I. Why Do REITs Have Ownership Limits in the First Place? -

Ownership limitation provisions are designed primarily to protect one of a REIT’s most valuable assets – its status as a REIT under the federal income tax rules. By placing limits on the amount of stock investors can own, the REIT builds in safeguards to ensure that it will satisfy the ownership tests that are a critical part of its qualification as a REIT, including the so-called “5/50 test,” and also protects the REIT from incurring related party tenant income, which can affect the REIT’s ability to satisfy the gross income tests necessary for REIT qualification. We discuss these ownership limitations, including when or how they may be waived, in further detail below.

The REIT’s charter will typically include a mechanism pursuant to which a stockholder whose actual and/or constructive share ownership surpasses the stated ownership limits included in the charter will have its shares automatically and effectively confiscated and held in trust for the benefit of a designated charity until the shares are sold in the marketplace.3 A stockholder whose shares are transferred to this trust will not receive the economic benefit of any appreciation in, or distributions paid on, these shares after the date the shares are deemed to be transferred to the trust.