is a lot of tax work to be done here because investors are often non-profits (think university endowments) or foreign investors who need specialized tax treatment (necessitating "blocker" entities), and ERISA work as well because pension funds are also investors. Much of this part is fairly similar to other forms of fund formation, but because REITs have a special tax status, there are some quirks thrown in there (I'm not a tax guy, I just take their word on it).

The next stage is deploying the money. Basically, you have a client with a big pool of money they need to use to buy and sell real estate to generate a return on investment. Sometimes this is buying and selling existing real estate, and different REITs often have different focuses, such as suburban commercial real estate or urban multifamily residential; others are less picky.

Often investments are made by working with developers though a joint venture (a "JV") to build a new development. The REIT will supply, say, 70% of the money, while the developer puts in 10% (the rest is a borrowed from a bank or other lender, and sometimes there's junior debt too) and does all the work. The lawyers get involved to negotiate the terms of the JV and draft the documents that bind the parties to that deal. How will profits be split is one question; it won't just be pro rate based on who put in money because you have to put some value on the developers work in building the project. Other questions involve who gets decisions on running the development: How does rent get paid, back to the investors or re-invested? Who gets to approve new tenants? What if one party wants to sell and the other doesn't? What if there are cost overruns, should the two parties pay pro rata based on their initial investment percentages, or should the developer put more in because it's his job to run things? These are business decisions but lawyers will draft the agreements.

Involved in all this is the standard real estate work: purchase and sales agreements, deeds, title insurance, etc. It's just usually larger, more complicated deals that are focused on returning investment over a certain period of time and thus need to be structured differently.

REITs are also like other companies: they can get merged, they can go public, etc. Doing diligence on REIT mergers is notorious drudgery for junior associates; you'll be reading through maybe hundreds of leases for change of control provisions or other key terms to make sure your client is buying what they thing they're buying.

I want to report this post. It's too good for TLS.

Being a REIT allows you to avoid paying federal income tax at the corporate level, as long as you pay out 90% of earnings as dividends. This makes it a very attractive option for large real estate deals, and income-oriented investors like them because they tend to pay strong dividends. If I recall correctly, there are several types of business that a REIT can do, such as buying and managing properties, making loans, etc.