Frequently Asked Questions About REITs
Below we have provided some of the more frequently asked questions and answers relating to Behringer Harvard’s various REIT offerings. Please see an investment program’s prospectus for more detailed information related to a particular offering.
Q: What is a REIT and why were REITs created?
A: Congress created REITs in 1960 to make investments in large-scale, income-producing real estate more accessible to smaller investors. At that time, the REIT vehicle—through its ability combine the capital of many investors to acquire a portfolio of assets—was the only way for the average investor to invest in significant commercial properties. REITs offer distinct advantages for investors, including greater diversification through investing in a portfolio of properties rather than a single building, and experienced real estate professionals to manage/operate each property.
In general, a REIT is a company that:
- Pays distributions to stockholders on at least 90% of its “REIT taxable income,” excluding income from operations or sales through taxable REIT subsidiaries;
- Avoids the “double taxation” treatment of income that generally results from investments in a corporation because a REIT is generally not subject to federal corporate income taxes on its net income, provided certain income tax requirements are satisfied;
- Combines the capital of many investors to acquire or provide financing for real estate-based investment; and
- Offers the benefit of a diversified real estate portfolio under professional management.
Q: What is an “UPREIT”?
A: With respect to investment programs structured as REITs, Behringer Harvard intends to own investments through an umbrella partnership real estate investment trust (“UPREIT”) or subsidiaries of such partnership. Behringer Harvard REITs utilize this structure because a sale of property directly to a REIT is generally a taxable transaction to the selling property owner. In an UPREIT structure, a seller of property who desires to defer taxable gain on the sale of the property may transfer the property to the UPREIT in exchange for limited partnership units in the UPREIT and defer taxation of gain until the seller later exchanges his UPREIT units on a one-for-one basis for REIT shares. If the REIT shares are publicly traded, the former property owner will achieve liquidity for the investment. Using an UPREIT structure gives Behringer Harvard-sponsored programs an advantage in acquiring desired properties from persons who may not otherwise sell their properties because of unfavorable tax consequences.
Q: How is Behringer Harvard different from its competitors who offer unlisted finite-life public REIT or real estate limited partnership units?
A: Behringer Harvard believes that its programs benefit from the focus on investing in institutional quality real estate using institutional investment strategies. Each Behringer Harvard-sponsored program has designed its holding period with a view to capitalize on the potential for increased current income and capital appreciation. Also, management believes that targeting these types of real estate investments will enhance our ability to enter into joint ventures with other institutional real property investors (such as pension funds, public REITs and other large institutional real estate investors). This can provide greater diversity of a program’s investment portfolio. In addition to each program’s focus on current income and capital appreciation, the programs have defined exit strategies and will invest in properties in accordance with such strategies. Behringer Harvard believes that a portfolio consisting of institutional quality real estate enhances a program’s liquidity opportunity for investors by making the sale of individual properties, multiple properties or a fund’s investment portfolio as a whole attractive to institutional investors and by making a possible listing of a program’s shares attractive to the public investment community.
Q: How do you calculate the payment of distributions to stockholders?
A: With respect to Behringer Harvard REITs, the aggregate amount of each quarterly distribution is determined by each programs’ board of directors and typically depends on the amount of funds available for distribution, current and projected cash requirements, tax considerations, and other factors. Each program must distribute at least 90% of its “REIT taxable income” to remain qualified as a REIT. The programs intend to continue to declare and make distributions provided that their boards of directors determine that there is sufficient cash available to do so. Distributions are paid to investors who are stockholders as of the record dates selected by the boards. Generally, the boards authorize distributions on a quarterly basis, portions of which are paid on a monthly basis. Monthly distributions are paid based on daily record and distribution declaration dates so investors will be entitled to be paid distributions beginning on the day that they purchase shares.
Q: May I reinvest my distributions?
A: If the Behringer Harvard-sponsored program has enacted a distribution reinvestment plan, you may participate in such plan to reinvest your distributions by checking the appropriate box on the subscription agreement or by filling out an enrollment form, which Behringer Harvard can provide to your at your request or you can download the form for the particular fund from our website.
Q: How do investors treat distributions from a REIT for tax purposes?
