WHAT IS AN Energy Trust
BREAKING DOWN Energy Trust
Energy trusts are exempt from corporate taxation if they distribute more than 90 percent of their earnings to their investors. As a result, these trusts pay out the majority of the profits they collect to their investors. In this way, energy trusts are similar to the better known real estate investment trusts (REITs).
Energy trusts differ slightly between Canada and the United States. Energy trusts in in the U.S. generally exist solely to hold oil and gas mineral rights. Canadian energy trusts are able to add new mineral properties to the trust, thus providing for an indefinite life as an actively managed mineral investment fund. Unlike Canadian energy trusts, U.S. energy trusts may not acquire new properties, and thus are born with a fixed quantity of reserve assets which decline gradually as the minerals are mined and sold. Eventually, U.S. energy trusts run out of mineral assets and become worthless.
Energy Trusts vs. Real Estate Investment Trusts
While energy trusts exist primarily to hold oil and gas mineral rights, real estate investment trusts are dividend-paying stocks that focus on real estate. REITS accumulate funds through an initial public offering (IPO), which is then used to buy, develop, manage and sell assets in real estate.
Shares of REITs are offered to the public by major exchanges. In this way, a REIT is similar to any other stock that represents ownership in an operating business. Each REIT share represents a proportional fraction of ownership in each of the underlying properties. When someone purchases a share of a REIT, they are essentially buying a physical asset with a long life span and potential for income through rent and property appreciation. This differs from common stocks where investors are buying the right to participate in the profitability of the company through ownership.
An initial public offering or IPO is the same for a REIT as it is for as any other security offering with many of the same rules regarding reporting requirements and regulations. However, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing and selling of property and distributes those funds directly to the REIT shareholder on a regular basis.