The Rise–and Complications–of “the REIT Conversion”

A trend that began slowly several years ago has started to gain momentum. Increasingly, businesses with a substantial amount of real estate have been approaching the IRS for a private letter ruling, granting them permission to realign their businesses under a REIT structure.

The primary driver behind this is simple: demand is high in today’s economy for income-producing assets and, as a result, the market has shown REITs considerable preferential treatment because of their reliable income stream. Looking at the S&P 500, for example, REITs have outperformed the index for the last five years. Also consider that pension funds and endowments, which have historically contributed 5% to 7% of their capital to non-traditional assets, are now allotting closer to 7% to 10% to these investments.