Entertainment Properties Trust

A REIT is essentially a corporation or business trust that combines the capital of many investors to acquire or provide financing for all forms of real estate. A REIT serves much like a mutual fund for real estate in that retail investors obtain the benefit of a diversified portfolio under professional management. Its shares are freely traded, often on a major stock exchange.

A corporation or trust that qualifies as a REIT generally does not pay corporate income tax to the Internal Revenue Service (IRS). This is a unique feature and one of the most attractive aspects of a REIT. Most states honor this federal treatment and do not require REITs to pay state income tax. This means that nearly all of a REIT's income can be distributed to shareholders, and there is no double taxation of the income to the shareholder. Unlike a partnership, a REIT cannot pass its tax losses onto its investors.

Starting in 1992, to address potential taxes related to the formation of a REIT when various partnerships ("Existing Partnerships") owning multiple properties are involved, a new form of REIT emerged. The "umbrella partnership REIT" ("UPREIT") proved popular in attracting capital, and since its creation more than 75 percent of new REITs have taken that form.

In the typical UPREIT, the partners of the Existing Partnerships and a newly-formed REIT become partners in a new partnership termed the Operating Partnership. For their respective interests in the Operating Partnership ("Units"), the partners contribute the properties from the Existing Partnerships and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and majority owner of the Operating Partnerships Units.

After a period of time (often one year) the partners may enjoy the same liquidity of the REIT shareholders by tendering their Units for either cash or REIT shares (at the option of the REIT or Operating Partnership). This conversion may result in the partners incurring the tax deferred at the UPREIT's formation. The Unitholders may tender their Units over a period of time, thereby spreading out such tax. In addition, when a partner holds the Units until death, the estate tax rules operate in such a way as to provide that the beneficiaries may tender the Units for cash or REIT shares without paying income taxes.

Existing UPREITs frequently issue additional Operating Partnership Units to partners in existing partnerships that hold and operate commercial real estate. The new Unitholders achieve precisely the same benefits of the tax deferral and liquidity as the original contributors to the Operating Partnership. The REIT benefits by being able to acquire additional assets without having to immediately tap into the capital markets.

In late 1994, the Internal Revenue Service issued final regulations approving one variant of the UPREIT structure. However, the solution of many technical issues still should be addressed by tax counsel when an UPREIT is used.

In order for a corporation or trust to qualify as a REIT, it must comply with certain provisions within the Internal Revenue Code. As required by the Tax Code, a REIT must:

• be a corporation, business trust or similar association;
• be managed by a board of directors or trustees;
• have shares that are fully transferable;
• have a minimum of 100 shareholders;
• have no more than 50 percent of the shares held by five or fewer individuals during the last half of each taxable year;
• invest at least 75 percent of the total assets in real estate assets;
• derive at least 75 percent of gross income from rents from real property, or interest on mortgages on real property;
• derive no more than 30 percent of gross income from the sale of real property held for less than four years, securities held for less than one year or certain prohibited transactions;
• pay dividends of at least 95 percent of REIT taxable income.

REITs were created to provide investors with the opportunity to participate in the benefits of ownership of larger-scale commercial real estate or mortgage lending, and receive an enhanced return, because the income is not taxed at the REIT entity level. This means that a diverse range of investors can realize investment opportunities otherwise available only to those with larger resources. This opportunity first became available when President Eisenhower signed the real estate investment trust tax provisions into law in 1960. The basic provisions of this law remain unchanged, although there have been a number of improvements to the law over the past 30 years.

The REIT industry has benefited from tax reform initiatives enacted in the 1980s. These initiatives eliminated the incentive of tax-sheltered real estate vehicles and promoted a return to the fundamentals of capital formation and investment in real estate for income and appreciation. A tax change in 1986 allowed REITs to manage their properties directly, and a 1993 change removes a significant barrier to pension plan investment in REITs.

Thousands of investors, both U.S. and non-U.S., own shares of REITs. So do pension funds, endowment funds, insurance companies, bank trust departments and mutual funds.

An individual who chooses to invest in a REIT seeks to achieve current income distributions and long-term stock appreciation potential. An investor also has the benefit of liquidity, if needed.

REIT shares typically may be purchased from $2 to $40 each, with no minimum purchase required.

