Abstract:
Methods of consolidating independent owners of distribution warehouses into a Real Estate Investment Trust (REIT) for purposes of achieving economics of scale, for obtaining favorable mortgage financing and for creating a vehicle to enable periodic refinancing and investment of proceeds from such refinancing in real estate opportunities. The REIT is formed and independent owners of distribution warehouses are assembled and selected to participate in the REIT. The participant enters in a sale-leaseback agreement with the REIT and transfers title in their warehouses to the REIT. The REIT finances the purchase of the warehouses by securing a non-recourse loan with at least a seven-year term, serviced on at least a seven-year debt payment schedule. On a periodic basis, preferably every seven years, each warehouse is reappraised, new leases entered into between the REIT and each participant, and new mortgage loans issued for each warehouse. The REIT invests proceeds from the new mortgage loans in real estate opportunities to produce investment revenue. The REIT distributes 90% of net earnings from the investment revenue to the participants.

Description:
FIELD OF THE INVENTION  
       [0001]     The present invention relates generally to a method of consolidating independent owners of distribution warehouses into a Real Estate Investment Trust (REIT) for purposes of achieving financial and investment benefits which otherwise would not be available to any one individual warehouse owner, and more particularly for purposes of obtaining economies of scale, including favorable mortgage financing, and for creating a vehicle to enable periodic refinancing and investment of proceeds from the refinancing in real estate opportunities that produce net earnings, 90% of which may be distributed to the REIT&#39;s participants.  
       BACKGROUND OF THE INVENTION  
       [0002]     The Real Estate Investment Trust Act of 1960 propagated laws for the establishment of Real Estate Investment Trusts otherwise known as REITs. A REIT is a company dedicated to owning and operating income producing real estate, such as apartments, shopping centers, and offices. Some REITs finance real estate.  
         [0003]     Congress created REITs to permit small investors to make investments in large-scale, income producing real estate. The REIT allowed small investors to pool their investments to acquire large real estate holdings.  
         [0004]     When first established, REITs could only own real estate. They could not operate or manage it. This caused REITs to find third-parties to operate and manage the REIT&#39;s commercial real estate. But, third-party managers often were viewed as having economic interests diverse from those of the REIT&#39;s owners. Investors saw this as a disadvantage. REITs therefore played a limited role in real estate investments until 1986.  
         [0005]     In 1986, Congress passed a tax reform act which permitted REITs not only to own income producing commercial properties but to operate and manage them. The law also put an end to real estate tax shelters that had attracted much of the capital from investors, not for the income they produced, but for the losses sustained and passed onto the investors. The change in the law caused real estate investment to focus on producing income.  
         [0006]     Under current law, a company can qualify as a REIT if it complies with provisions of the Internal Revenue Code that requires REITs to: 
        1. be taxable as a corporation;     2. be managed by a board of directors or trustees;     3. have shares that are fully transferable;     4. have a minimum of 100 shareholders;     5. have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year;     6. invest at least 75% of total assets in real estate assets;     7. derive at least 75% of gross income from rents from real property, or interest on mortgages on real property;     8. have no more than 20% of its assets consist of stocks and taxable REIT subsidiaries; and     9. pay annual shareholder dividends of at least 90% of its taxable income.        
 
         [0016]     REITs are attractive to investors because of their liquidity. Investors can buy and sell interest in diversified portfolios of property simply by buying and selling shares of the REIT. REITs are also considered to be relatively safe and conservative investments because information about the company, its property, the management, and its business plan are usually available, particularly if the REIT is traded publicly. REITs have also shown favorable performance on the stock market.  
         [0017]     REITs are classified into three types: 
        1. equity REITs that own and operate income producing real estate;     2. mortgage REITS that lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage backed securities; and     3. hybrid REITs which both own property and make loans to real estate owners and operators.        
 
         [0021]     REITs are managed by corporate officers who are accountable to the board of directors as well as the REIT&#39;s shareholders and creditors.  
         [0022]     U.S. Pat. No. 6,292,788 and U.S. Published Patent Application 0013750 disclose investment methods using REITs by dividing investment real estate into a plurality of tenant-in-common deeds of predetermined denominations that are subject to a master agreement and a master lease to form deedshares. Holders of the deedshares receive an income stream from the master lease without having to manage or maintain the real estate. The master tenant may also purchase the holders&#39; deedshares at the end of a specified term, which further may provide income to the holders.  
         [0023]     The method of the present invention differs from prior investment mechanisms involving REITs by providing a unique method of consolidating independent owners of distribution warehouses into a REIT to achieve numerous financial and investment benefits which otherwise would not be available to any one individual warehouse owner.  
       SUMMARY OF INVENTION  
       [0024]     It is an object of the present invention to monetize the fair market value of a participant&#39;s distribution warehouse to create cash reserves that may be used by the participant for working capital and future needs of the distribution company, to strengthen the participant&#39;s credit line and that of the distribution company, and to improve the participant&#39;s financial condition and the financial condition of the distribution company, as for example, by eliminating debt (and saving interest expense) and by purchasing income producing securities and investments.  
         [0025]     It is a further object of the present invention to permit the participant to acquire ownership of the REIT through participation and without the expenditure of money or other compensation for such ownership; neither will the participant be required to guarantee debt of the REIT, lend funds to the REIT, nor assume any direct or contingent liability for ownership of the REIT.  
         [0026]     It is a further object of the present invention to provide cash income to the participants through mandatory REIT distributions of at least 90% of net earnings.  
