Mainstreet Equity Corp. is not a real estate investment trust (REIT), but rather a real estate operating company (REOC). While a REIT legal structure has certain tax benefits, Mainstreet believes it is not conducive to its business strategy.
The primary advantage of a REIT structure is the deferral of taxes. If a REIT pays out the majority of its taxable income to its unitholders, the REIT forgoes paying tax at the corporate level, and its unitholders often can avoid paying taxes on the income in the year received depending on how much is deemed to be treated as return of capital. The portion deemed return of capital reduces the unitholder's average cost base and capital gains tax is only paid once the units are sold.
Mainstreet has chosen to remain a corporation as its business model is best achieved by retaining its cash flow, which includes not paying a dividend, and growing organically. Mainstreet acquires underperforming properties which require capital investments and take time to reposition, this often translates into negative cash flow as the property is being repositioned. If Mainstreet were paying out the majority of its cash flow, Mainstreet's ability to acquire such properties would be more limited due to cash flow constraints.
In addition, Mainstreet has grown its portfolio without equity dilution to its shareholders. Again, without the ability to retain cash flow and acquire properties with a higher returns profile, this would not be achievable. That is why many REITs issue equity in the form of additional units to fund new acquisitions, most of which are relatively stable properties. Mainstreet believes its business model achieves superior results over a long period of time.