Real estate has remained a favored asset class across cultures and economies. From family-held rental properties to institutional portfolios spanning continents, investors have long appreciated real estate for its income generation, capital preservation, and inflation protection.
As real estate investing has evolved, so have the structures through which investors participate. Among the most widely used vehicles are Real Estate Investment Trusts (REITs) and real estate partnerships, both of which enable individuals to pool capital and benefit from professionally managed income-generating properties.
However, while both models serve the same purpose—delivering real estate exposure—they differ in critical ways. Nowhere is this more evident than in how they distribute income to investors. The mechanisms, tax treatment, regulatory obligations, and flexibility of REIT distributions versus those of partnerships reflect fundamentally different approaches to ownership and earnings.
This article offers a comprehensive and easy-to-understand comparison of REIT and partnership distributions, particularly valuable for investors in the Middle East and North Africa (MENA), where both models are gaining traction in the investment landscape.
REITs and Partnerships: A Brief Structural Overview
Before comparing the distribution mechanisms, it’s important to clarify the foundational structures of each vehicle.
REITs: Public and Private Trust Entities
REITs are corporate entities that own or finance real estate. They can be publicly listed on stock exchanges or privately offered to institutional and qualified investors. Legally, they are required to meet specific criteria, including asset composition, income sources, and—most notably—distribution rules. To maintain REIT status, these entities must pay out a significant portion of their taxable income to shareholders.
REITs offer a “corporate-lite” investment approach: they are regulated like companies but designed specifically for real estate. Investors hold shares in the REIT and receive dividends, which represent their share of income from rents, interest, or capital gains.
Partnerships: Pass-Through Investment Vehicles
Real estate partnerships are usually structured as limited partnerships (LPs) or limited liability companies (LLCs) in the U.S., and they often exist under similar frameworks elsewhere. In these structures, a general partner (GP) manages the property and strategy, while limited partners (LPs) contribute capital and receive a share of the income.
Partnerships are “pass-through” entities for tax purposes. They do not pay corporate income tax themselves. Instead, income, losses, credits, and deductions are passed directly to the investors, who report these on their tax returns.
Distribution Requirements and Flexibility
One of the starkest contrasts between REITs and partnerships lies in their approach to income distributions—how much they must pay, when, and under what rules.
REIT Distribution Requirements
REITs are legally obligated to distribute at least 90% of their taxable income to shareholders annually to avoid corporate income tax. This rule is fundamental to the REIT model and aligns the interests of investors and managers, emphasizing income delivery over capital accumulation.
Most REITs go beyond the minimum and distribute close to 100% of taxable income. These distributions are typically made on a quarterly or monthly basis, depending on the REIT’s policy. Because of this mandatory distribution rule, REITs are often favored by income-oriented investors, including retirees, institutions, and wealth managers in search of consistent yields.
Partnership Distribution Flexibility
In contrast, real estate partnerships have no legal obligation to distribute a minimum portion of their income. The general partner (or managing member in an LLC) has discretion over if, when, and how much to distribute.
Distributions in partnerships are governed by the partnership agreement, which may specify hurdles, preferred returns, or waterfall structures determining how profits are split among partners. For instance, a deal might stipulate that limited partners receive an 8% preferred return before the general partner shares in any profits. Distributions may be periodic (quarterly or annually), irregular, or tied to specific liquidity events, such as a property sale or refinance.
This flexibility allows partnerships to prioritize reinvestment or debt repayment over cash payouts, offering strategic control but less predictability for investors.
Sources of Distributions
REIT Distribution Sources
REITs generate income from various property-related activities, depending on their sector (residential, commercial, healthcare, industrial, etc.). The majority of distributions are funded from:
- Net rental income after operating expenses
- Mortgage interest (in the case of mortgage REITs)
- Gains from property sales
- Other ancillary income, such as parking fees, storage rentals, or service charges
Because of their diversified holdings and public nature, REITs often have consistent cash flow and lower volatility in distribution patterns.
Partnership Distribution Sources
In partnerships, distributions can come from:
- Operating cash flow (net income after expenses and debt service)
- Capital events, such as refinancing or asset sales
- Return of capital, particularly in early years before the project generates income
While this variety provides more flexibility, it can also lead to uneven cash flow and greater dependence on project execution. If a development faces delays or cost overruns, distributions may be postponed or reduced.
Tax Treatment of Distributions
Taxation is a major area of divergence between REITs and partnerships, particularly for U.S. taxpayers and foreign investors.
REIT Taxation
REIT distributions are taxed based on their source, and typically fall into three categories:
- Ordinary income: This portion is taxed at the investor’s regular income tax rate.
