ANNAPOLIS—Earlier this week Reven Housing REIT announced it was no longer a Colorado company. It had become, like so many other REITs before it, a Maryland corporation.
The move is hardly a surprise. Most REITs are registered in Maryland because of the state's comprehensive legal framework written specifically for REITs. Almost all of the time, such as with Reven, a conversion to Maryland is of little notice. In other cases, such as the year-long struggle by two shareholders for control of Commonwealth REIT, the state's laws come under the spotlight as investors and REIT managers scrutinize them to see what is permitted and what is not.
To hear Chad M. Carpenter, chairman and chief executive officer of Reven, tell it, there is much to scrutinize as Maryland has done and exhaustive job with its legislation. "Our board of directors believes that Maryland's more comprehensive laws governing REITs, Maryland's policies with respect to REITs and the established body of relevant case law are more conducive to the operations of a REIT than the laws and policies of Colorado," he says in a prepared statement. Maryland laws "provide the directors and management of a REIT with greater certainty and predictability in managing the affairs of the company."
Maryland is, in other words, extremely REIT-friendly, much like Delaware is seen as a haven for business that want to incorporate.
Maryland was the first "to put out the welcome mat for REITs and has it out to this day," John Mallin, a real estate partner with the law firm McCarter & English, told GlobeSt.com. In 1962 Maryland became the first state to pass legislation that enabled and recognized REITs, only two years after the federal government did, giving it a leg up on other states in attracting REITs, he explains.
"If you're a REIT, you want to know that a state's government, as a whole, is familiar and comfortable with how REITs form and operate. Maryland is able to stake claim to that more than any other state, if for no other reason-and there are plenty-than they've been at it longer.
Beyond the general welcoming atmosphere, there are specific, law-centric reasons that Maryland is an ideal location for REITs, Mallin continues. "Maryland law affords REITs relatively broad protection from liability, a fairly easy process by which bylaws can be amended, fairly strong protection against hostile takeovers, and relatively flexible stockholder voting procedures."
For instance, he notes that REIT managers particularly appreciate the developed body of law that makes it relatively difficult to remove a REIT's trustees from office. "Maryland law allows a REIT's articles of formation to require a two-thirds vote to remove trustees, while other states typically require a lesser vote," he says. The shareholders at CommonWealth's seeking to wrest the REIT away from REIT Management & Research LLC's control found their struggle an uphill one in part because of this rule.
Indeed, Mallin also points out that Maryland law affords REITs stronger protection against hostile takeovers—and unless prohibited by its governing documents, a majority of the board of trustees, without separate action by the shareholders, can amend the declaration of trust.
Maryland's laws are not infallible for REITs though—after all Corvex Management LP and Related Fund Management LLC did eventually succeed in the mission. In March CommonWealth REIT confirmed that the two shareholders delivered written consents reaching the 66.7% threshold required to remove the entire Board of Trustees, without cause. Now, the REIT plans to call a special meeting of shareholders to elect new trustees to the board on or before May 23.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
