Real Estate Operating Company (REOC)

Definition

A Real Estate Operating Company (REOC) is a publicly traded company involved in real estate activities but opts out of taking the tax status afforded to Real Estate Investment Trusts (REITs). Unlike REITs, which enjoy tax exemptions at the entity level if they adhere to specific operational restrictions and distribution requirements, REOCs are subject to federal taxation. However, REOCs are not restricted in the type of real estate businesses they conduct and have the flexibility to reinvest their earnings back into the business instead of distributing a portion of their income to shareholders.

Key Points:

Tax Status: Unlike REITs, REOCs do not benefit from federal tax exemptions at the entity level.
Profit Reinvestment: REOCs have the advantage of reinvesting earnings back into the company rather than being mandated to distribute income as dividends.
Operational Flexibility: REOCs are free from REITs’ restrictions, providing broader operational strategies and diverse real estate investments.

Examples

Investment Choice: Sally wanted to invest in real estate passively but did not like the restrictions placed on REITs. She preferred a company to reinvest all income rather than pay her regular dividends. When she discovered real estate operating companies, she felt they were the perfect solution.
Corporate Strategy: A REOC might choose to allocate profits towards acquiring new properties, improving existing holdings, or diversifying into various sectors like residential, commercial, or industrial real estate without having to adhere to the stringent criteria that govern REITs.

Frequently Asked Questions (FAQs)

Q: What are the main differences between a REOC and a REIT? A: The primary differences lie in tax status and operational restrictions. REITs must distribute at least 90% of their taxable income as dividends to qualify for tax exemptions, whereas REOCs can reinvest earnings and are subject to normal corporate taxation.

Q: Can REOCs be a good investment? A: Yes, REOCs can be a good investment, especially for those investors looking for companies that reinvest their earnings to potentially increase the company’s value over time, rather than receiving regular dividend payouts.

Q: Are REOCs subject to any specific regulatory requirements? A: REOCs will have to comply with standard corporate governance and regulatory requirements applicable to publicly traded companies, but they are not bound by the specific guidelines that govern REITs.

Q: Do REOCs distribute dividends? A: Unlike REITs, REOCs are not required to distribute dividends, though they may choose to do so. Their primary attraction for certain investors is their ability to reinvest all of their earnings back into the business.

Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate and must distribute at least 90% of its taxable income to shareholders in the form of dividends to qualify for tax exemptions.
Operating Income: Income generated from the normal operations of the business.
Publicly Traded Company: A company whose shares are bought and sold on a public stock exchange.

Online Resources

References

“Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities” by Su Han Chan, John Erickson, and Ko Wang
“Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
Investopedia

Suggested Books

“Principles of Real Estate Management” by Karl Wiedenmann
“The Complete Guide to Investing in Real Estate: How to Turn $5,000 into $50,000 into $500,000” by Steve Berges
“Real Estate Finance and Investments: Risks and Opportunities” by Peter Linneman and Bruce Kirsch

Real Estate Basics: Real Estate Operating Company (REOC) Fundamentals Quiz

### What are REOCs not required to do that REITs must? - [ ] Pay taxes at the federal level. - [ ] Own real estate properties. - [x] Distribute at least 90% of their taxable income as dividends. - [ ] Trade publicly on stock exchanges. > **Explanation:** Unlike REITs, REOCs are not required to distribute a large portion of their taxable income as dividends. They can choose to reinvest earnings back into the business. ### From a tax perspective, a REOC is: - [x] Subject to federal corporate taxation. - [ ] Completely tax-exempt. - [ ] Taxed as a REIT. - [ ] Exempt from state taxes only. > **Explanation:** REOCs are subject to federal corporate taxation similar to other publicly traded companies, unlike REITs, which obtain tax exemptions if specific criteria are met. ### Why might an investor prefer a REOC to a REIT? - [ ] Because REOCs pay higher dividends. - [x] Because REOCs reinvest their earnings into the business. - [ ] Because REOCs are tax-exempt. - [ ] Because REOCs are more regulated. > **Explanation:** Investors may prefer REOCs if they want the company to reinvest earnings into the business to potentially increase its long-term value rather than receiving regular dividends. ### What type of activities can REOCs engage in? - [ ] Only residential real estate. - [x] Any type of real estate activities. - [ ] Only commercial real estate. - [ ] Only property management. > **Explanation:** REOCs are not restricted in the type of real estate businesses they conduct, giving them the flexibility to engage in any type of real estate activities. ### Which statement best describes a REOC? - [ ] A tax-exempt entity focused only on income-producing properties. - [x] A publicly traded real estate company without the restrictions of a REIT. - [ ] Exclusive to residential property management. - [ ] Limited to private investments only. > **Explanation:** A REOC is a publicly traded real estate company that is not bound by the operational restrictions of a REIT and is not tax-exempt. ### Do REOCs have to distribute income as dividends? - [ ] Yes, they must distribute at least 75%. - [ ] No, they are tax-exempt. - [ ] Yes, if they want to maintain their tax status. - [x] No, distributing income as dividends is not a requirement for REOCs. > **Explanation:** Unlike REITs, REOCs are not required to distribute income as dividends and can choose to reinvest earnings back into the business. ### Investors looking for regular income might prefer: - [ ] Real Estate Operating Companies. - [ ] Federal tax-exempt trusts. - [x] Real Estate Investment Trusts. - [ ] Private equity funds. > **Explanation:** Investors looking for regular income distributions might prefer REITs because they are required to pay out at least 90% of their taxable income as dividends. ### What kind of tax exemption do REOCs qualify for? - [ ] Federal corporate tax exemption. - [x] REOCs do not qualify for any specific tax exemptions. - [ ] Federal and state tax exemptions. - [ ] Municipal tax exemptions only. > **Explanation:** REOCs do not qualify for federal corporate tax exemptions; they are subject to taxation like other regular corporations. ### What kind of investor might be drawn to REOCs? - [ ] An investor seeking tax-exempt investment. - [ ] An investor looking for regular dividends. - [x] An investor interested in the reinvestment of profits. - [ ] An investor looking for state tax deferrals. > **Explanation:** An investor who is interested in the company reinvesting its profits into further growth and expansion might be drawn to REOCs. ### How do REOCs fund their growth compared to REITs? - [ ] REOCs depend entirely on dividends from shareholders. - [x] REOCs reinvest earnings from their operations. - [ ] REOCs rely solely on debt financing. - [ ] REOCs use crowd-funding methods. > **Explanation:** REOCs fund their growth by reinvesting earnings from their operations rather than being required to distribute a significant portion of their income as dividends.

Real Estate Operating Company (REOC)