         [0027]     It is a further object of the present invention to provide a mechanism through which the REIT acquires income producing real estate and other investment assets by means of periodic re-financing of the distribution warehouses.  
         [0028]     It is a further object of the present invention to have the REIT secure non-recourse financing to fund its operations and to acquire income producing assets without pledging the REIT&#39;s stock, without pledging a corporate participant&#39;s assets or stock, without requiring an individual participant&#39;s personal endorsement or guaranty, and without encumbering a participant&#39;s line of credit.  
         [0029]     It is a further object of the present invention to free the participants from managing the operations of the REIT by instilling such duties in a manager who is supervised by the REIT&#39;s Board of Directors.  
         [0030]     It is a further object of the present invention to cap the REIT&#39;s administrative expenses by dedicating a fixed portion of the rent paid to the REIT for such administrative expenses; in this manner the REIT will never be overburdened with excessive costs or expenses to dilute earnings and such fixed overhead expenses will enhance the price of the REIT&#39;s stock if publicly traded.  
         [0031]     It is a further object of the present invention to lease the distribution warehouses to the participants after purchase by the REIT at competitive market rates or lower, which is made possible by the unique financing of the REIT and through the consolidation of a large number of warehouses. Low rents offer a savings to the participants that add to their bottom line; for example, a participant with a 60,000 square foot warehouse paying $4.75 per square foot as rent will save $1.00 per square foot, or $60,000 per year, because the REIT is able to offer the warehouse to the participant at $3.75 per square foot.  
         [0032]     It is a further object of the present invention to provide a faster amortization rate of financing without a corresponding increase in rent to satisfy the financing&#39;s debt service; this results in a shortened period for payment of the debt service and re-mortgaging of the warehouses. The REIT is able to achieve a higher growth rate with increased earnings and a greater payout to the participants. The higher growth rate and earnings will enhance the REIT&#39;s stock prices should the REIT be publicly traded.  
         [0033]     It is a further object of the present invention to obtain better financing rates and terms with unencumbered collateral, which over time will enhance the REIT&#39;s position to negotiate loans at even better rates and terms.  
         [0034]     It is a further object of the present invention to grow the REIT by acquiring income producing real estate assets without leveraging these acquired assets; net earnings from the acquired assets will not be burdened with interest and the net income will be available to distribution to the participants of the REIT.  
         [0035]     It is a further object of the present invention to establish a unique lessor-lessee relationship unlike the typical situation where the REIT would have to acquire leases on the open market by negotiating with third-party lessees; under the present invention, the REIT and each participant are lessor and lessee, which results in a controlled rent and a controlled stream of rental income which will be unique to the REIT vis-a-vis all other REITs. This controlled rent will provide a certain stream of income to be capitalized by mortgage financing in the form of additional income producing real estate assets, all of which will allow net income for distribution to the REIT&#39;s owners (the participants) in a sure and highly predictable manner.  
         [0036]     It is a further object of the present invention to effect an initial public offering (IPO) of shares of the REIT, which will provide liquidity of ownership in the REIT, equity valuation (recorded on a day-to-day basis), and additional capital funds to grow the REIT.  
         [0037]     These objects and advantages are realized by providing a novel method of consolidating independent owners of distribution warehouses into a REIT. As part of the method of the present invention, the REIT is formed. A group of independent owners of distribution warehouses willing to participate in ownership of the REIT is assembled. Participants in the REIT are selected from the group of independent owners of distribution warehouses.  
         [0038]     As part of or in connection with the selection of the participants, each participant enters into a sale-leaseback agreement with the REIT. The sale-leaseback agreement preferably has terms obligating each participant to sell the participant&#39;s warehouse to the REIT and lease it back. The sales price is set at an appraised fair market value of the participant&#39;s warehouse. The sale-leaseback agreement may also have terms obligating the participant to lease the warehouse from the REIT after the warehouse is sold to the REIT under a lease agreement. Preferably, the lease agreement provides for a triple-net lease.  
         [0039]     The terms of the sale-lease agreement may also require the participant to pay rent to the REIT. Preferably, the rent is determined by a standard formula that charges a uniform rate per square footage of the warehouse so that the participant knows in advance what rent the participant will be required to pay and to assure that the participant&#39;s rental rate per square foot is the same rental rate paid by the other participants. The sale-leaseback agreement may also have terms obligating the participant to renew the lease on a periodic basis. Preferably, the participant is obligated to renew the lease at least every seven years and more preferably every seven years.  
         [0040]     Each participant&#39;s warehouse is appraised to determine its appraised fair market value. Preferably, the appraisal is conducted by at least one appraiser. It is preferred if the appraiser is selected by a lender who issues a non-recourse mortgage loan to the REIT as described below. Each participant pays for the cost of the appraisal for the participant&#39;s warehouse and the cost of environmental remediation if so required.  
         [0041]     Title in each participant&#39;s warehouse is transferred to the REIT. Preferably, title transfer is accomplished when the REIT purchases the warehouse from the participant by paying to the participant the appraised fair market value of the warehouse. After transferring title, each participant continues to pay maintenance expenses, insurance, and/or ad valorum taxes accruing from the participant&#39;s warehouse.  
         [0042]     If before transferring title to the REIT, a participant has entered into a lease for the participant&#39;s warehouse with a distribution company controlled by the participant (e.g., a distribution company in which the participant is a majority shareholder or owner), the lease is preferably cancelled before the participant transfers title to the REIT. This way the warehouse is transferred to the REIT unencumbered by a lease so that the REIT and the participant are free to enter into the lease under the lease agreement with each other as described above.  
