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Enjoying preferential tax treatment, REITs are subject to strict compliance requirements. To qualify as a REIT, a company must pass a quarterly asset test and an annual income test, demonstrating that it distributes at least 90% of its taxable income as dividends and holds at least 75% of its total assets in real estate, cash or government securities. Additionally, REITs operating in the U.S. have to comply with state reporting requirements, which may include compliance with state security laws and annual filings. Last but not least, REITs have extensive shareholder reporting obligations, which include disclosure about the properties in their portfolios and financial performance.
In the constantly evolving regulatory landscape, with new rules, guidelines and disclosures being added continuously by various regulators, REITs need robust governance and reporting strategies to ensure compliance. Below, we discuss specific disclosure requirements imposed on REITs and practical strategies to streamline reporting and governance.
Real estate investment funds are classified by the types of assets they hold, including equity REITs owning and operating income-generating real estate, mortgage REITs investing in mortgages or mortgage-backed securities, or hybrid REITS. Despite these differences, most types of REITs have to provide the same types of disclosures as outlined below.
Having to distribute over 90% of their taxable income as dividends, REITs have particular obligations related to shareholder reporting. They are required to provide detailed disclosures about properties in their portfolio, including location and type of properties, as well as their financial performance.
In particular, REITs are obliged to have a CPA audit of their annual statements and include the results of the audit in annual shareholder reporting. The latter should also include a report on dividend distribution on Form 1099-DIV as well as information about the shareholders' allocable share of the REIT's taxable income, capital gains and other financial data.
As most REITs in the U.S. are registered with the Securities and Exchange Commission, they have to file annual reports with the SEC disclosing detailed information on their business, their financial condition and results of their operations. In addition, REITs file reports on material events or significant changes, for example, changes of the CEO or acquisitions, and further provide quarterly updates on their financial performance.
On top of that, REITs need to provide multiple other disclosures, including:
State regulations add another level of complexity to REITs' compliance, setting additional reporting requirements to comply with state securities laws. Known as "Blue Sky Laws," these state laws can impose additional regulatory burdens and provide certain exemptions.
According to state securities laws, REITs may need to provide specific disclosures to investors within their respective jurisdictions. Such disclosures may include information about financial performance, management teams, or portfolio details above what is included in the federal requirements.
With more than 100 shareholders to qualify as a REIT, a company has a considerable reporting burden related to investors alone, not to mention federal and state disclosures. This requires effective cap table management and streamlined shareholder reporting to ensure regulatory compliance and provide transparency about the portfolio ownership structure.
Given the diversity of portfolios owned by REITs to maximize returns and manage risks, the compliance teams need a central database for all corporate records to have control of their data, update information in real-time and push it into reports. REITs further need to ensure unobstructed access to their data for all teams, including legal, compliance, tax, accounting and finance, to harmonize data across departments and ensure the potential to scale up.
In ensuring regular filings with SEC, IRS and local state regulators, the teams need automation and customizable templates for quarterly and annual reporting. The compliance teams will benefit from automated processes and reminders to ensure that all filings are submitted on time and no important deadline is missed for any of their multiple disclosures.
The volume and complexity of regulations affecting real estate investment funds create a substantial burden on legal, tax and finance teams to keep up with regulatory filings and ensure compliance. In pursuing diversification of their portfolios, REITs need to implement effective practical tools to leverage all their corporate data as a strategic resource and provide for necessary filings.
Assisted by modern technology, the teams can provide for effecting cap table management and shareholder reporting and ensure effective compliance on both federal and state levels. For more information, schedule a free demo or take a self-guided product tour.
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