The Study On The Legal System Of REITs

This dissertation is written to address the principles, establishment mechanism, operation mechanism, risk control mechanism and termination mechanism of REITs from perspectives of comparative and economic analysis. Through comparing the merits and disadvantages of foreign REITs system, we intend to seek and recommend a Chinese REITs system. The dissertation includes five chapters, and is structured as follows: Chapter One introduces the principles of REITs. It tries to present some preconditoned doctrines diagnosing the REITs system, which answer: Firstly, what do the concepts and terms related to REITs refer to, and what functions do they contain? Secondly, while drawing into the trust law, which kinds of legal relationship are included in two types of REITs (namely company type and contract type)? Thirdly, compared with real estate direct investment, comporate stocks and bonds, what advantages lie in REITs in the new economic era? Fourthly, from the last century to now, how have the U.S.A., Asia and China developed their REITs and which leads the world trend? It also holds that a REIT is essentially a combination of a corporation and a partnership in that it combines the benefits of a corporation with the pass-through nature of a partnership. Chapter Two discusses the establishment mechanism of REITs. When U.S. Inernal Revenue Code of 1960 established REITs and provided that an entity must be qualified in structure, asset, income and contribution tests in order to be a REIT. Its initial aim was to make REITs be a kind of passive businesses. As the origin country, U.S. A. has its economic and cultural background in producing REITs. Though there are social, economic and cultural obstacles in China, the feasibilities of drawing REITs into China have been formed. Because the C-REITs have differences in structure, asset, income and contribution compared with those of American REITs, the present C-REITs only satisfy partially these tests, thus the present C-REITs are called quasi- REITs. It is the inevitable way to set up the Chinese REITs establishment mechanism by a special legislation and through drawing lessons from American REITs and Asian REITs. Chapter Three covers the operation mechanism of REITs. If an entity selected to be a REIT, it will have benefits both in tax and listed companies, but it will lose its flexibilities in management, therefore, an entity must select carefully among five structures in order to obtain these benefits and to avoid any defect. In order to suit the modifications of Tax law, American REITs developed themselves from initial passive business to present active ones. There are following problems in the operation: the Securities laws and the applicable exemptions from registration, conflicts of interest and REIT governance, REIT share transfer restrictions, REIT antitakeover mechanisms. Meanwhile, the following problems lying in present Chinese REITs are pointed out: lack of special REITs law and industrial funds law, lack of asset securitization law and relavent tax law, the obstacles of current trust law and real estate law. And these problems are reflected in operational practices. Chapter Four looks into risk control mechanism. The real estate market collapsed in 1974-1975 contributed heavily to the collapse of the REIT industry itself. There are the economic and legal reasons for the risks. The economic reasons are as follows: one is REITs special structure of management which created the special incentives to debt leveraging; the other is the incentive to leverage REITs related to the incidence of sponsorship of REITs by financial institutions. The legal reasons are as follows: Firstly, the restrictions on REITs embodied in the Investment Company Act were extremely liberal; Secondly, the restrictions provided by relevant laws were too vague; Thirdly, the requirements of the Internal Revenue Code created even further incentives to leverage. There are two means to prevent the risks: the direct one is the regulation by the Investment Company Act, and the indirect one is the re...