         [0043]     The REIT purchases each participant&#39;s warehouse preferably for a cash payment made to the participant. It is preferred if the amount of the cash payment is 70%-80% of the appraised fair market value of the participant&#39;s warehouse. This leaves a balance owed to the participant. The REIT may issue a secured note payable to the participant for the balance owed. It is preferred if the secured note provides that the REIT will pay interest accruing on the balance owed to the participant. Preferably, the interest is paid in monthly installment payments. The secured note may also provide that the REIT will pay the balance owed to the participant in full at the time the REIT obtains a new non-recourse mortgage loan, which preferably is at the end of an initial lease term of at least seven years and more preferably seven-years.  
         [0044]     Interest in the secured note may be set at one percent above a prime rate that exists when the REIT issues the secured note. Preferably, the prime rate is the prime rate published in the Wall Street Journal. It is also preferred if the secured note is secured by a second lien on the participant&#39;s warehouse. The second lien may be recorded in an appropriate depository or registry to comply with applicable legal recordation requirements.  
         [0045]     In accordance with the method of the present invention, the REIT agrees to lease to each participant the warehouse the participant sold to the REIT. Preferably, the REIT and each participant enter into a lease agreement for the specific warehouse. It is preferred if the lease agreement has terms obligating the participant to pay rent to the REIT. The lease agreement preferably is for a term of at least seven years and more preferably seven years. It is also preferred if the lease agreement is a triple-net lease so that the cumulative rent paid by the participants to the REIT equals or is greater than a scheduled debt service on the non-recourse mortgage loan issued to the REIT as discussed below.  
         [0046]     In accordance with the method of the present invention, the sale-leaseback agreement and/or the lease agreement specifies a standard formula to compute the rent. Preferably, the standard formula charges a uniform rate per square footage of the warehouse so that the participant knows before they sign the sale-lease agreement and/or the lease agreement what specific annual rent the participant will be required to pay.  
         [0047]     Preferably, the rent is established by determining an annual debt service amount for the non-recourse mortgage loan that has or will be issued to the REIT as described below. The total square footage of all the warehouses leased or to be leased by the REIT is determined. The annual debt service amount is divided by the total square footage to derive a first component price per square foot. A second component and a third component are then added to the first component. The second component is preferably an amount dedicated for use by the REIT to pay for general and administrative expenses of the REIT. The third component is preferably an amount dedicated for use by the REIT as working capital and to permit the REIT to make interest payments and cash distributions to each participant.  
         [0048]     The addition of the second and third components to the first component results in a formula rental price per square foot. The formula rental price per square foot is multiplied by the square footage of the warehouse leased to the participant to derive the annual rent to be paid by the participant to the REIT. It is preferred if the second component is at least 50 cents per square foot. It is also preferred if the third component is at least 25 cents per square foot.  
         [0049]     It is preferred if each sale-leaseback agreement and lease agreement are contemporaneously entered into by the REIT and each participant.  
         [0050]     The method of the present invention may also include issuing a non-recourse mortgage loan to the REIT. Preferably, the non-recourse mortgage loan is issued by a lender. It is preferred if the non-recourse mortgage loan is issued for a loaned amount capable of financing at least a portion of the REIT&#39;s purchase of the warehouses and preferably the portion constituting the REIT&#39;s cash purchase or cash payment to the participant.  
         [0051]     The non-recourse mortgage loan may be issued under terms obligating the REIT to make installment payments of principal and interest to the lender on the loaned amount. The REIT may use the rent paid by the participants under the leases to make the installment payments to the lender. Preferably, the non-recourse mortgage loan has a term of at least seven years and more preferably a term of seven years. It is also preferred if the non-recourse mortgage loan is serviced on at least a seven-year debt payment schedule and more preferably a seven-year debt payment schedule.  
         [0052]     The lender may require the REIT to pledge the warehouses and/or an assignment of the lease agreements as collateral for the non-recourse mortgage loan. The lender will have a first primary lien on the warehouses.  
         [0053]     The REIT may use the non-recourse mortgage loan to finance the cash payment made by the REIT to the participants to purchase their warehouses.  
         [0054]     As part of the method of the present invention, an ownership interest in the REIT is transferred to each participant. Preferably, each participant&#39;s ownership interest in the REIT is a prorata share of the outstanding shares of the REIT. The participant&#39;s prorata ownership share is calculated by dividing the appraised fair market value of the warehouse the participant sold or will sell to the REIT by the total appraised fair market value of all warehouses sold or to be sold to the REIT by all participants.  
         [0055]     Under the method of the present invention, each warehouse owned by the REIT may be reappraised to determine the warehouse&#39;s reappraised fair market value. The reappraised fair market value of each warehouse is added together and used to calculate the total reappraised fair market value of all of the REIT&#39;s warehouses. Preferably, the reappraisal of each warehouse is conducted by at least one appraiser-selected by a lender who issues a new non-recourse mortgage loan to the REIT as described below. It is preferred if the REIT pays for the cost of reappraising the warehouses.  
         [0056]     The method of the present invention may include renewing each lease agreement entered into between the REIT and the participants. Preferably, the lease agreements are renewed for at least an additional seven year term and more preferably for an additional seven year term, with rental prices re-calculated on the same formula basis.  
         [0057]     In accordance with the method of the present invention, a new non-recourse mortgage loan is issued to the REIT for a loaned amount that is 70%-80% of the total reappraised fair market value of all of the warehouses. Preferably, the new non-recourse mortgage loan is issued by a lender. The new non-recourse mortgage loan may provide proceeds to the REIT.  
