Congress created REITs in 1960 to give everyone the opportunity to invest in large-scale, diversified portfolios of income-producing properties. Over the last four decades, Congress has updated the REIT rules many times to make REITs more investor friendly, maintain their competitiveness in the real estate marketplace and realize their full promise.

Today, REITs have become part of the investment mainstream. At the same time, REITs are rightly seen as an effective tool to provide diversification within an investor's portfolio. REITs have provided investors with growing dividends and the preservation of their capital against inflation. Throughout the more than 40-year REIT journey, the industry has recorded many milestones, including significant policy changes in Washington, increasing investor awareness and broader acceptance in the U.S. and abroad.

Congress helped guide the industry's evolution, according to Gil Menna, partner and chair of the real estate capital markets practice at Goodwin Procter.

"The REIT structure has evolved consistently with the market's needs," Menna says. "If you look at the REIT Act of 1960, Tax Reform Act of 1986, REIT Simplification Act of 1997, REIT Modernization Act of 1999, and the REIT Improvement Act of 2004 and what they contained, and you look at Internal Revenue Code, Congress has been smart. Congress has come to realize that the REIT is important to the broader capital markets, and because of this, it has become available to a wider array of investors."

The most recent legislation, the REIT Improvement Act of 2004, was passed by Congress in October 2004. The principal changes included in the RIA are to eliminate a discriminatory barrier to foreign investment in publicly traded U.S. REITs and provide the IRS with the ability to impose monetary penalties on REITs in lieu of the loss of REIT status when the REIT rules inadvertently are breached.

Brad Markoff, head of Alston & Bird LLP's REIT practice, says that REITs wouldn't be where they are today without past modifications of the tax code.

"It is now possible for REITs to conduct spin-offs, something that was not as clear two to three years ago," Markoff says. "REITs are very large corporations with strong balance sheets that have access to capital markets like the largest companies in the U.S. do."

All of the strides made on the legislative front have contributed to a broadening of the investor base. Tom Robinson, managing director of real estate investment banking at Legg Mason Wood Walker, Inc., says that the investor pool in REITs has changed dramatically. REITs once were a misunderstood, niche investment vehicle that, over the years, have proven their worth and garnered investor recognition.

"There is a much broader awareness among institutional investors. If you go back to the 1980s it was an investment vehicle dominated by retail investors, whereas now the investor base is equally institutional," Robinson says.

Sept. 14, 1960 REITs are created when President Eisenhower signs into law the REIT Act title contained in the Cigar Excise Extension of 1960. Also, the National Association of Real Estate Investment Funds, NAREIT's predecessor, is organized. 1961 The first REITs—Bradley Real Estate Investors, Continental Mortgage Investors, First Mortgage Investors, First Union Real Estate, Pennsylvania REIT and Washington REIT are created. June 14, 1965 Continental Mortgage Investors becomes the first REIT to be listed on the NYSE. 1969–1974 The initial REIT boom takes place as total industry assets increase from about $1 billion to over $21 billion, primarily fueled by mortgage REITs engaged in land development and construction financing. REIT balance sheet leverage soars. January 1972  NAREIT Index debuts. Jan. 3, 1975 First significant change to REIT tax rules. Congress enacts foreclosure property rules, which allow a REIT, after obtaining possession of a property after foreclosure proceedings or a default, to operate a property for 90 days and then to have it operated through an independent contractor. Nov. 4, 1976  As part of the Tax Reform Act of 1976, President Ford signs into law the first package of REIT simplification amendments, most notably allowing REITs to be established as corporations in addition to business trusts. January 1985 The National Real Estate Stock Fund is formed—the first open-end mutual fund devoted to REITs and other real estate securities. Oct. 18, 1986  President Reagan signs the Tax Reform Act of 1986. Among the real estate provisions, it enacts several rules that prevent taxpayers from using partnerships to shelter earnings from other sources. A number of REIT simplification changes also took effect, including one that allowed REITs for the first time to use their own employees to provide customary services to their tenants. 1989–1991 Worst real estate recession since the 1930s. REIT stock prices decrease before prices of private real estate. Oct. 16, 1991 NAREIT adopts the definition of Funds From Operations. Nov. 22, 1991 Kimco Realty Corporation concludes the first successful equity REIT IPO in many years. This marks the beginning of the modern REIT era. Dec. 12, 1991 New Plan becomes the first publicly traded REIT to achieve a $1 billion equity market capitalization. Dec. 20, 1992 Taubman Centers, Inc. concludes the first IPO of an UPREIT. Aug. 10, 1993 As part of the Omnibus Budget Reconciliation Act of 1993, President Clinton signs into law a change to the "Five or Fewer" rule that makes it easier for pension plans to invest in REITs. Aug. 5, 1997 As part of the Taxpayer Relief Act of 1997, President Clinton signs into law the REIT Simplification Act of 1997. Among other items, this allows a REIT to provide a small amount of non- customary services to its tenants without disqualifying the other rents collected from them. October 1997 U.S. Treasury Department amends its tax treaty negotiating position to allow most non-U.S. shareholders to pay only 15 percent in taxes on REIT ordinary dividends consistent with the treatment of other stocks. Jan. 4, 1999 NAREIT launches its Real Time Market Index. Dec. 17, 1999 As part of the Ticket to Work and Work Incentives Improvement Act of 1999, President Clinton signs into law the provisions of the REIT Modernization Act of 1999. Among other items is the ability of a REIT to form a taxable REIT subsidiary that can perform services to REIT tenants and others. Dec. 31, 1999 In a joint venture, NAREIT, EPRA and Euronext launch the EPRA/NAREIT Global Real Estate Index. Oct. 1, 2001   S&P opens the doors of its S&P 500 and other indexes to REITS. Equity Office Properties is the first REIT named to the list, and a month later Equity Residential follows. March 2003 The Principal Financial Group announces it will offer a REIT option as part of its basic 401(k) investment line-up. Also, the Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) announces it will include a real estate securities fund as an investment option in its 403(b) plan platform. These moves make a REIT option available to an additional 4.6 million plan participants. April 2004 EPRA/NAREIT Global Real Estate Index North America Series begins real-time calculations. Aug. 31, 2004 The NAREIT Equity Index outperforms the S&P 500, Russell 2000, NASDAQ Composite and Dow Jones Industrial Average on a total return basis over the 1,3,5,10,15,25 and 30-year periods. Additionally, the NAREIT Equity Index outperforms all of the aforementioned indices over a 20-year period, except the S&P 500. Sept. 15, 2004 Institutional Shareholders Services (ISS) data shows that REITs and real estate had the highest average Corporate Governance Quotient among the 24 industries it tracks. Real estate’s average CGQ of 65.2 percent far exceeded the overall average of 51.8 percent.

