What Is a REIT IPO and How Does It Work?

Real estate investment trusts (REITs) allow investors to gain exposure to real estate without directly owning properties. When a REIT goes public, it raises capital through an initial public offering (IPO), selling shares to investors. This process expands the REIT’s portfolio and increases liquidity while providing investors with potential income from real estate assets.

Taking a REIT public requires meeting regulatory requirements, selecting underwriters, and complying with tax and dividend distribution rules. Understanding the IPO process helps investors assess opportunities and risks.

Requirements for REIT Listing

A REIT must meet regulatory and financial criteria set by the U.S. Securities and Exchange Commission (SEC) and stock exchanges like the NYSE or Nasdaq. Under the Internal Revenue Code Section 856, at least 75% of a REIT’s total assets must consist of real estate, cash, or U.S. Treasuries, and at least 75% of its gross income must come from real estate-related sources such as rents or mortgage interest.

Ownership requirements mandate that a REIT have at least 100 shareholders within its first year, with no more than 50% of shares held by five or fewer individuals. To meet these thresholds, REITs often conduct roadshows before their IPO to attract investors.

Stock exchanges impose additional listing standards. The NYSE requires at least 400 shareholders holding at least 100 shares each, a market value of publicly held shares of at least $40 million, and a stock price of at least $4 per share. Nasdaq has similar requirements, including a minimum bid price of $4 and at least 1.1 million publicly held shares. These standards ensure financial stability before accessing public markets.

Underwriter Selection

Selecting an underwriter is crucial, as investment banks help market, price, and execute the offering. They conduct due diligence, structure the offering, and guide regulatory filings, influencing investor confidence.

REITs evaluate underwriters based on their experience with real estate offerings, distribution capabilities, and industry relationships. Larger REITs often work with major investment banks such as Goldman Sachs, Morgan Stanley, or JPMorgan Chase, while smaller REITs may choose regional or boutique firms for more personalized service.

The underwriting agreement determines whether the bank commits to purchasing all shares (firm commitment underwriting) or sells as many as possible without guaranteeing full subscription (best-efforts underwriting). Pricing the IPO involves market research, analysis of comparable REITs, and investor demand assessment through book-building. Institutional investors, such as pension and mutual funds, play a key role in setting the price. Strong demand can push the offering price higher, while weak demand may lead to a lower price or a delay in the IPO.

Tax Implications

Publicly traded REITs benefit from pass-through taxation, avoiding federal corporate income tax if they meet distribution and operational requirements. Unlike standard corporations, which face double taxation—once at the corporate level and again on shareholder dividends—REITs must distribute most of their taxable income to shareholders, allowing earnings to flow directly to investors.

To maintain this status, a REIT must derive most of its income from real estate-related activities and distribute at least 90% of its taxable earnings annually. However, REITs still pay certain state and local taxes and may incur excise taxes if they fail to meet payout thresholds. Taxable REIT subsidiaries (TRSs), which handle non-qualifying business activities, are subject to the standard corporate tax rate of 21% as of 2024.

For investors, REIT dividends are taxed as ordinary income at rates up to 37%, unlike qualified dividends from most corporations, which are taxed at lower capital gains rates. However, under the Tax Cuts and Jobs Act (TCJA), shareholders may deduct up to 20% of REIT dividends under Internal Revenue Code Section 199A, reducing the maximum tax rate on these earnings to 29.6%. This provision is set to expire in 2025 unless extended by Congress.

Dividend Distribution Mandates

REITs must distribute at least 90% of their taxable income to shareholders annually to retain their tax-advantaged status. Falling below this threshold results in the loss of REIT classification and exposure to corporate income tax, reducing profitability. Most REITs distribute closer to 100% to avoid federal taxes altogether.

Dividends are typically paid quarterly, though some REITs opt for monthly payments to attract income-focused investors. If a REIT wants to retain earnings for reinvestment while meeting payout mandates, it may issue stock dividends instead of cash. The IRS allows this under Revenue Procedure 2017-45, provided at least 20% of the total distribution is in cash. This flexibility helps REITs manage liquidity while maintaining investor returns.

Ongoing Reporting and Governance

After an IPO, a REIT must comply with SEC reporting and governance standards to maintain transparency and investor confidence. Publicly traded REITs file quarterly (10-Q) and annual (10-K) reports detailing financial performance, risk exposure, and management discussions. These filings follow Generally Accepted Accounting Principles (GAAP) and include key metrics such as Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO), which provide a clearer picture of cash flow and dividend sustainability than traditional net income figures. Material events, such as property acquisitions or leadership changes, must be disclosed through Form 8-K filings.

Corporate governance requirements include independent board members to oversee management decisions. Many REITs establish audit and compensation committees to enhance accountability. Shareholders, particularly institutional investors, influence governance policies, pushing for best practices in executive compensation, risk management, and sustainability initiatives. Strong governance structures help REITs comply with regulations and maintain investor trust.