Journal of Real Estate Finance and Economics, 28:4, 369±388, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
The REIT Modernization Act of 1999
JOHN S. HOWE*
Department of Finance, College of Business, 424 Cornell Hall, University of Missouri-Columbia, Columbia,
MO 65211-2600, USA
Department of Finance, College of Business, University of Missouri-Columbia, Columbia, MO 65211-2600,
This article examines two effects of the passage of the REIT Modernization Act (RMA) of 1999: its impacts on
REIT shareholder wealth and changes in REIT systematic risk in the period following its passage. The results
indicate a modest positive wealth effect associated with the legislative events leading to its enactment. Our
estimates of the wealth gain probably underestimate the true wealth gain because of the partially anticipated
nature of the legislative process. We also document a signi®cant decline in the systematic risk of REITs
subsequent to the passage of the RMA. The evidence suggests that this decline is not attributable to a provision of
the RMA that allows REITs to establish taxable subsidiaries.
Key Words: REITs, shareholder wealth, regulatory change, risk change
On December 17, 1999, the NAREIT Composite Index and the Morgan Stanley REIT
Index each rose almost 4 percent, the largest increase ever for these indexes in a single day.
The rise was attributed to a tip from Warren Buffett, the guru of investments. Buffett
auctioned his 20-year-old wallet as part of a fundraiser in Omaha, Nebraska and left a
stock tip in it: First Industrial Reality Trust, a REIT (Wall Street Journal, 1999a). But the
Buffett tip was not the only important thing to happen on that day. On the same day,
President Clinton signed the REIT Modernization Act (RMA) as a part of a larger bill.
The enactment of the RMA was expected to have a signi®cant impact on the future
growth, pro®tability and risk of the REIT industry. At the time of its passage, it was widely
believed that the most important provision of the RMA was the provision to allow REITs
to own up to 100 percent of a Taxable REIT Subsidiary (TRS). A REIT could now set up a
TRS to provide additional services to its tenants and others. Other provisions of the RMA
included a reduction in the mandatory payout requirement from 95 percent of earnings to
90 percent, and other relaxation of regulatory requirements.
Industry and media reports hailed the RMA as the most signi®cant legislation affecting
REITs since President Dwight Eisenhower signed the initial REIT legislation in 1960.
Steven A. Wechsler, President and CEO of NAREIT, summarized the reaction of the REIT
*Author for correspondence.