Similar to collateralized mortgage obligations, REMICS brings together a series of individual mortgage pools using maturity and risks, which issues securities and other bonds to investors.
The setting up of the 1986 Tax Reform Act authorized the REMICs. Such a real estate mortgage could be formed as a partnership, a corporation, a trust, or an association. Investors will not have to pay tax on REMICs at the federal level, even though individual income tax will be taxed.
REMIC is tax-exempt, but this status can be lost; any loan within it is swapped for another one. According to federal regulations, the loan in such a pool needs to be constant. This means that such loans cannot have a huge modification or swap with a new loan with fresh terms.
Real Estate Mortgage Investment Conduit
There could be restrictions on commercial real estate loans that were secured by REMICS. For instance, for a property owner interested in improving a property under the covering of such a loan, there could be limitations that will prevent any action.
The estimated renovations could significantly alter the collateral value that stood for the loan, which is not permitted. There were proposals introduced to change the regulations that tie down such renovation. The idea was to allow a property owner with commercial loans secured by REMICs, which improves enhancement of the property value in the future.
What is a Real Estate Investment Trust (REIT)?
A real estate investment is a particular type of company that allows investors to bring their money for investment in real estate assets. Some REITS might involve the purchase of properties and renting them to others. It might involve developing properties from fresh; some might not even have any property.
One might consider a REIT a mutual fund for real estate, even though it is an extreme simplification. Many investors purchase shares and direct their funds to a pool, leaving investment decisions to a professional manager.
REITs' idea is to allow everyday investors to invest in real estate assets that they wouldn't have access to. For instance, not everyone has the financial capacity to buy a 40-floor high rise tower or a shopping mall. Not everyone understands what it takes to purchase a portfolio of mortgages. With REITs, however, you can make your money work for you using this approach. Even with a couple of hundreds of dollars, you can access portfolios of commercial properties worth billions of dollars.
How does a Firm turn to a REIT?
One needs to understand that a company cannot just purchase real estate and the term itself a real estate investment trust. A couple of requirements specified below must be met:
75% of the assets of REITs must be invested in real estate or other related assets. Also, 25% or more of the income must come from the said assets. This means that ¾ of the revenue from REITs have to come from income sources like mortgage payment, rental income, management fees, and other sources with real estate as the background
The structure of the REITs must be a corporation with a hundred shareholders or less. This 100 shareholders requirement makes many REITs commence as real estate partnerships and later change to what is a REIT, in the future.
A shareholder of five or less can own nothing above 50% of the total shares from the REITs. In reality, REITs bring down the ownership capacity of any single investor of REIT to 10% to ensure that the rule is obeyed.
Also, REITs must pay out nothing less than 90% of the value of the taxable income. This explains the reason why REITs pay more than the average dividends. Typically, a lot of REITs pay 100% of their full taxable income.
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