A: A REIT is required by law to distribute each year to their shareholders at least 90% of their taxable income.
For REITs, dividend distributions for tax purposes are allocated as ordinary income, capital gains, and return of capital—each of which may be taxed at a different rate. All public companies, including REITs, are required to provide their shareholders early in the year with information clarifying how the prior year's dividends should be allocated for tax purposes. This information is distributed by each company to its list of shareholders on IRS Form 1099-DIV.
A return-of-capital distribution is the portion of the dividend that exceeds the REITs taxable income. A number of factors can result in a portion of the dividend being a return of capital, such as the effect of depreciation.
A return-of-capital distribution is not taxed as ordinary income, however. Rather, the investor's cost basis in the stock is reduced by the amount of the distribution. When shares are sold, the excess of the net sales price over the reduced tax basis is treated as a capital gain for tax purposes. As long as the appropriate capital gains rate is less than the investor's marginal ordinary tax rate, a high return of capital distribution may be especially attractive to investors. Distributions are not guaranteed. Past performance is not a guarantee of future performance.
Any distribution that the investment program properly designates as a capital gain distribution generally will be treated as long-term capital gain without regard to the period for which you have held your shares. However, because each investor’s tax considerations are different, Behringer Harvard suggests that you consult with your tax advisor. You should also review the section of the program’s prospectus entitled “Federal Income Tax Considerations.”
Q: How does a “best efforts” offering work?
A: Each investment program seeks to raise a maximum amount through an offering of shares of common stock on a “best efforts” basis. When shares are offered to the public on a “best efforts” basis, Behringer Securities LP, the dealer manager, is required to use only its best efforts to sell the shares and it has no firm commitment or obligation to purchase any of the shares.
Q: Who will select the investment a Behringer Harvard-sponsored program makes?
A: Each Behringer Harvard-sponsored REIT is externally managed by an advisor, which makes recommendations on all investments to the fund’s board of directors. The REIT’s advisor undertakes to use its best efforts to present the investment program with investment opportunities that are consistent with its investment policies and objectives as adopted by its board of directors. For more information regarding the advisor and selection of investments, please see “Management” section of an investment program’s prospectus.
Q: What is the experience of Behringer Harvard’s executive officers, directors, and key personnel?
A: Behringer Harvard’s senior management team and Chairman of the Board have significant experience acquiring, financing, developing and managing both institutional and non-institutional commercial real estate. For example, Robert M. Behringer, who serves as the Chairman of the Board, Chief Executive Officer, and Chief Investment Officer of several Behringer Harvard-sponsored REITs, has over 25 years of experience in the real estate industry. Prior to founding the Behringer Harvard organization, Mr. Behringer has experience investing in, managing and financing approximately 140 different properties with over 24 million square feet of office, retail, industrial, apartment, hotel and recreational space. Robert S. Aisner, who serves as a Director, the President, and the Chief Operating Officer of several Behringer Harvard-sponsored REITs, has over 30 years of experience and, prior to joining Behringer Harvard in 2003, Mr. Aisner served as an executive officer of a publicly traded apartment REIT. Please see “Management” in each program’s prospectus for an extensive discussion of senior management and their experience.
Q: In what types of property do you invest?
A: Behringer Harvard-sponsored REITs may invest in all types of commercial real estate, such as industrial, retail, hospitality, multifamily and other real properties, that are already well-positioned and producing rental income as well as opportunistic or value-added properties in various stages of development, redevelopment or in need of repositioning. Depending upon the program’s investment goals, a fund may target a specific property class or may focus on existing “core” properties. Please refer to an investment program’s prospectus for information regarding the program’s investment focus.
Q: Do you invest in anything other than real property?
A: Behringer Harvard-sponsored REITs are permitted to invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise. Behringer Harvard-sponsored REITs also may invest in collateralized mortgage-backed securities, Section 1031 tenant-in-common interests (including those previously issued by programs sponsored by Behringer Harvard Holdings or its affiliates) and other securities. The programs also may provide mortgage, bridge or mezzanine loans to owners of real properties or purchase mortgage, bridge or mezzanine loans or participations in mortgage, bridge and mezzanine loans from other mortgage lenders. These mortgage, bridge or mezzanine loans may be in the form of promissory notes or other evidences of indebtedness of the borrower that are secured or collateralized by real estate owned by the borrower. The REITs may also invest in entities that make investments similar to the foregoing. Because there are significant limits on the amount of non-real estate assets that a program structured as a REIT may own without losing REIT status, Behringer Harvard-sponsored REITs are significantly limited as to ownership of non-real estate investments.
