Real Estate Operating Company

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21 Aug, 2024

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A Real Estate Operating Company (REOC) refers to a business entity whose primary function is to invest in the real estate segment. REOCs deal with the purchase, sale, development, lease, and redevelopment of real estate. A significant portion of their asset holding is commercial property. These companies are listed for public trading on exchanges.

A real estate operating company’s investments are well-planned, strategically selected, and managed by a professional team. Also, such companies believe in maximizing shareholder value since their earnings or profits are reinvested in the business instead of being distributed as dividends to shareholders. However, the government charges higher corporate tax rates to REOCs than real estate investment trusts (REITs).

What Is A Real Estate Operating Company (REOC)?

A Real Estate Operating Company (REOC) is a specific kind of real estate entity whose shares are available for public trading on exchanges. Such a company is engaged in property investments, majorly in the commercial sector.
Although these firms operate and manage the properties in nearly the same manner as the Real Estate Investment Trusts (REITs), they do not distribute dividends to shareholders. Hence, they can reinvest their profits in the business.
However, REOC earnings are subject to double taxation, i.e., corporate income tax and tax on dividends when distributed to shareholders.

How A Real Estate Operating Company Work?

A Real Estate Operating Company (REOC) operates in the same manner as a Real Estate Investment Trust (REIT). The firm buys, manages, and develops properties. However, a REOC actively searches for and invests in new real estate projects. Such companies are more interested in commercial real estate investments like malls, offices, departmental stores, hotels, etc.

A significant portion of REOC earnings is realized from the capital gains on the sale, rent, or lease of shops or offices on its commercial premises or apartments in its residential buildings. However, these firms earn additional income even after selling properties since they still hold the right to manage and operate common areas like parking lots, corridors, lobbies, halls, terraces, etc.

The real estate operating company requirements may vary based on the business an entity undertakes. For instance, a REOC may function as a management company if it manages properties for other real estate firms, maintains commercial and residential properties, and collects rent from tenants in line with the service agreements signed with clients.

The primary objective of a real estate operating company is to generate income and provide positive returns to investors through the efficient management and operation of real estate assets. A REOC’s shares are available for public trading on exchanges like NASDAQ and New York Stock Exchange. Investors can buy REOC units from broker-dealers or experts.

For investors, REOC is a suitable and pocket-friendly investment option that diversifies the real estate property holding and maintenance risks. Hence, a REOC diversifies investors' funds across different real estate options, including commercial and residential properties. Moreover, such investments are under professional management, mitigating risks for investors. However, such assets are exposed to market uncertainties such as credit, interest rate, liquidity, and housing market risks.

Examples

Listed below are a few examples of real estate operating companies.

Example #1

Assume a real estate operating company buys a multi-story commercial building and sells each floor to other business entities planning to establish offices. However, the REOC retains the building‘s parking bay and charges the owners a specific amount as monthly rent. The monthly rent becomes the REOC’s ongoing earnings, even after it sells the units in the building.

Example #2

The 2017 Year in Review Canadian Real Estate Investment Banking presented the annual summary of REOC stocks. The report offered detailed information about property transactions, trading outcomes, and other factors that affect performance in the real estate segment. It opened with a discussion on how the rise in interest rates in Canada after a gap of 7 years left the real estate market undisturbed.

Canadian Real Estate Operating Companies List:

REOCs vs REITs

REOCs and REITs are similar in terms of the asset class investors invest in and manage. However, their investment objectives and legal compliance requirements differ. Let us see how:

Basis	Real Estate Operating Company (REOC)	Real Estate Investment Trust (REIT)
Definition	REIT is a real estate firm that owns, handles and manages properties in different sectors to generate income.	REIT is a real estate firm that owns, handles, and manages properties in different sectors to generate income.
Investment Style	More than 85% is invested in publicly held real estate companies at REOCs.	Investing in new real estate constructions and commercial properties is a feature of REITs.
Business Interest and Earnings	Such companies can have business interests in sectors other than real estate, i.e., they can earn profits from other business operations or investments as well.	These companies must maintain an investment level of over 75% in real estate alone and reap a maximum chunk (higher than 75%) of their overall earnings from such investments. They are subject to other business interest restrictions.
Taxation	REOC profits are subject to double taxation, i.e., the corporate income taxes and taxes on dividends received by shareholders.	REIT earnings are subject to tax benefits and are exempted from corporate income tax to a certain extent if the company distributes 90% or more of its earnings as dividends to shareholders. However, shareholders are liable to pay taxes on dividends.
Dividends	REOCs are not obliged to pay off dividends to shareholders. Instead, they can reinvest business earnings in operations.	REITs are enforced by law to attribute a minimum of 90% of their earnings as dividends to their shareholders.
Investors’ Expectations	Capital gain and shareholder value maximization over a period is seen.	Passive and regular cash flow in the form of monthly, quarterly, or annual dividends are seen.
Minimum Number of Investors	Not applicable	A minimum number of investors are required.
Shareholders’ Distribution	Not applicable	A maximum of 5 shareholders hold less than 50% of the trust’s total shares.
Operational Requirement	Not applicable	At least 100 shareholders must be on board post one year of commencement for a REIT to be recognized as a trust.

Frequently Asked Questions (FAQs)

1. Is investing in real estate operating companies worthwhile?

Since the value of properties usually appreciates, the real estate sector can be a rewarding investment. However, investors who do not have adequate funds to buy physical property can invest in the shares of a real estate operating company. REOCs provide them with greater liquidity and the chance to benefit from capital gains over a period.

2. Do real estate operating companies offer benefits to those working in this sector?

For real estate professionals, brokers, agents, or dealers, there are multiple benefits of working with real estate operating companies:
- Building connections with reputable clients
- Rewarding opportunities and income
- A flexible schedule
- Unlimited growth potential

3. Which is the largest real estate operating company or real estate investment trust in the US?

The largest real estate company in the world by market capitalization is the US-based company Prologis (PLD) with a market cap of $111.61 billion.

4. Which are some of the best real estate operating companies, real estate investment trusts, or real estate firms in the US?

Some of the best companies operating in the real estate sector in the US are:
- Keller Williams Realty
- eXp Realty
- Re/Max
- Redfin
- HomeServices of America and Berkshire Hathaway HomeServices
- Compass
- Coldwell Banker Realty
- Sotheby's International Realty