         [0058]     The REIT invests the proceeds provided by the new non-recourse mortgage loan in at least one investment capable of producing investment revenue. It is preferred if the proceeds of the new non-recourse mortgage loan are invested in a variety of multiple investments. Preferably, the REIT&#39;s Board of Directors selects the investments. It is preferred if the investments include income producing real estate. The REIT preferably distributes at least 90% of net earnings from the investment revenue produced by the investment to the participants. Preferably, 90% of the net earnings are distributed by the REIT to the participants annually.  
         [0059]     Preferably, the events of (1) reappraising each warehouse, (2) renewing each lease agreement, (3) issuing new non-recourse mortgage loan to the REIT, and (4) investing the proceeds from the new non-recourse mortgage loan, occur on a periodic basis, as for example, at least every seven years or every seven years.  
         [0060]     In another embodiment of the present invention, a manager is employed by and/or for the REIT. The manager may be responsible for general and administrative operations of the REIT, including managing the real estate investment assets owned by the REIT. It is preferred if the manager acquires an ownership interest in the REIT.  
         [0061]     The REIT may pay the manager an annual management fee. It is preferred if the management fee is an amount, preferably a fixed amount, that is computed by multiplying the second component price per square foot (e.g. 50 cents per square foot) by the total square footage of all the warehouses owned or to be owned by the REIT.  
         [0062]     It is preferred if the manager has a one-percent ownership interest in the REIT. In this instance, each participant&#39;s ownership interest in the REIT will be a prorata share of the outstanding or remaining 99% interest of the REIT. Each participant&#39;s prorata ownership share of the REIT maybe calculated by dividing the appraised fair market value of the warehouse sold or to be sold by the participant to the REIT by the total appraised fair market value of all of the warehouses sold or to be sold by the participants to the REIT.  
         [0063]     In another embodiment of the present invention, the REIT may purchase and obtain title to any leasehold improvement made by the participant to the leased warehouse during the term of the lease agreement. It is preferred if the REIT pays the participant an amount that is or constitutes the participant&#39;s original cost for the leasehold improvement. It is also preferred if the REIT&#39;s purchase of the leasehold improvement is accomplished at the time the lease agreement is renewed.  
         [0064]     In a further embodiment of the present invention, an initial public offering of REIT&#39;s stock may be made. It is preferred that the stock is publicly offered on a recognized stock exchange. It is also preferred if the initial public offering is approved by the Board of Directors of the REIT.  
         [0065]     The REIT may be created and/or operated as described herein through the use of a computer system and computer applications, including a database containing the REIT&#39;s business, financial, and investment records, as for example, sale-leaseback agreements, lease agreements, investments, investment revenue, proceeds, net earnings, and distributions made to the participants.  
         [0066]     The computer system may include a CPU which executes instructions that implement the database server application and stores information. The computer system may preferably include network interface so that the database may be accessed through other computers on a local area network. The computer system also preferably includes a communication device, e.g. a telephone modem, a cable modem, a DSL modem, or other similar device, capable of communicating data between computers on a systems and a wide area network. The communication devices may be used to connect the computer system through the internet or intranet in order to permit users at remote locations to access data in the database. A printer or printers may be connected to the computer system to create database reports. 
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0067]      FIG. 1  is flowchart depicting the steps of forming the REIT, assembling a group of independent owners of distribution warehouses, selecting participants in the ownership of the REIT, and appraising each participant&#39;s warehouse, which steps form part of an embodiment of the method of the present invention.  
         [0068]      FIG. 2  is a flowchart depicting the further steps of transferring title in each warehouse from the participants to the REIT and leasing the warehouses after transfer back to the participants, which steps form part of the embodiment of the method of the present invention.  
         [0069]      FIG. 3  is a flowchart depicting the further step of issuing a non-recourse mortgage loan to the REIT, which step forms part of the embodiment of the method of the present invention.  
         [0070]      FIG. 4  is a flowchart depicting the further steps of transferring ownership in the REIT to the participants, reappraising each warehouse, and renewing each lease agreement, which steps form part of the embodiment of the method of the present invention.  
         [0071]      FIG. 5  is a flowchart depicting the further steps of issuing a new non-recourse mortgage loan to the REIT, investing proceeds from the new non-recourse mortgage loan, and distributing at least 90% of net earnings from the investments to the participants, which steps form part of the embodiment of the method of the present invention.  
         [0072]      FIG. 6  depicts the terms of the sale-leaseback agreement, which may be included as part of the embodiment of the method of the present invention.  
         [0073]      FIG. 7  depicts the terms of the lease agreement, which may be included as part of the embodiment of the method of the present invention.  
         [0074]      FIG. 8  depicts the procedure that may be used to establish the rent to be paid by the participants, which may be included as part of the embodiment of the method of the present invention.  
         [0075]      FIG. 9  depicts an alternative step of employing a manager for the REIT, which step may be included as part of the embodiment of the method of the present invention.  
         [0076]      FIG. 10  depicts alternative step of the REIT purchasing leasehold improvements made by the participants, which step may be included as part of the embodiment of the method of the present invention.  
         [0077]      FIG. 11  depicts alternative step of the REIT&#39;s stock being subject to an IPO, which step may be included as part of the embodiment of the method of the present invention. 
     
    
     DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS  
       [0078]     With reference to the figures where like elements have been given like numerical designation to facilitate an understanding of the present invention, and particularly with reference to the embodiment of the method of the present invention illustrated in  FIGS. 1 through 5 , the method of the present invention involves consolidating independent owners  10  of distribution warehouses  11  into a Real Estate Investment Trust or REIT  12 .  
