SIE Understanding Products and Their Risks Question 20: Answer and Explanation

Question: 20

Which type of REIT has the broadest range of cash flow types?

• A. S corporation
• B. Mortgage
• C. Equity
• D. Hybrid

Correct Answer: D

Explanation:

D: Hybrid REITs use both mortgage interest rate spreads and rents and capital gains from ownership of commercial buildings to generate cash flow. An S Corporation, Choice A, is a way for a group of one hundred or fewer investors to have flow-through tax treatment (as a partnership has) with limited liability. Mortgage REITs, Choice B, receive cash flow from the interest rate spread from borrowing from investors at a lower interest rate and issuing mortgages at a higher interest rate. Equity REITs, Choice C, generate cash flow through purchasing ownership in and managing business properties.