Q: What specific criteria are used in the selection of potential investments?
A: In selecting properties, relevant real property and financial factors, including condition and location of the property, its income-producing capacity and the prospects for its long-term appreciation are considered. Acquisitions or originations of loans are evaluated for the quality of income, and the quality of the borrower and the security for the loan or the nature and possibility of the acquisition of the underlying real estate asset. Investments in other real estate-related securities will adhere to similar principles. In addition, Behringer Harvard consider the impact of each investment as it relates to our portfolio as a whole.
Q: What are your typical lease provisions?
A: Behringer Harvard-sponsored REITs will execute new tenant leases and existing tenant lease renewals, expansions, and extensions with terms that are dictated by the current submarket conditions and the verifiable creditworthiness of each particular tenant. In general, the investment programs will enter into standard commercial leases. These may include standard multi-tenant commercial leases, “triple net” leases or participating leases. In addition, we may enter into leases with a taxable REIT subsidiary (“TRS”) of the investment program with respect to certain hospitality properties. Under standard multi-tenant commercial leases, tenants generally reimburse the landlord for their pro rata share of annual increases in operating expenses above the base amount of operating expenses established in the initial year of the lease term. Under triple net leases, tenants generally are responsible for their pro rata share of building operating expenses in full for each year of the lease term. Behringer Harvard expects that the standard multi-tenant and participating lease terms will have initial terms of not less than three years and will include renewal options that are granted at the great of market rates or the existing rental rate as expiration. Behringer Harvard expects that triple net leases will be for initial terms of ten year or more, and that any leases with TRSs would be for terms of five years.
With respect to any multifamily real estate investments, Behringer Harvard REITs generally will use the standardized residential lease for each state in which the investment program owns an apartment community. Residential leases typically have terms of one year or less.
Q: How will you determine whether tenants have the appropriate creditworthiness for each building?
A: The investment programs intend to use credit rating services to the extent available to determine creditworthiness of potential tenants and any personal guarantor or corporate guarantor of each potential tenant to the extent available. The investment programs will review the reports produced by these services together with relevant financial and other data collected from these parties before consummating a lease transaction. Such relevant data from potential tenants and guarantors includes income statements and balance sheets for current and prior periods, net worth or cash flow of guarantors, and business plans and other data deemed relevant. However, for investment program’s whose focus is opportunity-based and enhanced value, any lesser creditworthiness of existing tenants may not be a significant factor in the program’s determination whether to acquire the property. In such circumstances, the investment program will undertake efforts to attract new, more creditworthy tenants.
Q: What steps do you take to make sure you invest in environmentally compliant property?
A: For acquisitions located in the United States, Behringer Harvard-sponsored programs will always obtain a Phase I environmental assessment of each property purchase and for each property secured by a mortgage loan. A Phase I environmental site assessment consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concern, visually observing the neighboring properties to asses surface conditions or activities that may have an adverse environmental impact of the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, groundwater or building materials from the property. With respect to international investments, Behringer Harvard-sponsored programs will seek to obtain an environmental assessment that is customary in the location where the property is being acquired.
Q: How does each Behringer Harvard-sponsored REIT provide for improvement and other working capital needs and maintain the viability of your asset if cash flow is decreased?
A: During the acquisition process, the progam will establish estimates for working capital needs throughout the life of each acquired asset. For each property acquisition, upon the closing of the investment in the property, all or a portion of these amounts are reserved from initial capital and placed in an interest-bearing (typically money market) account as reserve for working capital for use during the life of the asset. Additional amounts for these purposes may be reserved or otherwise retained from the cash flow of the asset or from general cash flow. Working capital reserves are adjusted through continual re-projection and annual budgeting processes. If depleted during the course of the asset’s holding period, unless otherwise budgeted, the reserve requirement may be replenished from excess cash flow to provide for the financial endurance of the asset. Working capital reserves are typically utilized for non-operating expenses such as improvements, leasing commissions, and major capital expenditures. In addition, any reserves established, a lender may require escrow of working capital reserves in excess of established reserves.
