::Prime Capital Real Estate Investment Co, LLC::

What is a REIT?

A REIT is a company that owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of a REIT are freely traded, usually on a major stock exchange. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate tax bill. As a result, most REITs remit at least 100 percent of their taxable income to their shareholders and thereforeown no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. However, like other businesses but unlike partnerships, a REIT cannot pass any tax losses through to its investors.

Why were REITs created?

Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to smaller investors. Congress decided that the only way for average investors to invest in large-scale commercial properties was the same way they invest in other industries, through the purchase of publicly traded stock. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: greater diversification through investing in a portfolio of properties rather than a single building and expert management by experienced real estate professionals.

How does a company qualify as a REIT?

In order for a company 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 an entity that is taxable as a corporation
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 its shares held by five or fewer individuals during the last half of the taxable year
Invest at least 75 percent of its total assets in real estate assets
Derive at least 75 percent of its gross income from rents from real estate property or interest on mortgages on real property
Have no more than 20% of its assets consist of stocks in taxable REIT subsidiaries
Pay annually at least 90 percent of its taxable income in the form of shareholder dividends

How are REITs managed?

Like other public companies, the corporate officers and professionals that manage REITs are accountable to both their boards of directors as well as their shareholders and creditors. Most REITs became public companies within the past 10 years, often transforming to public ownership what previously had been private enterprises. In many cases, the majority owners of these private enterprises became senior officers of the REIT and rolled their ownership positions into shares of the new public companies. Thus, the senior management teams of many REITs today own a significant portion of the company's stock, which helps align the economic interests of management with shareholders.

What is "Funds From Operations"?

Funds from operations (FFO) is a supplemental measure of a REIT's operating performance. FFO is different from corporate "earnings" as typically reported in the financial press. NAREIT defines FFO as net income (computed in accordance with generally accepted accounting principles) excluding gains or losses from sales of property, plus the depreciation of real estate. Historically, commercial real estate maintains residual value to a much greater extent than machinery, computers or other personal property. Therefore, current depreciation used in normal earnings measures overstates the real depreciation of REIT corporate assets. Thus, the company does not require as much cash flow to maintain and replace its physical assets, which may in fact be appreciating. FFO recaptures that cash flow and presents it as part of a REIT's annual financial performance. Many securities analysts judge a REIT's performance according to its FFO per share growth.

How are REIT stocks valued?

Like all companies whose stocks are publicly traded, REIT shares are priced every day in the market and give investors an opportunity to value their portfolios daily. To assess the investment value of REIT shares, typical analysis involves one or more of the following criteria:

Management quality and corporate structure
Anticipated total return from the stock, estimated from the expected price change and the prevailing dividend yield
Current dividend yields relative to other yield-oriented investments (e.g. bonds, utility stocks and other high-income investments)
Dividend payout ratios as a percent of REIT FFO
Anticipated growth in FFO per share
Underlying asset values of the real estate and/or mortgages, and other assets.

Why should I invest in REITs?

REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of high-growth stocks and somewhat more than the returns of bonds. Becuase most REITs also have a small-to-medium equity market capitalization, their returns should be comparable to other small to mid-sized companies.

There is a relatively low correlation between REIT and publicly traded real estate stock returns and the returns of other market sectors. Thus, including REITs and publicly traded real estate stocks in your investment program helps build a diversified portfilio.

REITs offer investors:

Current, stable dividend income
Dividend growth that has consistently exceeded the rate of consumer price inflation
High dividend yields
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 which minimizes risk
Performance monitoring: a REIT's performance is monitored on a regular basis by independent directors of the REIT, independent analysts, independent auditors, the Securities and Exchange Commission and the business and financial media. Their scrutiny provides the investor a measure of protection and more than one barometer of the REIT's financial condition.