         [0079]     As shown in  FIG. 1 , REIT  12  is formed. REIT  12  may be formed by completing and filing all required paperwork in compliance with applicable law. The formation of REIT  12  would be well understood by one of ordinary skill in the art to which the invention pertains. REIT  12  may be formed by any person or entity desiring to form REIT  12 . For example, REIT  12  may be formed by any person or entity wishing to be a participant  15  in REIT  12  or by any person or entity wishing to manage or control REIT  12 , as for instance, manager  93 .  
         [0080]      FIG. 1  also shows owners  10  being assembled into group of independent owners  13  of distribution warehouses  11  who are willing to participate in REIT  12 . Group of independent owners  13  may be assembled by any person or entity desiring to assemble group of independent owners  13 . Preferably, group of independent owners  13  is assembled by any person or entity who formed REIT  12  or by any person or entity desiring to associate with, participate in, manage, or control REIT  12 . For example, group of independent owners  13  may be assembled by any person or entity wishing to be a participant  15  in REIT  12  or by any person or entity wishing to manage or control REIT  12 , as for instance, manager  93 .  
         [0081]     As illustrated in  FIG. 1 , participants  15  are selected to participate in REIT  12  from group of independent owners  13  of distribution warehouses  11 . Any person or entity may select participants  15  to participate in REIT  12 . Preferably, a person or entity having an interest in REIT  12  selects participants  15 . Such persons may include one or more owners  10  who are part of group of independent owners  13  of distribution warehouses  11 , an actual or potential participant  15 , an actual or potential manager  93 , and/or lender  27 .  
         [0082]     It is preferred that participants  15  are selected to participate in REIT  12  by having each owner  10  from group of independent owners  13  of distribution warehouses  11  provide a financial statement to the person(s) and/or entity(ies) selecting participants  15 . More preferably, each owner  10  from group of independent owners  13  of distribution warehouses  11  provides a financial statement for each of the past five years preceding the current year.  
         [0083]      FIGS. 1 and 6  show that as part of or in connection with the selection of participants  15 , each participant  15  preferably enters into sale-leaseback agreement  16  with REIT  12 . Sale-leaseback agreement  16  may include terms  17 . Terms  17  of sale-leaseback agreement  16  preferably obligate participant  15  to sell warehouse  11  owned by participant  15  to REIT  12  and for REIT  12  to purchase warehouse  11  from participant  15 . Terms  17  of sale-leaseback agreement  16  may also provide that the sales price for warehouse  11  is set at appraised fair market value  18  of warehouse  11  owned by participant  15 . Terms  17  of sale-leaseback agreement  16  may also obligate participant  15  to lease warehouse  11  from REIT  12  under lease agreement  24  that provides for triple-net lease  19  after warehouse  11  is sold to and purchased by REIT  12 .  
         [0084]     Terms  17  of sale-leaseback agreement  16  may also require participant  15  to pay rent  20  to REIT  12 . Preferably, terms  17  of sale-leaseback agreement  16  provide that rent  20  is determined by standard formula  21  that charges uniform rate per square footage  22  for warehouse  11  so that participant  15  knows in advance what rent  20  participant  15  will be required to pay to REIT  12 .  
         [0085]     Terms  17  of sale-leaseback agreement  16  may also obligate participant  15  to renew lease agreement  24  on a periodic basis. Preferably, participant  15  is obligated to renew lease agreement  24  at least every seven years and more preferably, every seven years.  
         [0086]      FIG. 6  illustrates that terms  17  of sale-leaseback agreement  16  may obligate REIT  12  to purchase warehouse  11  owned by participant  15 . Preferably, terms  17  of sale-leaseback agreement  16  specify that REIT  12  will purchase warehouse  11  from participant  15  for fair market value  18  of warehouse  11 . It is further preferred if terms  17  of sale-leaseback agreement  16  further specify that REIT  12  will pay participant  15  cash payment  81 .  
         [0087]     Cash payment  81  is preferably amount  82  which is 70%-80% of appraised fair market value  18  of warehouse  11  thereby leaving balance owed  83 . Terms  17  of sale-leaseback agreement may require REIT  12  to issue secured note  84  payable to participant  15  for balance owed  83 . It is preferred if secured note  84  provides that REIT  12  will pay interest  85  accruing on balance owed  83  to participant  15 . Preferably, interest  85  is paid in monthly installment payments  86 . More preferably, secured note  84  provides that REIT  12  will pay balance owed  83  in full to participant  15  at the time REIT  12  obtains new non-recourse mortgage loan  38 , preferably at end  87  of initial seven-year lease.  
         [0088]     With reference to  FIG. 1 , warehouse  11  owned by each participant  15  is appraised to determine appraised fair market value  18 . Preferably, the appraisal is conducted by at least one appraiser  45 . It is preferred if appraiser  45  is selected by lender  27  who issues non-recourse mortgage loan  26  to REIT  12 . It is further preferred if appraiser  45  is an MAI appraiser. Participant  15  preferably pays for cost  46  of the appraisal of warehouse  11  owned by participant  15 .  
         [0089]      FIG. 2  reveals that title  23  of warehouse  11  owned by each participant  15  is transferred to REIT  12 . Transfer of title  23  in warehouse  11  owned by each participant  15  may be accomplished when REIT  12  purchases warehouse  11  from participant  15  by paying participant  15  appraised fair market value  18  of warehouse  11 . After transferring title  23  in warehouse  11 , each participant  15  continues to pays maintenance expenses  76 , insurance  77 , and/or ad valorum taxes  78  accruing from warehouse  11  that participant  15  sold to REIT  12 .  
