subject: Comparison Of Mlps And Reits [print this page] Real Estate Investment Trusts (REIT) is an investment trust or a corporation where groups of people invest their money in real estate businesses directly, either through properties or through mortgages. It is a security that sells like a stock on major exchanges and shows the best features of both stocks and real estates. It can also be considered as an income security that combines the capital of many investors to acquire various real estate assets, with an added profit for the investors, who get to have a more liquid investment. A Multiple Limited Partnership (MLP) on the other hand is a fixed partnership that is traded on a securities exchange just like the shares of a corporation. Like REIT, it is also usually used for real estate and natural resources. Although MLP units trade just like REIT shares, they distribute income and capital gains differently and have discrete tax ramifications.
To be proficient as a Real Estate Investment Trusts company it is legally required for a company to compensate substantially all of its taxable income (90%) in the form of dividends and distributions to its shareholders once every year. Once the company is qualified as Real Estate Investment Trusts, it can diminish the dividends, which it provides to the shareholders. For a company or partnership to be legally capable, as a Multiple Limited Partnership the partnership must derive 90% of its money flow through activities or interests and dividend payments relating to a invariable kind of business, mostly pertaining to real estate and natural resources.
In REIT there is no double taxation of the income to the shareholders. Real estates owned by REIT pay no income taxes. MLP has tax advantages equivalent to those of REIT but it suffers from troublesome administrative costs and agency issues because of which it is not considered as a proper vehicle for the real estate businesses. MLPs do not remunerate income taxes on their earnings and hence their dividends are not eligible for the 15% tax rate. A REIT must invest 75% of the whole assets in real estate assets. REITs invest in shopping malls, office buildings, apartments, warehouses and hotels.
REITs can be classified in to three categories:
1.Equity REITs: They own real estate.
2.Mortgage REITs: They loan money to real estate owners or buy existing mortgages or mortgages backed securities.
3.Hybrid REITs: they own property as well as loan funds to owners of real estates.
MLPS are also classified in to three categories:
1.Roll-up: Multiple assets or small limited partnerships consolidated into a broad single multiple limited partnerships.
2.Rollout: A large, single multiple limited partnership like a corporation spins off some of its assets into a separate multiple limited partnerships.
3.Roll-in: brand-new assets put into a multiple limited partnership with a guaranty to combine supplementary assets in the future.
Real Estate Investment Trusts are total return investments and provides a system to capitalize on the financial benefits of the real estate business. They purvey a acceptable investment vehicle for investors with restricted financial means, who can pool their resources and invest in real estate properties without any main commitment of time or capital required for direct ownership. One of the more substantial benefits of Multiple Limited Partnerships is the diversification value they purvey to bonds, utilities, real estate investment trusts, and other high yielding investments. A standard circumstance for Multiple Limited Partnerships is one in which interest rates are steady or declining and cash distributions are rising. Limited partnership organizational structure in real estate might be profitable only to investors in high tax brackets.
by: Jim Knight
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