Q: Do you acquire some of your properties in join ventures, tenant-in-common investments and other co-ownership arrangements?
A: Behringer Harvard-sponsored REITs may acquire properties in joint ventures, tenant-in-common investments or other co-ownership arrangements when it is advantageous for a program to do so, including participation in acquisitions controlled by a third-party or when such party has special knowledge of such property, to diversify the portfolio of properties in terms of geographic region or property type, and to enable the program to make investments sooner than would be possible otherwise, since the amount of gross proceeds raised during the early stages of offering may be insufficient to acquire title to all of a particular piece of real property targeted for investment. The sooner a program is able to invest in properties, the greater the fund’s ability will be to pay distribution from operating cash flow and for capital appreciation of the investments. Additionally, the increased portfolio diversification made possible by investing through joint ventures, tenant-in-common investments and similar arrangements helps reduce the risk to investors as compared to a program with a smaller numbers of investments. Such joint ventures may be with other Behringer Harvard-sponsored programs or with third parties. The programs also may make or invest in mortgage, bridge or mezzanine loans secured by properties owned by such joint ventures.
Q: What are tenant-in-common investments?
A: Tenant-in-common investments are an acquisition of real estate owned in co-tenancy arrangements with parties seeking to defer taxes under Section 1031 of the Code. Generally, a special purpose entity (i.e., an entity formed solely for use in the applicable transaction) and a Behringer Harvard-sponsored program (in the event that we purchase a tenant-in-common interest) purchase a property directly from a seller. Persons who wish to invest the proceeds from a prior sale of real estate in another real estate investment for purposes of qualifying for like-kind exchange treatment under Section 1031 of the Code then purchase a tenant-in-common interest in the property through an assignment of the purchase and sale agreement relating to the property. Typically, all purchasers of tenant-in-common interests in a property, including a Behringer Harvard-sponsored program if it purchases tenant-in-common interest in such property, would execute an agreement with the other tenant-in-common owners and a property management agreement providing for the property management and leasing of the property by an affiliated property management services entity or another property management company. The tenant-in-common agreement generally provides that all significant decisions, such as the sale, exchange, lease or release of the property, or any loans or modifications of any loans related to the property, require unanimous approval of all tenant-in-common owners, subject to the deemed consent for failure to respond to any request for consent prior to the applicable deadline, and the fund’s right to purchase the interest of owners upon their failure to consent with the majority.
Q: How will you decide to sell one or more assets?
A: As an investment reaches what the investment program has determined to be its optimum value, the program will consider disposing of the investment and may do so for the purpose of either distributing the net sale proceeds to its stockholders or investing the proceeds in other assets that the program believes may produce a higher overall future return to its investors. Such dispositions typically occur during the anticipated holding period described in a particular program’s prospectus. However, in accordance with the program’s investment objective of achieving maximum capital appreciation, the investment program may sell a particular property or other asset before or after the anticipated holding period, if selling the asset is in the program’s best interest. The determination of when a particular investment should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing and projected economic conditions, whether the value of the property or other investment is anticipated to decline substantially, whether the program could apply the proceeds from the sale of the asset to make other investments consistent with its investment objectives, whether disposition of the asset would allow the program to increase cash flow, and whether the sale of the asset would constitute a prohibited transaction under the Internal Revenue Code or otherwise impact its status as REIT. The ability to dispose of property during the first few years following its acquisition is restricted to a substantial extent as a result of an investment program’s status as a REIT. Under applicable provisions on the Internal Revenue Code regarding prohibited transactions by REITs, a REIT that sells property other than foreclosing property that is deemed to be inventory or property held primarily for sale in the ordinary course of business is deemed a “dealer” and subject to a 100% penalty tax on the net income from such transaction. As a result, Behringer Harvard-sponsored investment programs will attempt to structure any disposition of its properties to avoid this penalty tax, including possibly through reliance on safe harbors available under the Internal Revenue Code for properties held at least four years or through the use of a TRS.
