Real Estate Investment Trusts

1
Real Estate Investment Trusts The United
States Experience
CTPA Roundtable February 2, 2006 Paris,
France Tony M. Edwards, EVP General Counsel
2
Overview

• U.S. Tax Treatment of REITs and REIT Shareholders
• Operation and Profile of U.S. REITs
• Benefits of Investment in U.S. REITs
• Globalization of Real Estate Securities
• Tax Treaty Issues for REITs and REIT Shareholders

3
Qualification as REIT for U.S. Tax Purposes

• Company must be in the commercial real estate
  business
• At least 75 of assets must be real property and
  be held for the long-term
• At least 75 of revenue must come from real
  estate
• Stock must be widely held
• At least 100 shareholders
• 5 or fewer individuals can not collectively own
  more than 50 of the REITs stock

4
U.S. Tax Treatment of REITs and Shareholders

• REIT structure intended to eliminate entity-level
  tax
• At least 90 of taxable income must be
  distributed annually to shareholders
• Company receives a dividends paid deduction
• Income taxes are paid at the shareholder level

5
What is a U.S. REIT?

• Full-time professional management teams
• Business plans designed to maximize shareholder
  value
• SEC financial reporting and transparency
• Stock values backed by real assets
• Traditional corporate governance and
  accountability
• Tax transparency

6
The U.S. REIT Industry in 2005

• Over 475 billion of commercial real estate owned
• 15-20 of investment-grade commercial real estate
• More than 24,000 properties nationwide
• All major property sectors
• All major geographic regions
• 331 billion equity market capitalization
• 197 publicly traded REITs in the NAREIT index
• 169 REITs trade on the NYSE
• 35 REITs in SP indexes (9 in SP 500)

7
5 Reasons to Invest in U.S. REITs

1. Diversification
2. Dividends
3. Liquidity
4. Performance
5. Transparency

8
Dividends REITs Deliver Reliable Current Income
Average annual total returns 13.8 Average
annual dividends 8.1 percentage points or 59
of total return
Percent
Average annual dividend return 8.1
9
DividendsU.S. REITs Produce High Yields
Before-tax yields as of January 17, 2006
Percent
Equity REITs
Corporate Bonds
10-Year T-Notes
SP 500
3-Month T-Bills
10-Year TIPs
10
PerformanceShort-Term and Long-Term Performance
Compound annual total returns in percent,
December 31, 2005
30-Year Compound Total Return
3-Year Compound Total Return
REITs
SP 500
SP 500
REITs
11
Globalization of Real Estate Securities

• Many countries have adopted a REIT-type
  structure
• LPT - Listed Property Trusts (Australia)
• Dutch FBI - Fiscal Beleggings Instelling
  (Netherlands)
• S-REIT Singapore Real Estate Investment Trust
• J-REIT - Japanese Real Estate Investment Trust
• SIIC Sociétés d'investissements Immobiliers
  Cotées (France)
• Canadian REITs Legislated in 1993, growing
  universe
• Belgium REITs Growing universe
• Hong Kong REITs Largest REIT IPO Completed in
  November 2005
• Bulgarian REITs Newest country with REIT
  legislation
• Malaysian REITs Growing universe
• Under discussion
• United Kingdom Draft legislation issued by UK
  Treasury in Dec. 2005
• Germany Enabling legislation expected in 2006
  or 2007

12
Tax Treaty Issues for REITs and Shareholders

• Current tax treaty issues for REITs are very
  different than the issues with respect to
  collective investment vehicles
• The issue that has been addressed in the United
  States has been treaty treatment of dividends
  from REITs to REIT shareholders
• Key question treatment like other dividends
  versus treatment like direct real estate income

13
U.S. Tax Treaty Policy for REIT Dividends

• Pre-1988
• Non-U.S. investors in U.S. REITs treated the same
  as investors in non-REITs
• REIT dividends treated like all other dividends
• 1988-1997
• Non-U.S. individuals owning less that 10 of the
  REIT treated the same as investors in non-REITs
  and subject to 15 withholding tax rate
• All other shareholders treated the same as direct
  RE investors and subject to 30 withholding tax
  rate (except as otherwise provided under U.S. tax
  code)

14
U.S. Tax Treaty Policy for REIT Dividends

• 1997-today
• Non-U.S. shareholders treated the same as
  investors in non-REITs and subject to 15
  withholding tax rate if
• the shareholder owns 5 or less of the REIT and
  the REIT is listed
• the shareholder owns 10 or less of the REIT and
  the REIT is diversified
• the shareholder owns 10 or less of the REIT and
  the shareholder is an individual
• Other shareholders treated the same as direct RE
  investors and subject to 30 withholding tax rate
  (except as otherwise provided under U.S. tax code)

15
Theory Underlying U.S. Tax Treaty Policy

• Our new policy takes into account that portfolio
  investments in a REIT whether by individuals or
  institutional investors may be indistinguishable
  in intent and results from similar investments in
  other corporate securities and should be afforded
  similar tax consequences in appropriate
  circumstances.
• - Statement of Department of the Treasury Joseph
  H. Guttentag, International Tax Counsel Before
  the Committee on Foreign Relations (October 7,
  1997)

16
Future Treaty Issues for REITs and Shareholders

• As REITs become increasingly globalized, tax
  treaties can help facilitate this cross-border
  activity
• Cross-border investment in REITs by non-residents
• Tax treaties could provide rules to address the
  treatment of cross-border real estate investments
  of REITs
• Tax treaties could provide rules to address the
  cross-border investment of one REIT in another
  REIT