         [0090]     Again with reference to  FIG. 2 , if before transferring title  23  in warehouse  11  to REIT  12 , participant  15  has entered into lease  79  for warehouse  11  with distribution company  80  controlled by participant  15 , lease  79  is preferably cancelled before participant  15  transfers title  23  in warehouse  11  to REIT  12 . Thus, title  23  in warehouse  11  is transferred to REIT  12  unencumbered by lease  79  so that REIT  12  and participant  15  are free to enter into triple-net lease  19  by signing and entering into lease agreement  16  for warehouse  11 .  
         [0091]     It is preferred if transfer of title  23  in warehouse  11  of each participant  15  to REIT  12  occurs in conjunction with or as part of the purchase by REIT  12  of warehouse  11  from each participant  15 .  
         [0092]     The purchase of warehouse  11  by REIT  12  from each participant  15  may be accomplished as part of sale-leaseback agreement  16  or may be accomplished by REIT  12  and each participant  15  entering into separate purchase or buy-sell agreements or comparable agreements. The required agreements to effect transfer of title  23  in each warehouse  11  to REIT  12  and the purchase of each warehouse  11  by REIT  12  would be understood by a skilled artisan to which the subject matter of the present invention pertains.  
         [0093]     REIT  12  purchases warehouse  11  from each participant  15  by paying to participant  15  fair market value  18  of warehouse  11 . Preferably, REIT  12  pays participant  15  cash payment  81  which may be amount  82  which is 70%-80% of appraised fair market value  18  of warehouse  11  thereby leaving balance owed  83 . REIT  12  may issue secured note  84  payable to participant  15  for balance owed  83 . It is preferred if secured note  84  provides that REIT  12  will pay interest  85  accruing on balance owed  83  to participant  15 . Preferably, interest  85  is paid in monthly installment payments  86 . More preferably, secured note  84  provides that REIT  12  will pay balance owed  83  in full to participant  15  at the time REIT  12  obtains new non-recourse mortgage loan  38  at end  87  of the initial seven-year lease.  
         [0094]     The money received by each participant from REIT  12 , as for example money from cash payment  81 , monthly installment payments  86 , and payment of balance owed  83 , may be used by participant  15  as deemed necessary. For example, participant  15  could use the money to pay off debt or could invest in short-term municipal bonds or other investments that will produce income to participant  15 .  
         [0095]     Interest  85  in secured note  84  is preferably set at one-percent above  88  prime rate  89  that exists when REIT  12  issues secured note  84 . Preferably, prime rate  89  is the prime rate published in the Wall Street Journal. It is also preferred if secured note  84  is secured by second lien  90  on warehouse  11  sold by participant  15  to REIT  12 . Second lien  90  may be recorded in the appropriate depository or registry to comply with applicable recordation requirements.  
         [0096]     With reference to  FIGS. 2 and 7 , REIT  12  and each participant  15  enter into lease agreement  24  for warehouse  11  sold by participant  15  to REIT  12 . It is preferred if lease agreement  24  has terms  25  obligating participant  15  to pay rent  20  to REIT  12 . Lease agreement  24  is preferably for term  49  of at least seven years and more preferably seven years. Lease agreement  24  preferably is triple-net lease  50  so that rent  20  paid by all participants  15  to REIT  12  equals or is greater than scheduled debt service  51  on non-recourse mortgage loan  26  issued to REIT  12 .  
         [0097]     Sale-leaseback agreement  16  and/or lease agreement  24  may specify standard formula  21  that charges uniform rate per square footage  22  of warehouse  11  so that participant  15  knows before entering sale-lease agreement  16  and/or lease agreement  24  what specific annual rent  65  participant  15  will be required to pay to REIT  12  for warehouse  11 .  
         [0098]     As shown in  FIG. 8 , rent  20  is established by determining annual debt service amount  52  for non-recourse mortgage loan  26  that issued or will issue to REIT  12 . Total square footage  53  of all warehouses  11  leased or to be leased by REIT  12  is determined. Annual debt service amount  52  is divided by total square footage  53  to derive first component price per square foot  54 . Second component  55  and third component  56  are then added to first component  54 . Second component  55  is amount  57  which is dedicated for use by REIT  12  to pay for general and administrative expenses  58  of REIT  12 . Third component  56  is amount  59  which is dedicated for use by REIT  12  as working capital  60  and to permit REIT  12  to make interest payments  61  and cash distributions  62  to participants  15 .  
         [0099]     The addition of second component  55  and third component  56  to first component  54  results in formula rental price per square foot  63 . Formula rental price per square foot  63  is multiplied by square footage  64  of warehouse  11  leased or to be leased to participant  15  to derive annual rent  65  to be paid by participant  15  to REIT  12 . It is preferred if second component  55  is at least 50 cents per square foot  66  and more preferably, 50 cents per square foot. It is also preferred if third component  56  is at least 25 cents per square foot  67  and more preferably 25 cents per square foot.  
         [0100]     By way of example, if non-recourse mortgage loan  26  is 160 million dollars which is amortized over seven years at an interest rate of 5.5%, the annual payment of principal and interest, which is annual debt service  52 , will be $27,588,000. Assuming there is 10 million total square footage  53  of warehouses  11 , annual debt service  52  of $27,588,000 is divided by total square footage  53  of 10 million square feet to derive first component price per square foot  54  of $2.75 per square foot. Second component  55  of 50 cents per square foot (covering general and administrative expenses  58 ) and third component  56  of 25 cents per square foot (covering working capital  60 , interest payments  61 , and cash distributions  62 ) are added to first component price per square foot  54  of $2.75 per square foot to derive formula rental price per square foot  63  of $3.50 per square foot.  