When the investment programs decides to sell a particular property or other investment, the program will seek to achieve a selling price that maximizes the capital appreciation for investors based on then-current market conditions. Behringer Harvard cannot assure you that this objective will be realized. The selling price of a leased property will be determined in large part by the amount of rent payable by tenants.
Q: What real estate fundamentals should I consider before investing?
A: Investors should understand some of the fundamental factors that influence the value of real estate holdings. One critical factor is how well balanced the supply of new properties is with the demand for new space. When construction adds new space into a market more rapidly than it can be absorbed, building vacancy rates increase, rents can weaken, and property values decline, thereby depressing net asset values.
In a strengthening economy, growth in employment, capital investment, and household spending increase the demand for new office buildings, apartments, industrial facilities, and retail stores. However, the economy is not always equally strong in all geographic regions, and economic growth may not increase the demand for all property types. Thus, investors should compare the types of properties and the locations that make up a portfolio prior to investing.
Q: What factors contribute to an investment program’s earnings?
A: The most immediate sources of revenue growth are higher rates of building occupancy and increasing rents. As long as the demand for new properties remains well balanced with the available supply, market rents tend to rise as the economy expands. Occupancy in under-utilized buildings can be increased when skilled owners upgrade facilities, enhance building services, and more effectively market properties to new types of tenants. Property acquisition and development programs also can create growth opportunities.
Q: For whom is an investment in a Behringer Harvard program suitable?
A: Investors seeking to generate current income and explore opportunities for capital appreciation may find real estate investments such as REITs an attractive investment choice. In addition, investors looking to diversify their investment portfolios beyond other stocks and bonds are attracted to the unique characteristics of non-listed REITs. Other typical investors in REITs are institutions, such as pension funds, endowment funds and foundations, insurance companies, bank trust departments, and mutual funds. Investors who require immediate liquidity or guaranteed income are cautioned that an investment in a Behringer Harvard program may not meet those needs.
Q: Who can buy shares?
A: An investment in a Behringer Harvard-sponsored program is suitable only for persons who have adequate financial means and who will not need immediate liquidity from their investment. For investors in a Behringer Harvard-sponsored REIT, residents of most states can buy shares pursuant to a specific fund’s prospectus provided that they have either (1) a net worth of at least $70,000 and an annual gross income of at least $70,000, or (2) a net worth of at least $250,000. For these purposes, net worth does not include your home, home furnishings or automobiles. These minimum levels may be higher in certain states, so you should carefully read the more detailed description in the “Suitability Standards” section of each Behringer Harvard-sponsored REIT’s prospectus.
Q: Is there any minimum investment required?
A: Yes. With respect to programs structured as REITs, you must invest at least $2,000, except in New York where you must invest at least $2,500. Investors who already own shares and investors who are concurrently purchasing shares from an affiliated Behringer Harvard public real estate program and participants in a distribution reinvestment plan can make purchases for less than the minimum investment. These minimum investment levels may be higher in certain states, so you should carefully read the more detailed description of the minimum investment requirements appearing in the “Suitability Standards” section of each fund’s prospectus.
Q: May I make an investment through my IRA, SEP, or other tax-deferred account?
A: Yes. You may make an investment through your individual retirement account (IRA), a simplified employee pension (SEP) plan or other tax-deferred account. In making these investment decisions, you should, at a minimum, consider (1) whether the investment is in accordance with the documents and instruments governing such IRA, plan or other account, (2) whether the investment satisfies the fiduciary requirements associated with such IRA, plan or other account, (3) whether the investment will generate unrelated business taxable income (UBTI) to such IRA, plan or other account, (4) whether there is sufficient liquidity for such investment under such IRA, plan or other account, (5) the need to value the assets of such IRA, plan or other account annually or more frequently, and (6) whether such investment would constitute a prohibited transaction under applicable law.
Q: If I invest in an offering, how may I later sell my interest?
