June 8, 2016

Waivers of Ownership Limitation Provisions in REIT Charters

Ownership limitation provisions in REIT charters are designed primarily to protect the company’s status as a REIT under the federal income tax rules. By placing limits on the amount of stock investors can own, the REIT builds in safeguards to ensure that it will satisfy REIT ownership tests, including the so-called “5/50 test,” and also protects the REIT from incurring related party tenant income, which can affect the REIT’s ability to satisfy the gross income tests necessary for REIT qualification. Not all ownership limits are created equal, however, and there are a number of variations and nuances that can affect both to whom the ownership limitations apply, and whether and when the REIT’s board of directors may provide waivers of the ownership limits. The ownership limitations in many REIT charters applies to holders that together form a “group” for securities law purposes but the determination of “group” status is a highly fact-dependent analysis that has historically been difficult to apply, particularly in the age of increased shareholder activism. REITs considering a waiver request must carefully review the relevant provisions in its charter and equally carefully apply to them the specific facts and circumstances at hand.


1. Why Do REITs Have Ownership Limits in the First Place?

2. The 5/50 Ownership Limitation

3. Parsing the Charter: Variations in Ownership Limitation Provisions

4. Beneficial Ownership and “Group” Status Under the Securities Laws

5. Waiver Considerations

6. Related Party Tenant Ownership Limitations

7. Conclusion

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