REITs: hot property for the 90's.

Between new and existing real estate investment trusts (REITs), REft capital could easily double within a few years, and quadruple by the end of the decade. Three initial public offerings that closed within an eight day span in November, raising in excess of $500 million, indicate the stepped-up pace of REIT activity likely to be seen in the next year.

One of the keys to a successful REIT is to have a strong management team that knows real estate very well and whose interests run parallel to their shareholders. In the past this was a problem as outside advisory firms managed REITs and had few or no shares in the company. Some outside firms would charge large fees for buying an asset -- a big conflict of interest. Now most REITs are formed from existing companies converting to REIT form. This is a significant advantage, as these firms use existing officers to manage the REIT and many own shares in the company.

There are still a great deal of existing owners that would benefit from converting to a REIT format. but these deals do not happen overnight. The process is very complex and time consuming; not to be undertaken without being advised by experienced investment bankers, attorneys and accountants knowledgeable of the REIT vehicle. It takes a great deal of decision making before any property owner can decide comfortably that conversion to a REIT would be advantageous.

The immediate hurdles are the initial cost to convert to a public vehicle, which can be significant. In addition, property owners need to understand and be prepared for the increased scrutiny and oversight of the public market.

Simultaneously, there seems to be healthy demand from investors for these types of investments if they are well structured with a minimum of conflicts and are priced properly. When Coopers & Lybrand published 'REITs: A Vehicle for the 1990's' we expressed our belief that the REIT would become the real estate equity vehicle for the future.

Back then we cited the Tax Reform Act of 1986 and the stock market crash of October 1987 as contributing factors to the growth of REITs. Little did we know that the real estate profitability crisis and the savings and loan debacle would make the REIT picture even rosier.