         [0101]     By determining annual rent  65  using formula rental price per square foot  63 , a safeguard is implemented which protects participants  15  against REIT  12  arbitrarily setting annual rent  65 . Also, the procedure prevents REIT  12  from paying out general and administrative expenses  58  that exceed that portion of annual rent  65  (first component  54  of 50 cents per square foot) collected by REIT  12 , which is dedicated for use by REIT  12  for general and administrative expenses  58 .  
         [0102]     It is preferred if each sale-leaseback agreement  16  and lease agreement  24  are contemporaneously entered into by REIT  12  and participant  15 .  
         [0103]      FIG. 3  illustrates that non-recourse mortgage loan  26  is issued to REIT  12 . Preferably, non-recourse mortgage loan  26  is issued by lender  27 . It is preferred if non-recourse mortgage loan  26  is issued for loaned amount  28  which is capable of financing at least portion  29  of cash purchase  30  made by REIT  12  for warehouses  11 . Lender  27  is preferably a banking institution, as for example, a bank or savings and loan.  
         [0104]     Non-recourse mortgage loan  26  may be issued under terms  31  obligating REIT  12  to make installment payments  32  of principal  33  and interest  34  to lender  27  on loaned amount  28 . REIT  12  may use rent  20  paid by participants  15  to make installment payments  32  to lender  27 . Preferably, non-recourse mortgage loan  26  has term  68  of at least seven years and more preferably seven years. It is also preferred if non-recourse mortgage loan  26  is serviced on at least seven-year debt payment schedule  69  and more preferably a seven-year debt payment schedule  69 .  
         [0105]     Lender  27  may require REIT  12  to pledge warehouses  11  and/or assignment  70  of lease agreements  24  as collateral  71  for non-recourse mortgage loan  26 . Lender  27  will have first primary lien  72  on warehouses  11 . Non-recourse mortgage loan  26  preferably finances cash payment  81  made by REIT  12  to participants  15  to purchase warehouses  11 .  
         [0106]     Non-recourse mortgage loan  26  and new non-recourse mortgage loan  38  (because they are non-recourse) mean that REIT  12  will not have to endorse or guarantee, either through the corporate entity or individually through participants  15 , payment of non-recourse mortgage loan  26  and/or new non-recourse mortgage loan  38 .  
         [0107]     As shown in  FIG. 4 , ownership interest  35  in REIT  12  is transferred to each participant  15 . Preferably, ownership interest  35  of each participant  15  in REIT  12  is prorata share  73  of outstanding shares  74  of REIT  12 . Prorata share  73  of ownership interest  35  of participant  15  in REIT  12  is calculated by dividing appraised fair market value  18  of warehouse  11  sold or to be sold by participant  15  to REIT  12  by total appraised fair market value  75  of all warehouses  11  sold or to be sold by all participants to REIT  12 .  
         [0108]     As an example, if warehouse  11  sold or to be sold by participant  15  to REIT  12  has appraised fair market value  18  of $1 million and total appraised fair market value  75  of all warehouses  11  sold or to be sold by all participants to REIT  12  is $200 million, participant will receive a 0.5 or ½% ownership interest  35  in REIT  12 .  
         [0109]     As shown in  FIG. 4 , each warehouse  11  owned by REIT  12  may be reappraised to determine reappraised fair market value  36  thereof. Reappraised fair market value  36  of each warehouse  11  is used to calculate (by adding) total reappraised fair market value  37  of all warehouses  11  owned by REIT  12 . Preferably, the reappraisal is conducted by at least one appraiser  47  (preferably an MAI appraiser) selected by lender  40  who issues new non-recourse mortgage loan  38  to REIT  12 . It is preferred if REIT  12  pays for cost  48  of reappraising warehouses  11 .  
         [0110]     Again with reference to  FIG. 4 , each lease agreement  24  entered into between REIT  12  and participants  15  may be renewed. Preferably, lease agreements  24  are renewed for term  98  of at least seven years and more preferably seven years.  
         [0111]     With reference to  FIG. 5 , new non-recourse mortgage loan  38  is issued to REIT  12  for loaned amount  39  that is 70%-80% of total reappraised fair market value  37  of all warehouses  11 . Preferably, new non-recourse mortgage loan  38  is issued by lender  40 . New non-recourse mortgage loan  38  provides proceeds  41  to REIT  12 .  
         [0112]     Lender  40  is preferably a banking institution, as for example, a bank or savings and loan. Lender  27  and lender  40  may be the same lending institution or different lending institutions. REIT  12  or preferably Board of Directors  91  of REIT  12  may select lender  27  and/or lender  40 .  
         [0113]     As referenced in  FIG. 5 , REIT  12  may invest proceeds  41  in at least one investment  42  capable of producing investment revenue  43 . Preferably, Board of Directors  91  of REIT  12  selects investment  42 . It is preferred if multiple investments  42  are made by REIT  12  using proceeds  41 . It is also preferred if investment  42  includes income producing real estate  92 . REIT  12  preferably distributes at least 90% of net earnings  44  from investment revenue  43  to participants  15 .  
         [0114]     It is preferred if the events of (1) reappraising each warehouse  11 , (2) renewing each lease agreement  24 , (3) issuing new non-recourse mortgage loan  38  to REIT  12 , and (4) investing proceeds  41  from new non-recourse mortgage loan  38 , occur or take place on a periodic basis, preferably at least every seven years, and more preferably every seven years.  