According to Markoff, REITs earned the right to be put on a level field with traditional businesses.

"The market acceptance is there," Markoff says. "In 10 more years we'll be able to give 20 years of data on how modern-era REITs have performed in all different types of conditions."

Marty Cicco, head of global real estate for Merrill Lynch, says that the broadening investor base gains momentum every quarter.

"I think the amount of money flowing in and the number of conferences [about the sector] attest to the fact that REITs are an accepted, trusted and understood format," Cicco says.

Robinson also sees the REIT vehicle increasingly recognized as an efficient asset class.

"REITs are going to continue to grow in terms of acceptance as a mainstream investment choice. They are maturing as operating companies, managing their balance sheets well, growing their capitalization and becoming part of the mix," Robinson says.

INDUSTRY Snapshot Total equity market capitalization = $275 billion Equity REIT market capitalization = $248 billion REITs own more than $400 billion of commercial real estate, or 10 to 15 percent of the total institutionally owned commercial real estate market 187 REITs are in the NAREIT Composite Index 154 REITs are traded on the New York Stock Exchange NYSE listed REITs market capitalization = $265 billion Commercial real estate industry represents a significant portion of the U.S. Economy: 6.0 percent of GDP in 2003 6.7 percent of GDP growth over the past 10 years Source: NAREIT. Data as of Sept. 30, 2004

As REITs have expanded their investor base within the U.S., they also have begun to raise awareness overseas. The increasing interest in global investing rapidly is becoming an important dynamic in the REIT industry.

"Fifteen years ago no one would have thought we'd go to Europe to talk about the REIT industry," Menna says. "But there is more real estate outside the U.S. than there is inside the U.S."

According to Cicco, however, REIT-like investment vehicles will have to become more consistent in terms of structure and tax laws in order to gain sustained momentum abroad.

"If you go around the world, the whole role of the advised [REIT-like structure] versus the self- administered one is inconsistent, although getting better. You see the activity of the Australian market conforming to the U.S. model of self-administered and self-advised. The Japanese market has yet to conform to that model, so it will be interesting to see how much global interest this market will achieve," Cicco says. "The pressure of cross-border growth and activity on the larger industry leaders will continue, but much of that growth will depend on legislative consistency and adoption of the right structure."

Menna agrees, saying that the REIT vehicle needs to become more user-friendly as an investment vehicle abroad.

"There are two overarching issues that must be addressed in order for the REIT vehicle to be seamless—currency gains and tax credits," Menna says. "U.S. REITs don't receive the benefit of an offshore tax credit. We should institute a tax credit to level the playing field with the rest of corporate America, thereby helping U.S. real estate entrepreneurs access offshore capital."

REITs continue to make their mark in the U.S. and internationally, as they have proven their worth as a stable asset class and long-term investment vehicle by continually meeting the challenges set before them. REITs have evolved successfully while staying true to their charter, and yet still are primed to grow in the future.