A: Behringer Harvard-sponsored REITs are currently not listed for trading on any national securities exchange or for quotation on the Nasdaq National Market System (or any successor market or exchange). There is no public market for the shares and Behringer Harvard cannot be sure if one will ever develop. As a result, you may find it difficult to sell your shares. If you are able to find a buyer, you may sell your shares to that buyer unless the buyer does not satisfy the suitability standards applicable to him or her, or unless such sale would cause the buyer to own more than 9.8% of the outstanding common stock. You may be able to have your shares repurchased by the REIT pursuant to the REIT’s limited redemption program, if applicable. Behringer Harvard-sponsored REITs may also repurchase your shares in exigent circumstances, subject to a one-year holding requirement. An investment program’s redemption plan can be amended, modified, or terminated at any time. Please refer to an investment program’s prospectus or periodic reports filed with the SEC to determine if the program has an active redemption program and if so, the plan’s terms and conditions.
Q: What are your exit strategies?
A: Depending upon then prevailing market conditions, Behringer Harvard-sponsored programs will consider the process of listing or liquidation within the anticipated holding period after the termination of its primary offering. If the program does not begin the process of liquidating its asset or listing its shares within that time period, unless such offering is extended by a majority of the board of directors and a majority of the independent directors, the investment program will hold a stockholders meeting to vote on a proposal for an orderly liquidation, which proposal will include information regarding appraisals of the program’s portfolio. If the program’s stockholders do not approve the proposal, the investment program will obtain new appraisals and resubmit the proposal by proxy statement to its stockholders up to once every two years upon written request of stockholders owning 10% of the program’s outstanding common stock.
Q: How will I be notified of how my REIT investment is doing?
A: You will receive periodic updates on the performance of your investment in a Behringer Harvard-sponsored program, including an annual Form 1099. Information contained in these materials and other information concerning the business of each fund and its affiliates will be available on the following Web Site: www.behringerharvard.com.
Q: Who can help answer my questions?
A: If you have any questions about the offering of a specific fund or if you would like to receive a copy of an investment program’s prospectus, please contact your registered representative or contact:
Behringer Securities LP
15601 Dallas Parkway, Suite 600
Addison, Texas 75001
(866) 655-3700
2008 Tax Information
Q: What are Behringer Harvard’s business hours?
A: Investment Services is open Monday through Friday, 7:00 a.m to 7:00 p.m, Eastern Time.
Please note: As we are experiencing higher call volumes, please note that your wait time may be longer than normal. Duplicate tax forms are available via BehringerHarvard.com by logging onto the Financial Professionals section or Investors section.
IRS Form 1099
Q: When was the 2008 IRS tax form 1099 mailed for each Behringer Harvard applicable REIT product?
A: As of February 2, 2009, form 1099 was mailed to stockholders.
Q: How do investors obtain a duplicate IRS tax form 1099?
A: A duplicate form may be obtained by logging onto the Investors section of BehringerHarvard.com. Investors who are new to Behringer Harvard or have not created a login will need to do so before accessing any account information. Once you have logged on, the duplicate form 1099 can be found through the “Statements” link.
Q: How do financial advisors obtain a duplicate IRS tax form 1099 for their client?
A: A duplicate form may be obtained by logging onto the Financial Professional section of BehringerHarvard.com using your DST Vision ID. Once you have logged on, you can find the duplicate form 1099 under your client’s account through the “Statements” link.
IRS Schedule K-1
Q: When was the 2008 IRS Schedule K-1 tax form mailed for each Behringer Harvard applicable LP (Limited Partnership) product?
A: All 2008 Schedule K-1s were mailed March 26-27, 2009.
Q: How do investors obtain a duplicate IRS Schedule K-1?
A: A duplicate form may be obtained by logging onto the Investors section of BehringerHarvard.com. Investors who are new to Behringer Harvard or have not created a login will need to do so before accessing any account information. Once you have logged on, the duplicate Schedule K-1 can be found through the “Statements” link.
Q: How do financial advisors obtain a duplicate IRS Schedule K-1 for their client?
A: A duplicate form may be obtained by logging onto the Financial Professional section of BehringerHarvard.com using your DST Vision ID. Once you have logged on, you can find the duplicate Schedule K-1 under your client’s account through the “Statements” link.