7994 / What diversification requirements apply in determining whether a trust qualifies as a REIT?
- No more than five percent of the value of a REIT’s total assets may consist of securities of any one issuer (except with respect to taxable REIT subsidiaries (TRS) and securities permitted under the 75 percent test).
- A REIT may not hold securities that represent more than 10 percent of the voting power of the outstanding securities of any one issuer.
- A REIT may not hold securities that represent more than 10 percent of the total value of the outstanding securities of any one issuer.1
The IRC recognizes that the value of securities may fluctuate between quarters. As such, Section 856 provides that if a REIT meets the diversification requirements at the close of any given quarter, it will not fail to meet the requirements in the subsequent quarter unless the failure is due to the acquisition of securities or property and is wholly or partially the result of that acquisition. If a REIT fails to meet the diversification tests at the close of a quarter as a result of an acquisition of securities made during that quarter, it has a 30-day period in which to correct the discrepancy. If the discrepancy is corrected within that 30-day period, the REIT will be treated as having satisfied the diversification test for the quarter.2
1. IRC § 856(c)(4)(B)(iii).
2. IRC § 856(c)(4).