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The Rise of the REIT

Business professor studies impact of growing number of family-owned Real Estate Investment Trusts

Kevin Chiang
Professor Kevin Chiang is an expert in Real Estate Investment Trusts, an area of the economy that's tripled since 1993. (Photo: Sally McCay)

Estimates vary, but family-owned businesses comprise somewhere in the neighborhood 90 percent of all businesses in America. That was not the case in the real estate industry until after the passage of a law that helped triple the number of family-owned real estate companies and transformed the industry into a more public $500 billion market.

The Revenue Reconciliation Act of 1993 prompted many founder- and family-owned real estate companies to restructure as publicly traded Real Estate Investment Trusts (REIT’s). Kevin Chiang, professor of real estate/finance, is an expert on REITs -- companies that own and, in most cases, operate income-generating commercial properties such as offices, apartments, hotels and malls -- and has written extensively on the plethora of issues that have emerged with the increase in REITs from 20 percent in 1994 to 60 percent in 2007.

Chiang’s most recent paper, co-authored with Honors College business major Gregory Wachtel, explores the motivations behind the increasingly significant role of REITs in the green building revolution. A second paper examines why family-owned REITs tend to perform better than privately owned ones. His findings focus primarily on the period since the passage of the 1993 law, which allowed for companies to count all employees as investors, makng it easier to meet the required 100-investor minimum to become a REIT. The federal government's hope was that if it eliminated corporate income tax for REITs as long as they paid out at least 90 percent of its taxable income to sharholders, particpiation would increase, thus causing a reduction in rental rates for consumers.

The government's goal of lower rental rates did in fact come to frution, as did a substantial increase in the number of publicly traded REITs to about 150. Among those, the number listed in the S&P 500 went from two to 17 between 2001 and 2014. “It was the government trying to figure out how this Wall Street idea could bring benefits to Main Street -- and for the most part it worked," says Chiang.

REITs practice corporate social responsibility 

Chiang’s expertise in REITs is part of a research agenda that is intentionally focused on the business school’s three-prong concentration of family business, sustainability and entrepreneurship. “Research is like operating a company,” says Chiang. "You need to make a mark and specialize in a certain market before you can expand into different areas. This is my base, which allows me to address a lot of other corporate issues. It also creates opportunities for undergraduates to help conduct research in a broad range of areas.” 

Chiang’s paper on “Corporate Social Responsibility and Growth Opportunities” focuses on three critically important CSR dimensions related to the real estate industry: the environment, community and governance. He found empirical evidence that REITs are motivated to engage in environmental CSR when growth opportunities are available, and a competitive advantage can be gained. 

“In order to add values and benefits to society in a sustainable way, firms also need to seek value creation for themselves,” says Chiang, emphasizing the energy savings of being located in a green buildings, which results in fewer employee absences and higher profits from consumers who want to support green businesses. “Green space is where corporations want to be in order to capture the market. It’s based more on an economic ideology than a political one. It’s being done in red states and blue states. It’s about making money and being green.”

Chiang emphasizes the growing emphasis on CSR in the real estate market by pointing out that 54 percent of the real estate firms in his sample had CSR involvement, compared to just five percent CSR participation among the roughly 5,000 U.S. public (non-real estate) firms. This participation rate is especaily important given that real estate has a “vast impact on the natural environment, human health and the economy” accounting for 28 percent of total GDP, 38 percent of CO2 emissions, 39 percent of total energy use, and 68 percent of total electricity consumption, according to the U.S. Environmental Protection Agency.

Chiang quotes Sara Neff, vice president for sustainability at Kilroy Realty Corp., who says REITs create value that is important to tenants and that Kilroy uses CSR to differentiate itself from its competitors. “It used to be okay to build a (LEED) Silver Building, and (LEED) Gold was pretty impressive,” she says. “Now, everything is Gold, and we are going to (LEED) Platinum for the really big stuff. I think that is really great because the reason we are doing that is because our tenants are responding.”

Family-owned REITs tend to have higher corporate value

Chiang’s paper on “REIT Governance, Entrepreneurial Control, and Corporate Value” explores the question of whether, and how, founder-family ownership and control of REITs affects their valuation. He discovered that founder/family-owned REITs, on average, have a higher corporate valuation than non-founder/family REITs depending on their corporate structure and how much money family members invest. The more capital that family members put into the REIT, he says, the more invested they are in all areas of the business, which tends to lead to higher valuation.  

"Founder/family ownership is founded to provide incentive and capacity to monitor mangerial agents and reduce agency costs," writes Chiang, who produced the article with Professor Rocki-Lee DeWitt with the help of recent graduates David Folkman and Long Jiao, who were undergraduates at the time. Not all family-owned REITs have higher valuation, however. When founder/families control both CEO and chairman functions and have superior voting rights, valuation decreases.

“There's less accountability, so they can play golf all day if they want,” says Chiang, who receives calls from REIT owners interested in applying his research. "In contrast," he says, "when professional outside CEOs are hired and monitored by family-founder chairs, value is added. This way, they can make sure the CEO is doing their job. It allows for some checks and balances."