THE IMPLEMENTING RULES and Regulations of the Real Estate Investment Trust (REIT) Act of 2009, or Republic Act 9856, were released recently and are now in force.

The law establishes the framework for an investment scheme that aims to assist in the funding and development of infrastructure projects and, at the same time, promote investors? interests.

A REIT is a stock corporation organized for the purpose of owning income generating real estate assets, such as offices, apartments, shopping centers, hotels and other similar structures.

The company should have a minimum paid-up capital of P300 million. Its stocks can be acquired through subscription or purchase in a stock exchange.

To attract investments in REITs, the law requires them to distribute every year at least 90 percent of their distributable income as dividends to their stockholders not later than the last day of the fifth month following the close of their fiscal year.

And to make sure the investors are not shortchanged, the law, at the outset, declares as void and of no effect ?any structure, arrangement or provision which would have the effect of diminishing or circumventing in any form this entitlement of dividends.?
Information

Ahead of the effectivity of the implementing rules, the country?s major real estate development companies?Ayala, SM Development, Robinsons and Megaworld, among others?have expressed their intention to organize REITs to avail of the benefits of the law.

Considering today?s real estate values and development costs, the P300 million minimum paid-up capitalization will surely be exceeded. At least P1 billion in seed money would be the norm for serious players in the REIT business.

As in any investment program, the investor should know what he is getting into before signing the dotted line and parting with his hard-earned money.

In the case of REITs, investors should look beyond the slick promotional materials that these companies are expected to churn out as soon as they get their registration papers from the SEC.

The principal source of credible information about REITs would be the REIT Plan they are obliged to register with, and secure the approval of, the SEC before offering their stocks to the public.

The plan should give investors a clear understanding of the assets, plans, business policies and investment strategies of the REIT so they can make an informed judgment on their investment.

Conditions

Of the 25 pieces of information that a plan should state, three items (without denigrating the significance of the others) merit close attention.

First is the ?general character and competitive conditions of all real estate now held or intended to be acquired by the REIT, and how such real estate meets the established criteria for selection.?

Looking at the listing, the following questions may be asked: Are the real estate honest-to-goodness ?money makers? or slow moving assets being dumped on the REIT? Are they located in areas where other developers have built equally, if not better, facilities?

What is the company?s track record about the quality of its projects? Does it have sufficient expertise and experience in the management of residential or commercial buildings?

On a related issue, the plan should also spell out the ?terms and conditions of the arrangements or agreements that have been entered into by the REIT for it to own legal and beneficial title over specific property, and the benefits and risks of such arrangements.?

Thus, for example, if the acquisition or construction of the commercial building is covered by loans with stiff payment conditions or liberal foreclosure procedures in case of non-payment, the investors could find themselves holding the proverbial empty bag in case the REIT?s revenue stream goes awry.

Dividends

The information in the plan that should be of most serious concern to investors is the ?dividend policy.?

The mandatory annual distribution of dividends is subject to the condition that it should come from unrestricted retained earnings.

Lest it be misunderstood that dividend is not solely distributable in cash, it may be in the form of stocks or properties, depending on the REIT's board of directors.

Although there are specific accounting rules on the computation of those earnings, the figures that go into such determination depend on the interpretation or application of those rules.

As the saying goes, there are several ways of skinning a cat. Some accountants, like lawyers, are adept at stretching the rules to earn (literally!) brownie points from their clients.

If the dividend policy is vague, or filled with legal or accounting gobbledygook, the investor should not be too optimistic about enjoying yearly dividends from his investment.

The bottom line is, read the plan carefully. If you are in doubt about some of its provisions, seek clarification from the REIT concerned or consult your own financial adviser. Remember, it?s your money on the line.

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