David Brandon, national director of REIT services for KPMG and former NAREIT general counsel, has witnessed firsthand many of the regulatory changes that have been implemented to create the effective and efficient REIT structure that exists today.
"REITs have made a critical contribution to the financing of real estate, helping stabilize and expand access to the capital markets for real estate," Brandon says. "All of which has tremendous intangible benefits for the country as a whole."
While working at NAREIT, Brandon played a key role in the passage of a law that changed the "five or fewer" rule which made it easier for pension fund to invest in REITs. The change was part of the Omnibus Budget Reconciliation Act of 1993. Going forward, Brandon says NAREIT's focus should be on ways to expand the ability of all investors to invest in U.S. REITs. Brandon points to the FIRPTA provisions as a key component to opening U.S. REITs to a large pool of international capital.
"Also, NAREIT should continue to eliminate what I consider to be the 'traps for the unwary,'" Brandon says. "These include some of the overly technical issues that can still affect REIT qualification status, and an inordinate amount of REIT advisors' and in-house management's time is spent on these issues."
While REITs have gravitated toward the mainstream as an investment option, Brandon says that was not always the case. In fact, he remembers when REITs had an uphill battle to gain recognition.
"In the 1980s, REITs were competing with the tax regime that encouraged a lot of real estate tax shelter development through real estate partnerships. REITs don't allow that and they don't pass through any losses," Brandon says. "As a result of the Tax Reform Act of 1986, a lot of the more abusive real estate partnership structures were shut down and REITs started to have more appeal."
Brandon adds that following the savings and loan crisis in the early 1990s, REITs "stepped up to the plate" and provided a large injection of capital into a lot of distressed real estate saving Congress from a second round of defaults. Following that, the public benefit of REITs became obvious, Brandon says.
Around that same time period, Brandon says the most significant event in the industry's history took place. Brandon cites the ability for REITs to provide customary property management services really impacted the industry in a positive way going forward.
Going forward, Brandon says he expects REITs will be able to come in and take advantage of some of the openings that appear in the market. He says it may take longer and may come in larger chunks that what has been seen in prior decades.
"But REITs will definitely take a larger share of the overall commercial real estate market," Brandon says.