Legal Research On Real Estate Investment Trusts

Real Estate Investment Trusts, referred to as REIT, is a very mature productamongst real estate securitization. With the use of the product, real estate developers willbe able to list some or all of its commercial property assets on packaging, divide theminto equal shares sold to investors, distribute income such as rent, mortgage loan interestas dividend periodically, and hire professional fund company or investment institution tomanage the trust. In the overseas markets, REIT is a successful financial investment toolfor its long history, soundness, and unique advantages. In order to reduce the risk of realestate investment, broaden the financing channels of development and constructioncompanies, and guide the domestic real estate market, China is attempting to introducethis system. At present, the China Banking Regulatory Commission and a number ofinstitutions have drafted the "Regulation on Trust Company's Business of Real EstateInvestment Trusts (Draft)", which is requiring social opinions openly. The "draft" has laida solid foundation for the establishment of China's REIT.The Introduction of this paper introduces the significance the topic and the currentsituation of researches at home and abroad. Considering the special historical backgroundof worldwide financial crisis, this paper not only introduces the REIT system, but alsoraises a suggestion on a risk prevention mechanism for REIT and the whole financialsystem of real estate, combining with the reality of China. Through a synthesis of presentresearches on REIT at home and abroad, the Introduction attaches importance to theconcern, analysis and study of current trust law, the State Council policy, and the "Draft"from the China Banking Regulatory Commission.The main body is consisted of four chapters.Chapter1is entitled Overview of the Basic Principles of REIT. Through the analysisof the concept of REIT and the origin of system, finds that the establishment of REITsystem is based on two basic concepts: tax avoidance and passive investment. Thevarious types of REIT, though divided by different standards, are also related to these twoconcepts. For example, the difference on the passiveness distinguishes the Equity,Mortgage and Hybrid REIT. Different operational structures can be derived from a REITentity, in that there are the typical ones like traditional structure, UPREIT, DOWNREIT,"Paired-share,""Stapled" and "paperclip". By Comparing REIT with Other financial instruments, the following advantages of the system can be drawn: liquidity andliquidation, small and medium-sized investors oriented, dispersion of investment risks,less effects by inflation, avoidance to duplication of taxation. Finally, the Chapteranalyses the legal situation of China's REIT, and explores some parts of the macro policyissues on the system.Chapter2is entitled the Establishment and Operation of REIT. Section1focuses onthe core rule of the establishment--"five tests", whose history indicates most of thehistory of the US REIT. It concludes the Congress' loosen attitude towards theestablishments of REIT. Comparatively, the drawbacks of China's REIT on theconditions of establishment, rules of income and assets test and the perfection measurescan be seen. Section2is the operational rules of REIT, and it selective analyses theconsequences of violating the "five tests" and "prohibited transactions", followed bysuggestions on the operational rules of China's REIT. Section3is the other issues on thesystem. It proposes comprehensive advice on legislative models, forms of organization,type selection, tax incentives, and negative attributes of China's REIT. The chapter pointsout that China's REIT should adopt the pattern of centralized legislation, and level of thenormative documents to adjust REIT shall not be lower than administrative regulations.Referring to foreign legislations, the chapter holds that it is appropriate for China to takethe public offering and close-ended type of organization for REIT. And it is suitable forChina to choose equity-type only, because it fits the negative attribute of REIT. Thecurrent lack of legislation in China contains that the institutional arrangements of the taxbenefits of REIT has not been made, and the backup legislative program has selectedmortgage REIT, which is against the systematic principle of "passive investment".Chapter3is entitled the Trust Legal Relationship of REIT. Section1is the summary,and it discusses the transition process of REIT with the development of the trust lawsystem from the modes of property arrangements, contracts to systems. Thus it suggestedthat the emphasis on governance is the core elements of the legal construction of REIT.In addition, this section also concludes the rights and obligations of REIT according tothe basic principles of trust law, on the perspective of manager. Section2is the Conflictsof interests of REIT. It draws a quantitative and qualitative analysis of the conflicts ofinterests from basic legal rights and obligations, under the premise of the distinctionbetween contractual, corporate and limited partnership types of REIT. Section3exhaustively covers china's future governance rules dealing with the conflicts of interests above, including holders' meeting, independent trustee, prudent investor, internalmanagement, financing leverage limit, business judgment rule, the standard of entirefairness and DOWN REIT. Deflects exist is China's holders' meeting that legal status issuspicious; provisions are difficult to put into practice and short of interoperability.China's independent trustee is currently lack of specific and detailed standards. The Draftdoes not allow REIT to adopt internal management, and it is not in line with internationaltrends and economic principles. As a result, the chapter suggests it authorizes the right ofchoosing internal management to REIT. China's financing leverage limit towards REIT istoo harsh, which is not conducive to the normal operations of REIT. And the chaptersuggests a certain rise of the proportion. China's prudent investor should involve thespecific standards for managers and prudent investment obligations. Business judgmentrule and entirely fair standard correspondingly are greatly essential to the governance ofordinary REIT and UPRET. They can be adopted as judging rules when courts andarbitral institution hear managers of REIT to be suspected of breaching of fiduciary duty.Finally, ordinary REIT can adopt DOWN REIT to eliminate the special conflicts ofinterests in UPREIT.Chapter4is entitled the securities law relationship of REIT. The chapter firstlycombines REIT and the framework of asset securitization, and explains that under theframe, the dynamic rights and obligations of REIT can be reflected. Because theframework contains subjects of rights and obligations such as sponsor, SPV, credit ratingagency, credit enhancement agency, and underwriter, and institutional arrangements suchas true sale and bankruptcy remoteness. All the special elements above are not built intrust law framework. Section2continues the logic of the asset securitization, anddiscusses the rights and obligations during the issuing activities of REIT, including duediligence, to build a risk control system, information disclosure, and to employ thesponsor institution, establishment or acquisition of a SPV. The chapter especiallydiscusses the obligation of information disclosure of REIT which is different from othersecurities in that it should disclose information on real estates. The example of SEC canbe followed that it prepares a set of industrial disclosure guidelines to regulateinformation disclosure in securities issuance activity of REIT. Section3successivelydiscusses the continuous information disclosure obligation during the progress of thesecurities trading, and the special provisions on the listed UPREIT trading. Thecontinuous information disclosure obligation requires specific regulatory requirements, and need to comply with the prohibition of false or omitting statements. Significantinformation that can affect the volatility of REIT securities should be compulsorily andfairly disclosed. UPREIT issues OP units at the same time when ordinary shares areissued. Whether the two issues should be combined to fulfill the same obligation ofregistration requires a appropriate criteria. Finally, referring to the run of the multi-levelcapital market in the US, the chapter launches a vision on the choice of listing venue ofChina's REIT. China's REIT is a close-end fund system, and should has targetedprovisions correspondingly on the main board, the SMSE, the GEM, the new thirdboard or regional OTC market.