Couple questions about REITs - please help!

<span class=keyword_link><a href=//www.wallstreetoasis.com/company/fairvalue-advisors>FairValue</a></span>:

Dear all, can you please help me with several questions regarding REITs.

1. In what assets can REIT invest? Specifically, can it invest in stock of a company owning property (i.e. project company)? Can it invest in holding company owning project company owning properties?
If yes, will income (dividends) from such subsidiaries will qualify as income from real estate assets?

2. Can REIT provide loans to real estate companies? (to daughter, or granddaughter, to 3rd party cos). Let's assumed the loan will be secured by real estate pledge.
If yes, does interest income qualify as income from real estate?

3. How is management fee usually structured for REIT manager? Is it fixed, % of NAV or something else?

4. Is it common to have some incentive similar to carried interest for REIT manager?

5. If REIT can invest in stock of project companies, what are restrictions to attract debt at subsidiary level?

Thank you.

1. Yeah, of course. Generally REITs will have tons of bootleg little LLCs, where each one owns its own property and will have some sketchy name like "117 w. 32 LLC" which will then roll up into one of several larger opcos which will roll up into the holdco which is the REIT. Corporate structures vary but as a rule, the actual "REIT" entity itself generally does not own real estate outright, but owns equity in other corporate entities that own real estate. So yeah, REITs can certainly own equity in corporate entities that own property an more often than not that's all they own. If you mean like... have the right to buy stocks on public equity markets just because the company they're buying owns real property then no. I mean... Goldman Sachs owns 200 west, right? That doesn't mean a REIT could buy GS stock.

Also I'm not a tax lawyer or anything, but even if it were legal to buy public equity into a REIT wouldn't it make no sense from a tax perspective? The REIT is like a pass-through entity so don't you have to pay personal income tax on distributions as opposed to 15% on equity distributions?

2. Yeah it's called a mortgage REIT. I think there's some hubbub about making them illegal but for now it's fine. Redwood Trust is a good example of one that's been active recently. I don't think they can do unsecured corporate lending though. Pretty sure it has to be mortgages.

3. Can't say with 100% certainty as I'm not on the compensation committee at a REIT, but my guess is that it's like any other CEO, salary woth some discretionary bonus. Shouldn't be NAV as that creates a perverse inventive given that real property is highly leverageable and REIT investors are generally yield buyers. So if comp were NAV driven wouldn't the incentive be to lever every property to the hilt and soak up all your NOI in interest payments to fund acquisitions? I mean it's a REiT not a hedge fund, you know? Would be surprised i it were NAV driven but i guess ive seen dumber shit before. Anyways, plenty of REITS are public, cant you just look at the 10-k of some REiT and see management compensation?

4. Conceptually I feel like management carried interest as a perk doesn't really make sense in the context of a REIT. I mean... Aren't all the equity holders basically carried interest investors? All a REIT does is buy real property and pay out the cash it throws off to equity holders. How would carried interest be different from just buying the equity?

5. No restrictions at the subsidiary level from the government/regulators, but there are restrictions from the corporate level lenders generally. Every REIT builds their capital structure a bit differently, but in general at te most basi level for the big guys its some combination of mortgage and corporate debt at the holdco level. Obviously that's very simplistic and REIT capital structures are generally quite interesting and complex, but the mortgage debt is always going to be structurally senior to the corporate debt, and since all that a REIT is is a bunch of properties, obviously you would never lend at the corporate level if every property had a mortgage on it and would get ripped out from under you in a bankruptcy. So they'll generally include bond covenants in corporate debt that limits the amount of properties you can mortgage. The opposite is not true though, like, mortgages are silent on holdco level borrowing (but not propco level mezz) im guessing because of bankruptcy remoteness issues