No. REITs are not partnerships. There are important organizational and operational differences between REITs and limited partnerships.

One of the major differences between REITs and limited partnerships is how annual tax information is reported to investors. An investor in a REIT receives IRS Form 1099 from the REIT, indicating the amount and type of income received during the year. An investor in a partnership receives a very complicated IRS Schedule K-1.

The oversight/corporate governance features of a REIT are believed to be far superior to those of a partnership.

There are over 300 REITs operating in the United States today. Their assets total over $61 billion. Over 80 percent of these trade on the national stock exchanges:

New York Stock Exchange - 147 REITs
American Stock Exchange - 42 REITs
NASDAQ National Market System - 12 REITs

In addition, there are dozens of REITs that are not traded on a stock exchange.

Like all companies whose stocks are publicly traded, REIT share prices are quoted daily. To determine a value for these shares, typical analysis involves one or more of the following criteria:

Anticipated total return from the stock, calculated from the anticipated price change and the prevailing yield;
Current prevailing dividend yield relative to other yield-oriented investments (e.g., bonds, utility stocks);
Dividend coverage from funds from operations;
Management quality structure;
Anticipated growth (or lack thereof) in funds from operations per share;
Underlying asset value of the real estate and/or mortgages, and other assets

The REIT industry has a diverse profile, which offers many attractive opportunities to investors. REIT industry analysts often classify REITs in one of the three investment approaches.

Equity REITs own real estate. Their revenue comes principally from rent. REIT industry investments in property ownership have increased steadily for 30 years.
Mortgage REITs loan money to real estate owners. Their revenue comes principally from interest earned on their mortgage loans. Some mortgage REITs also invest in residuals of mortgage-based securities.
Hybrid REITs combine the investment strategies of both equity REITs and mortgage REITs.

Industry Profile
REIT Type by Market Capitalization
Oct. 31, 1996

REITs can also be distinguished by...

Type of property...
Some REITs invest in a variety of property types -- shopping centers, apartments, warehouses, office buildings, hotels, etc. Other REITs specialize in one property type only, such as shopping centers or factory outlet stores. Health care REITs specialize in health care facilities: hospitals, including acute care, rehabilitation and psychiatric, medical office buildings, nursing homes, and congregate and assisted living centers.

Geographic focus...
Some REITs invest throughout the country. Others specialize in one region only, or even a single metropolitan area.

$70.481 Billion REIT Industry Profile
by Property Investment Strategy
Oct. 31, 1996

A REIT's investments are determined by its board of directors or trustees. Directors are elected by, and responsible to, the shareholders. In turn, the directors appoint the management personnel. REIT directors are typically well-known and respected members of the real estate, business and professional communities.

REITs employ professional management, individuals who are hired and periodically reviewed by the REIT's board of directors. REIT managers are selected based upon their extensive real estate background and expertise. REITs can be either internally managed or externally advised.

In addition to avoiding double taxation and requiring no minimum investment, REITs also offer investors:

Current income: usually stable and often provides an attractive return;
Liquidity: shares of publicly traded REITs are readily converted into cash because they are traded on the major stock exchanges;
Professional management: REIT managers are skilled, experienced real estate professionals;
Portfolio diversification: minimizes risk;
Performance Monitoring: a REIT's performance is monitored on a regular basis by independent directors of the REIT, independent analysis, independent auditors, and the business and financial media.

This scrutiny provides the investor a measure of protection and more than one barometer of the REIT's financial condition.

An individual may invest in a publicly traded REIT, which in most cases is listed on a major stock exchange, by purchasing shares through a stock broker. An investor can enlist the services of a broker, investment advisor or financial planner to help analyze his or her financial objectives. These individuals also may be able to recommend an appropriate REIT for the investor. An investor can also contact a REIT directly for a copy of the company's annual report, prospectus and other financial information. In addition, investors can diversify their investment further by buying shares in a mutual fund that specializes in investing in real estate securities.

Potential investors may contact the National Association of Real Estate Investment Trusts (NAREIT) for a free listing of all publicly traded REITs, with exchange symbols, and a list of educational publications available, as well as a list of the mutual funds that primarily invest in REITs.

30 West Pershing Road • Suite 201 • Kansas City, MO 64108 • (888) EPR-REIT

Contact Info - Company Governance