         [0115]     Because REIT  12  and each participant  15  are lessor and lessee of warehouses  11 , lease agreements  24  can be redrawn at any time and warehouses  11  reappraised and re-mortgaged. The ability to control lease agreements  24  and re-mortgage warehouses  11  on a periodic basis, or preferably every seven years, permits REIT  12  to “pump” out the equity of warehouses  11  preferably every seven years and invest proceeds  41  in carefully selected investments  42  which are preferably real estate investments. Investing proceeds  41  in investments  42  is accomplished by processes well understood by one of ordinary skill in the art to which the invention pertains. Such investment of proceeds  41  should be based on sound investment strategies that maximize the income earning potential of investments  42 .  
         [0116]     As an example, if REIT  12  starts with 10 million total square feet  53  of warehouses  11 , total appraised fair market value  75  of warehouses  11  will be about $200 million ($20 per square foot). The “pump” out every seven years will be about 62% to 70% multiplied by $200 million, which equals about $100 million to be invested in investments  42 . Over a period of 50 to 100 years, REIT  12  will likely assume a size that will make REIT  12  one of the largest REITs of its kind. Moreover, there is never any leverage or borrowing on investments  42  made by REIT  12 , although this is an option. Only warehouses  11  are remortgaged.  
         [0117]     Investments  42  will likely increase in value thereby increasing the equity of REIT  12 . Over time, REIT  12  will be more valuable to participants  15  than ownership of their respective distribution companies and/or warehouses  11 . If distribution companies owned by or constituting participants  15  ever cease to exist, for whatever reason, participants  15  will still have their ownership interests  35  in REIT  12 .  
         [0118]     Again with reference to  FIG. 5 , net earnings  44  from investment revenue  43  generated from investments  42  will be distributed by REIT  12  to participants  15  each year, if net earnings  44  have been generated during the existing year. Applicable law requires REIT  12  to distribute at least 90% of net earnings  44  on an annual basis to qualify as a REIT and to avoid federal corporate income tax.  
         [0119]     Net earnings  44  of REIT  12  will never be compromised by exorbitant overhead since the overhead of REIT  12  must be contained and encompassed with annual management fee  96  based on amount  97  which is derived using first component price per square foot  54 , preferably in the amount of 50 cents per square foot. As stated above, first component price per square foot  54  is dedicated for general and administrative expenses  58  of REIT  12 .  
         [0120]     An alternative embodiment of the present invention is shown in  FIG. 9 . In this embodiment, manager  93  is employed by and for REIT  12 . Manager  93  may be responsible for general and administrative operations  94  of REIT  12 . It is preferred if manager  93  acquires ownership interest  95  in REIT  12 .  
         [0121]     REIT  12  may pay manager  93  annual management fee  96 . It is preferred if annual management fee  96  is amount  97  that is computed by multiplying first component price per square foot  54  by total square footage  53  of all warehouses  11 .  
         [0122]     It is preferred if manager  93  has one-percent ownership interest  99  in REIT  12 . In this case, each ownership interest  35  of participant  15  in REIT  12  is prorata share  100  of remaining 99% interest  101  of REIT  12 . Prorata share  100  of ownership interest  99  of participants  15  in REIT  12  is calculated by dividing appraised fair market value  18  of warehouse  11  sold or to be sold by participant  15  to REIT  12  by total appraised fair market value  75  of all warehouses  11  sold or to be sold by all participants to REIT  12 .  
         [0123]     Manager  93  of REIT  12  preferably attempts to secure for participants  15  and for REIT  12  all economies of scale that can be negotiated on the strength of the consolidation as provided by REIT  12 . Such economies of scale may be negotiated in areas of truck purchases, truck rentals, freight, warehouse equipment, purchases and rental, warehouse security systems, technological systems for warehouse operations, insurance on warehouses  11 , taxes on warehouse property and the like.  
         [0124]     Manager  93  of REIT  12  may also act as a buying group for participants  15  without charging participants  15  for the service. This will permit rebates from purchases from preferred vendors within a buying group to be passed through to participants  15  at 100 cents on the dollar thus saving participants  15  the amount of rebate which is customarily held back by buying groups to fund the buying groups&#39; operation. For example, most buying groups retain anywhere from 10 cents to 20 cents on the dollar of every rebate paid by the preferred vendors. With REIT  12  handling the same chores as a buying group, collecting and dispersing rebates to participants  15 , rebate funds could go entirely to participants  15 .  
         [0125]      FIG. 10  shows another alternative embodiment of the present invention in which REIT  12  purchases and obtains title  102  to leasehold improvement  103  made by participant  15  in warehouse  11  during term  49  of lease agreement  24  or renewal term  98  thereof. It is preferred if REIT  12  pays participant  15  an amount  104  that is original cost  105  of participant  15  for leasehold improvement  103 . It is also preferred if purchase of leasehold improvement  103  by REIT  12  is accomplished at the time lease agreement  24  is renewed.  
         [0126]      FIG. 11  also shows an alternative embodiment of the present invention wherein stock  102  in REIT  12  is subject to initial public offering  106 . It is preferred that stock  107  of REIT  12  is publicly offered on a recognized stock exchange  108 . It is also preferred if initial public offering  106  is approved by Board of Directors  91  of REIT  12 .  
         [0127]     While preferred embodiments of the present invention have been described, it is to be understood that the embodiments described are illustrative only and that the scope of the invention is to be defined only by the appended claims when accorded a full range of equivalence, many variations and modifications naturally occurring to those skilled in the art from a perusal hereof.