Glossary

Domestically Controlled REIT (DC REIT)

Also known as: DC REIT, Domestically controlled REIT exception, DC REIT

A REIT in which foreign persons hold, directly or indirectly, less than 50% of the value of its stock at all times during a specified testing period, which causes the REIT's stock to fall outside the definition of a U.S. real property interest and generally exempts a foreign shareholder's gain on selling that stock from FIRPTA.

Domestically controlled status is arguably the single most valuable structural attribute a REIT-based inbound investment vehicle can have, because it lets foreign investors exit their position by selling REIT shares rather than the REIT selling underlying real property, converting what would otherwise be a FIRPTA-taxable disposition into a transaction generally outside FIRPTA's reach for the selling shareholder. Maintaining the status requires ongoing, careful monitoring rather than a one-time determination: the 50%-foreign-ownership threshold must be satisfied continuously (or under specific look-back testing conventions) throughout the relevant period, foreign ownership held indirectly through domestic entities can, under look-through rules, still be attributed as foreign for this purpose in certain circumstances, and admitting new foreign investors, redemption activity, or transfers among existing holders can each shift the REIT's foreign-ownership percentage in ways that jeopardize the status if not tracked closely. Because of this fragility, REIT sponsors targeting domestically controlled status typically build cap-table monitoring, transfer restrictions, and investor certification requirements directly into the REIT's governing documents and subscription agreements, and sponsors sometimes seed a REIT with sufficient U.S. investor capital specifically to establish a durable domestic-ownership buffer before admitting foreign capital.