How Does A REIT Work?



Real Estate Investment Trusts (REITs) have historically been used for traditional real property holdings that produce rental income, such as apartment buildings, shopping centers and office space. In 2007, we obtained a private letter ruling from the Internal Revenue Service confirming that our transmission and distribution assets could constitute real estate assets under applicable REIT rules. Since InfraREIT's formation in 2010, InfraREIT and Sharyland, our tenant, have developed expertise in owning and operating electric transmission assets in a REIT.

For an entity to qualify as a REIT, the entity must meet certain thresholds:

  • The REIT must own the property
  • Rental income must be paid to the REIT by a separate operator of the property
  • 75 percent of the rents must be from real estate assets
  • 75 percent of the assets must be real estate assets
  • The REIT must have 100 or more shareholders
  • 90 percent of the taxable income must be distributed by the REIT as dividends to investors on an annual basis

As long as these thresholds are met, the REIT receives a deduction for dividends paid. If not, the REIT is taxed as a regular corporation.