For years, the once-glamorous REIT structure fell out of favor with private lenders and fund managers. But the landscape has changed—dramatically. Thanks to the passage of the so-called ‘One Big Beautiful Bill,’ (“OBBB”), REITs are not only back—they may just be the most powerful tool in your strategic toolbox.
What Was the Problem with REITs?
Historically, REITs came with three major headaches: (1) prohibitive compliance burdens, (2) limitations on how revenue could be earned, and (3) investor education challenges. Many fund managers avoided the REIT structure altogether in favor of LPs or LLCs that were more straightforward.
A Game-Changer for Compliance
The One Big Beautiful Bill helped streamline REIT compliance—especially for funds operating in the real estate credit space. Now, sponsors have a clearer roadmap on how to qualify income, maintain REIT status, and deliver pass-through tax benefits without unnecessary red tape. In short, it’s become easier to manage. However, some issues still could occur. We will go over a few common pitfalls still in existence post OBBB.
Failure to Distribute Most Taxable Income to Investors
REITs require funds to distribute atleast 90% of its taxable income to investors. Should you fail to do so, this could cause the fund issues. Working with an experienced CPA is essential: they should account for fund valuation, loan loss reserves as well as defaulted loans and how you account for them. Doing a stress test quarterly (coupled with your 5/50 test) would make the most sense here.
Closely Held Companies Could Violate REIT Taxation
The 5/50 rule as it is known is still in play. Simply put, no five individuals should own more than 50% of the REIT. This rule must be complied with in the second half of the company’s tax year after the first full year of being (or converting into) a REIT. Having a strong accounting staff or REIT compliance company is recommended as this test must be strictly complied with or you risk losing the REIT benefits. Having forced distributions to comply with the rule should be standard in your offering documents.
Loan Sales Should Be Prohibited in REITs as You Could be Held to Have Dealer Income
Loan sales are problematic for REITs and REITs are supposed to be passive investors, i.e., hold onto investments through payoffs or otherwise. Should REITs be active investors, it could trigger dealer income ,which is prohibited for REITs.
If selling loans to your warehouses or being a correspondent is essential to your business, consider either separate funds or organizing a sub-REIT, keeping the loan sales at the parent entity and not the subsidiary.
Modern Lenders Need Modern Tools
Private lending has grown more competitive. Investors want tax advantages. Borrowers expect speed. Regulators demand precision. A REIT, properly structured, now helps lenders address all three. It’s not for every deal, but it should absolutely be in your toolkit if you’re serious about scaling.
One Big Beautiful Bill Changes to REITs and Sub-REIT Structures
One of the most significant impacts of the One Big Beautiful Bill is how it enhances the benefits of Section 199A for REIT investors. Previously, Section 199A of the Tax Cuts and Jobs Act allowed non-corporate taxpayers to deduct up to 20% of their qualified REIT dividends, providing a substantial tax break. However, the deduction was set to expire in 2025. The new law not only makes the Section 199A deduction permanent but also increases the deduction for qualified REIT dividends from 20% to 23%. This means that for investors in a REIT, their effective tax rate on qualified dividends could be reduced to as low as 28.49%—a highly attractive benefit for high-net-worth individuals and income-focused investors. By locking in this tax treatment and expanding its value, the One Big Beautiful Bill reinforces the long-term viability of REIT structures as efficient vehicles for real estate investment.
Conclusion
With regulatory clarity improving, REITs are viable again. Don’t dismiss them based on outdated assumptions. The passage of the One Big Beautiful Bill has reopened the door to a powerful tax-advantaged strategy that could set your fund apart. Now is the time to re-evaluate. Contact me and I can steer you in the correct position you need.
About the Author
Named to the 2022–2025 Southern California Super Lawyers® list, a designation given to only 5% of attorneys, Anthony Geraci, Esq. is the CEO and a partner at Geraci LLP. He leads the firm’s strategy and the development of Geraci’s team and culture. A nationally recognized speaker, Anthony provides peace of mind to clients and team members alike.
