Real Estate Operating Company (REOC)

What Is a Real Estate Operating Company (REOC)?

A real estate operating company (REOC) is a publicly-traded company that actively invests in properties — by and large commercial real estate. Dissimilar to real estate investment trusts (REITs), REOCs reinvest the money they earn once more into their business and are subject to higher corporate taxes than REITs.

Seeing Real Estate Operating Companies (REOCs)

Investors have a number of options in the event that they wish to expand their holdings and add real estate to their portfolios. Purchasing real property is one option, yet that can come at a big cost and enormous risk. Investors who buy properties — residential or potentially commercial real estate — must have the option to bear the financial burden of purchasing and keeping up with properties notwithstanding the risks and uncertainties that accompany the housing market.

REOCs can shield investors from a portion of the risks that accompany holding real property. Possessing a couple of shares in one of these companies gives you immediate exposure to several distinct types of real estate that are carefully chosen and afterward managed by a team of specialists.

The majority of their holdings are [commercial properties](/commercial-property, for example, retail stores, lodgings, office buildings, shopping centers, and multifamily homes. Numerous REOCs likewise invest in and oversee properties. For example, a company might sell or lease out units of a multifamily home or office building to various individuals yet at the same time keep up with and earn money from common spaces like parking parcels and entryways.

Shares in REOCs are traded on exchanges just like some other publicly-traded company. Investors can purchase shares through their broker-dealer or another financial professional. Despite the fact that they kill the risk of holding physical property, REOCs are subject to certain market risks including interest rate risk, housing market risks, liquidity risk, and credit risk.

REOCs pay federal taxes since they are not required to disseminate their earnings to shareholders.

REOCs versus REITs

In spite of the fact that the two of them invest in real estate holdings, there are functional and strategic differences among REOCs and REITs. REITs own and operate properties that generate income through rents or leases. These might be residential residences, inns, and even infrastructure properties, for example, pipelines and cell telephone towers. Investors can decide to buy shares in three unique types of REITs — value REITs, mortgage REITs, and hybrid REITs.

REOCs are structured in a manner that permits them to reinvest their earnings back into the company as opposed to disseminate them to shareholders. In that capacity, they can extend their holdings by purchasing new properties or put money back into existing holdings to further develop them. They may likewise involve earnings to buy new properties for the express purpose to sell them back sometime in the not too distant future. Having the option to reinvest their earnings means REOCs seek no favorable tax treatment, so they pay higher taxes than REITs.

To qualify as a REIT, companies must meet certain requirements. These incorporate — among others — investing at least 75% of their assets in real estate and distributing no less than 90% of their earnings to unitholders. In exchange, REITs seek favorable tax treatment. Corporate taxes for REITs are far lower than those forced on REOCs on the grounds that they are exempt from federal taxation.

REITs will generally invest and purchase properties that limit the amount of risk associated with certain commercial properties as a result of the special tax status they appreciate. Their investment strategies will generally be as long as possible. This means REITs don't purchase investment properties to sell them later on the same way some REOCs do.

Features

• REOCs can reinvest their earnings back into the business as opposed to convey them to unitholders the same way REITs are constrained to do.
• REOCs have the potential for greater growth possibilities than REITs yet they probably won't generate as much immediate income.
• A real estate operating company (REOC) participates in real estate investments and trades on a public exchange.