One of the most important economic sectors in our country is real estate, in recent years there has been a considerable increase in this sector. For this reason, investing in real estate has become relevant since the investor assumes a lower risk in this type of investment, as it is guaranteed by an asset that acquires a capital gain over time. There are various ways of investing or raising capital for the purpose of developing real estate activities, however, one of the figures that provides greater legal certainty to all parties is the trust.
The trust is a legal instrument through which a first party, called the settlor, contributes assets, said assets are managed by a second party, the trustee who is a financial institution and a third party receives the benefits of the trust, the trustee who may or may not , be the same settlor. A practical example of the use of the trust as an investment instrument, is when there is a person who owns a real estate, who needs capital to develop it and later market it. The owner would contribute the property to the trust, in turn the investors contribute economic resources and the trustee will guarantee the investors that the resources contributed are used in a transparent way, in addition to guaranteeing the payment of the profits generated once the project is completed.
Another advantage of the trust contract is that penalties can be established in case of non-compliance by any of the parties, for example, the payment to investors of a certain amount, in case of delays in the project, attributable to the developer or builder. In this way, it will be easier for investors to execute the established penalty, since the resources being part of the trust assets are at the disposal of the fiduciary, who will be in charge of delivering to each of the parties what corresponds, in accordance with in accordance with the provisions of the contract.
One aspect to consider in the figure of the trust is the tax, in a traditional operation where a company is constituted in order to develop and commercialize real estate, at the moment in which one of the partners contributes the property to the company, the alienation occurs and therefore the Income Tax (ISR) is caused. However, section V, of article 14 of the Federal Tax Code (CFF), establishes that the transfer of assets shall be understood to be the one carried out, through the trust, in the following cases:
- In the act in which the settlor designates or undertakes to appoint a different trustee of him and provided that he does not have the right to reacquire the assets from the trustee.
- In the act in which the settlor loses the right to reacquire the assets of the trustee, if such right had been reserved.
In this way, through the trust, it could be avoided that the contribution of the property is considered as an alienation for tax purposes and thus cause the tax until the property is sold to the final buyer and liquid resources are available for payment, with the purpose of not decapitalizing the interested parties. The trust is an instrument that allows the development and management of real estate projects, granting legal certainty to all its parties and generating greater confidence to potential investors, since on the one hand the contractual agreements are supported by the trustee and the development of the real estate project is carried out in a transparent way and with the obligation to render accounts and, on the other hand, the trust equity that guarantees the project is a separate asset, which cannot be seized by third party creditors of the parties. For all of the above, it is important that, at the time of entering into the trust agreement, the parties that comprise it are duly advised, since a trust agreement with clear rules can prevent possible conflicts or establish alternatives for prior resolution to introduce themselves.
Corporations and Investors
A real estate investment trusts are created when a corporation uses investors’ money to buy and operate income properties. Real estate investment trusts are bought and sold on major exchanges, just like any other stock. A corporation must pay 90% of its taxable profits in the form of dividends to maintain itself. By doing this, real estate investment trusts avoid paying corporate income tax, whereas a regular company would pay taxes on its profits and then have to decide whether or not to distribute its after-tax earnings as dividends.
Solid Long-Term Investment
Like regular dividend-paying stocks, they are a solid investment for stock market investors who want a regular income. Compared to the aforementioned types of real estate investment, they allow investors to participate in non-residential investments, such as shopping malls or office buildings, that are generally not feasible to buy directly for individual investors. More importantly, they are highly liquid because they are interchanged. In other words, you won’t need a real estate agent and title transfer to help you withdraw your investment. In practice, they are a more formalized version of a real estate investment group.
Equity Trusts vs. Mortgage Trust
Finally, when looking at real estate investment trusts, investors should distinguish between equity trusts that own buildings and mortgage ones that provide financing for real estate and venture into mortgage-backed securities. Both offer real estate exposure, but the nature of the exposure is different. An equity one is more traditional as it represents real estate ownership, while a mortgage one is focused on income from real estate mortgage financing.
What does it take to invest in a real estate investment trust?
Being an investor who wants portfolio exposure to real estate without a traditional real estate transaction and what it takes to get started is simple investment capital. Real estate investment trusts are essentially dividend-paying stocks whose primary interests comprise commercial real estate with long-term cash-producing leases. Despite this, they are essentially stocks, so the leverage associated with traditional rental properties does not apply.