51.   What About The Real Estate Investment Trust?

The ideal type of business organization for the investor would have the following characteristics.

First: Limit the investor's liability to the sum invested.

Second: Continue in existence even if the principal (syndicator) dies or goes into bankruptcy.

Third: Not be subject to federal or state income taxes, but pass on all of its earnings to its investors free of taxes.

Fourth: Enable the investor to sell or transfer his in­vestment freely in the open market without any permis­sion from the business organization.

Fifth: At a readily ascertainable and fair price.

None of the various types of business organizations which existed until recently will fill all of the above de­sirable requirements. At least there was no such ideal business organization suitable for the syndicate. Take a real estate corporation. True, you could sell or transfer your shares of stock merely by endorsing your name on the back. But to obtain that right, you have to pay a high price. The corporation is a separate entity for tax pur­poses. It has to pay taxes on its profits. You have to pay taxes once more on any dividends which you will receive. Because of this double taxation, the corporation is not a good medium for the syndicate.

Other business organizations avoid this double taxa­tion but have other drawbacks. Some do not protect you from personal liability over and above your investment. Others make the transfer of your investments more cum­bersome and at times dependent upon the consent of one of the principals.

In 1960, the Federal Government passed legislation which permits the creation of a new type of business or­ganization, the Real Estate Investment Trust. Such a trust, properly organized and managed in conformity with the law is intended to give the investors the first four advantages set out at the beginning of this chapter. The larger trusts will probably seek stock exchange listing, so that you would have all five advantages.

Some states must still pass or modify legislation to per­mit the creation of these real estate investment trusts. Experienced syndicators say that the Real Estate Invest­ment Trust will open new vistas in the field of syndication, that the easier transferability of shares in such a trust will create a broader market for syndicate participa­tions. At the time of the writing of this book, no one has sufficient experience with the Real Estate Investment Trust to tell exactly how it will work out. However, it appears to have such an unusual potential and has aroused so much interest, that we have devoted a separate part of this book to it. (See Appendix, E).

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