RE5003 Chap.8 Ownership Forms, REITs and Private Equity Funds
Ownership Forms, REITs and Private Equity Funds
Two considerations behind every form
The fifth lecture asks what decides the organisational form of each investment on the four-quadrant grid. General business management asks how formal the structure is, whether it outlives its owners, how far owners are liable and how easily stakes change hands. Tax covers how operating income is taxed and how gains are treated on sale or liquidation.
The lecture's table compares sole proprietorships, general and limited partnerships, corporations, limited liability companies and joint ventures on these points.
Corporations offer limited liability, perpetual existence and easy transfer but are taxed twice; partnerships pass income through but expose the general partner.
REITs and business trusts
A REIT invests in and manages income-producing property, and listed units trade freely.
The qualification tests in the lecture require at least 75% of assets in real estate, at least 75% of gross income from rents or mortgage interest, no more than 20% in taxable subsidiaries and distribution of at least 90% of taxable income, making the REIT a pass-through entity.
The lecture's comparison for Singapore sets the REIT, tax transparent and passive with a 45% leverage limit, against the business trust, taxed like a company at 17%, able to run active operations, with no mandatory distribution and no gearing limit. Removing a REIT manager needs more than half the vote; removing a business trust manager needs more than three quarters.
Hospitality groups often staple the two together.
Private equity real estate
Private equity real estate funds pool capital from limited partners such as pension funds, endowments, sovereign funds and wealthy individuals, add bank debt, and are run by a general partner who acquires, adds value and sells, earning a carried interest.
A closed-end fund moves from fundraising on a private placement memorandum through capital calls and active holding to exit and distribution. Compared with REITs, these funds are close-ended, illiquid, opaque, more aggressively geared and aimed at capital gain; their managers find and make deals, while REIT managers grow risk-adjusted cash flows.
What this chapter covers
- 01
Business management and tax as the drivers of ownership form
- 02
Liability, tax and transfer across the main legal forms
- 03
REIT qualification tests and pass-through taxation
- 04
REITs against business trusts, and stapled structures
- 05
Limited partners, general partners and carried interest
- 06
The life cycle of a closed-end private fund
Worked example · free
Payout and gearing for a REIT
- 1Apply the payout rule.
- 1Apply the leverage limit.
- 2Explain what the two limits imply for growth.
Key terms
- Limited Partnership
- A partnership in which limited partners have limited liability and income passes through to the partners.
- Pass-Through Entity
- A vehicle whose income is taxed in the hands of its investors rather than at entity level.
- Business Trust
- A trust that can run active business operations, taxed like a company, with no mandatory distribution.
- Stapled Security
- A single traded unit combining a REIT that owns property with a business trust that operates it.
- General Partner
- The sponsor that manages a private fund, makes the investment decisions and earns a carried interest.
- Carried Interest
- The general partner's share of a fund's profits, earned for creating the gains.
- Capital Call
- A request by a fund manager for committed capital to be paid in as investments are found.
- Deposited Property
- The total assets of a REIT, the base against which development and leverage limits are measured.
Ownership Forms, REITs and Private Equity Funds FAQ
Why does a corporation face double taxation?
Profits are taxed once at the entity level and again when distributed to shareholders as dividends. Partnerships and REITs avoid this by passing income through so it is taxed only in the hands of investors.
What must a REIT do to remain a pass-through vehicle?
The tests set out in the lecture require most assets and income to come from real estate and at least 90% of taxable income to be distributed each year. Distribution in return for tax transparency is the core bargain.
When would a business trust be preferred to a REIT?
When the assets must be actively operated, as with hotels, or when the sponsor wants to retain earnings and gear more heavily. The cost is company-level tax and weaker unitholder power to remove the manager.
How does a general partner get paid in a private fund?
Through a carried interest, a share of the profits the fund generates. The structure rewards the general partner for finding deals, adding value and exiting well, aligning its pay with gains to the limited partners.
Why are private real estate funds closed-ended?
They raise a fixed pool of commitments, invest it through capital calls, add value and then sell within a set life so that capital can be returned. The planned exit is built into the structure from the start.
Assessment move
Make a one-page table with REIT, business trust and private fund as columns and liability, tax, payout, gearing, liquidity and manager role as rows. Fill it from memory, then check it against the lecture; the gaps show what to revise.
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