- Return of capital: Non-taxable in the year received; reduces the investor’s cost basis and may trigger capital gains upon sale of the REIT shares.
- Capital gains: Taxed at favorable long-term capital gains rates if held for more than one year.
Importantly, REITs do not pass through depreciation or losses directly to investors. This means investors do not benefit from the same level of tax shield as with partnerships.
In many jurisdictions, REIT dividends are withheld for foreign investors at the applicable treaty rate, though some REITs structure their operations to minimize these effects.
Partnership Taxation
Partnerships pass through all tax attributes, including:
- Income and losses
- Depreciation deductions
- Interest expense
- Capital gains or losses
This allows investors to offset other income, defer taxes, or take advantage of depreciation in the early years. Distributions from partnerships are generally not taxed when received unless they exceed the investor’s basis. Instead, income is taxed when earned, regardless of whether it is distributed.
The result is a more tax-efficient structure, particularly for high-net-worth or institutional investors who can optimize their tax positions.
However, this pass-through model also introduces complexity. Investors must file K-1 statements in the U.S. (or local equivalents), which can delay tax filings and require professional accounting support. Foreign investors may face withholding requirements, income reporting obligations, or permanent establishment risks, depending on treaty status.
Liquidity and Exit Considerations
REIT Liquidity
Publicly traded REITs offer superior liquidity. Shares can be bought or sold daily on major exchanges. Investors can exit partially or entirely without involving the REIT itself. This marketability makes REITs attractive for portfolio diversification, retirement planning, and passive income.
Even private REITs often provide redemption programs, although these may have limitations, such as quarterly withdrawal caps or early exit penalties.
Partnership Liquidity
Real estate partnerships are inherently illiquid. Investors commit capital for a fixed term, typically 5–10 years, with limited options for early exit. There is usually no secondary market, and withdrawals must be approved by the general partner if allowed at all.
While this illiquidity enables long-term planning and reduces volatility, it also makes partnerships unsuitable for investors who may need access to their capital on short notice.
Control and Decision-Making Power
In a REIT structure, investors have no direct control over property decisions. They elect a board of directors (for public REITs), but day-to-day management is the responsibility of professional executives and property managers. The structure is corporate—investors trust the REIT’s leadership and strategy.
In partnerships, limited partners similarly have minimal operational authority, but the general partner often operates in closer proximity to the investors. Some partnership agreements allow for investor voting rights on key issues such as asset sales, refinancing, or management changes. The relationship between the general partner and the limited partners is more personal and deal-specific.
This can create both opportunity and risk: competent sponsors may drive strong returns through hands-on strategies, while poor execution or lack of transparency may harm investor interests.
Regulatory Oversight
REITs—especially public ones—are subject to strict regulatory oversight. In the U.S., this includes SEC reporting, GAAP accounting, Sarbanes-Oxley compliance, and periodic shareholder meetings. In countries like Saudi Arabia and the UAE, REITs are regulated by the Capital Market Authority (CMA) and similar agencies, requiring disclosure of NAVs, distributions, and portfolio performance.
Partnerships are privately regulated. Oversight is primarily governed by contract law and the partnership agreement. While private offerings to accredited investors are subject to securities exemptions, they do not require the same level of public reporting or audit.
Investors must therefore place greater reliance on sponsor integrity, operational transparency, and thorough due diligence.
Which Model Is Better for You?
The choice between REITs and partnerships largely depends on investor priorities, risk tolerance, tax profile, and capital availability.
REITs may be more suitable for:
- Investors seeking regular income with high liquidity
- Individuals with limited time for due diligence
- Those who prefer regulated, exchange-listed investments
- Portfolios requiring dividend-generating assets
- Investors based in jurisdictions where public REITs are tax-advantaged
Partnerships may appeal to:
- Investors who want higher potential returns and direct asset exposure
- High-net-worth individuals optimizing for tax deferral or depreciation
- Long-term capital providers comfortable with illiquidity
- Those seeking involvement in specific projects, niches, or geographies
- Investors comfortable with more complex structures and accounting
Conclusion
REIT distributions and partnership distributions both offer gateways to the benefits of real estate, but they reflect two very different investment philosophies. REITs emphasize accessibility, income consistency, and market liquidity, governed by formal regulation and geared toward mainstream investors. Partnerships offer control, customization, and potential tax benefits, at the cost of complexity and illiquidity.
For investors across the Arab world and other emerging markets, understanding these differences is essential. As both REITs and partnerships become more accessible—through global platforms, Shariah-compliant structures, and digital financial services—making the right choice depends on aligning each model’s strengths with your own financial goals.
