REITs for Real Estate and Tax Counsel - media.straffordpub.com

Presenting a live 90-minute webinar with intera

REITs for Real Estate an

Understanding Organizational, Operational an

THURSDAY, NOVEMBER 6, 2014
1pm Eastern | 12pm Central | 11am Mountain

Micah Bloomfield,
Mayer Greenberg,
Scott L. Semer, Partn

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active Q&A

nd Tax Counsel

nd Tax Considerations When Dealing With REITs

| 10am Pacific

Today’s faculty features:
, Partner, Stroock & Stroock & Lavan, New York
, Partner, Stroock & Stroock & Lavan, New York
ner, Davies Ward Phillips & Vineberg, New York

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Un
E

nderstanding Real
Estate Investment

Trusts

November 6, 2014

Micah Bloomfield
Mayer Greenberg

Scott Semer

Basic REIT

• No entity level tax provided
operational requirements are
distributed

• Access to Capital: May be p

– Other Master Limited Partner
Companies, the only way to b
entity-level tax

• Flexibility: May be any type

– Usually organized as corporat
LLCs

T Benefits

d organizational and
e met and all income

publicly traded

rships and Regulated Investment
be publicly traded and be free from

e of U.S. entity

tions or trusts, but may also be

5

The Basic REI

• Organizational Requirement

– Principle requirement is broad ow
– No E&P from non-REIT year. (1

Treas. Reg. §1.337(d)-7.

• Four Basic Operational Req

– Assets: Must primarily hold real
– Income: Must primarily earn pas
– Income: 95% of gross income m
– Distribution: Must distribute mo

IT Framework

ts

wnership
10 year tax on appreciated property)

quirements

estate assets (75%)
ssive income from real estate (75%)
must be passive
ost of its income to shareholders (90%)

6

Organizational

• Managed by trustees or directo
• Not beneficially owned by fiv

– Lookthrough to underlying shar
company

– Special definition of “individual

• Actually owned by 100 or mo
• Have transferable shares or ce
• Not a bank or insurance comp
• Taxable as a U.S. corporation

l Requirements

ors
ve or fewer “individuals”

reholders for REITs owned by public
l”

ore persons
ertificates
pany

7

Potential Issues & Stru

• Five or fewer provisions a

– “Excess share” provisions in arti
number of shares of any single s

– Restrictions may go beyond tax r
shareholder rights plans (“poison

• Less case law on excess share

• Finding Shareholders need
shareholder requirement

– Private REITs often engage facil
– Often use special class of stock w

of $100,000 with fixed return in

ucturing Opportunities

as takeover defense

icles of incorporation generally restrict
shareholder to 9.9% or less
rules: some REITs still implement
n pills”)

provisions

ded to satisfy 100

litators to find these investors
with aggregate liquidation preference
9-12% range

8

Asset

• 75% of value: real estate assets, c

– Rev. Rul. 2012-17 money market ac

• No more than 25% of value repre

– No definition of “securities” in REIT
– RIC rules refer to the SEC Act of 19

• The value of any one issuer’s sec
REIT’s total assets

– In absence of REIT definition, relian
the SEC act of 1940

• Ownership of any issuer may not
just equity

• No more than 25% of value may

Tests

cash, cash items

ccounts are now confirmed as cash items

esented by non-real estate securities

T rules
940 definition

curities may not exceed 5% of the

nce on definition of issuer under § 2(a) of

t exceed 10%. Vote or value. Not
be made up of TRS

9

Special As

• Hotel REITs

– Enabled by TRS related party rent exceptio
– Hotel must be managed by independent con

• Healthcare REITs

– Recent developments in senior care facilitie

• PLR 201104023: “age in place” senior assis
related party rent exception

• But see PLR 2008130015: certain independe
• Must be managed by independent contractor

• Mortgage REITs

– Expansion of good mortgages. Rev. Proc. 2

• Other REITs

– Sale of timber qualifies as sale of real estate
– The Service has blessed income from sale o

• PLR 201123005

sset REITs

on
ntractor, not TRS. § 856(l)(3).
es

sted living facility was healthcare facility; qualified for TRS
ent living facilities may not be healthcare facilities
r, not TRS.

2003-65. debt secured by LLC interests

e asset
of carbon credits as “good” income

10

New Developments in C
Real Estate Ass

• Proposed REIT Asset R
• Critical commentary

Classifying
sets
Regulations

11

Slide Intention

nally Left Blank

Income Tests • 75%
relate
Satisfy Both Tests:
* Rents from Real Property • 95%
* Real Property Gains (unless • QRS
prohibited transaction)
*Dividends from other REITs earne
*Interest on Real Estate Mortgages • No m
*Foreclosure Property Income
*Temporary Investment Income a pro
tenan

–B
R

• Certa
curre
incom

of gross income must be real-estate
ed
of gross income must be passive
income is treated as having been
ed directly
more than 1% of gross income from
operty attributable to impermissible
nt services

Based on single property, not entire
REIT; but not lease by lease either!

ain hedging income & most foreign
ency gains are excluded from REIT
me test calculations

13

Some Overlooked

• Useful vehicle for many international
while avoiding FIRPTA and branch p
– Domestically controlled REIT no
holding company under FIRPTA.
– Dividend attributable to sale of U
subject to branch profits tax

• Pension-held REITs: Provide a 5% cu
sensitive to the tax on unrelated busin
– UBTI generally has stricter stand
• Especially the case on parkin
– Smaller tax-exempt ownership sta

• Not necessarily limited to “traditiona
– Possibly includes energy, storage

d REIT Benefits

l investors to invest in U.S. real estate
profits tax
ot treated as a U.S. real property
. (Only w/r stock sale)
U.S. real estate may be “ECI” and

ushion for tax exempt taxpayers
ness taxable income (UBTI)
dards than REIT income rules
ng
akes avoid many UBTI issues entirely
al” real estate businesses
e, communications, retail, casinos

14

The Nebulous Bo

Impermissible Tenant S

Income, and

• To avoid impermissible ten
“customary” and not prima
tenant

– Maid service is an impermi
– Comparatively little guidan

more modern buildings and

• Concierge, technology servic
• Marketing funds

• Little guidance on what con

– PLR 9646027: charges for
impermissible tenant servic

• Limited to “infrequent, limite

oundary Between
Services, Ordinary Bad
d Good Rent

nant services income, must be
arily for convenience of

issible tenant service
nce exists on services provided in
d situations

ces, construction management

nstitutes a “tenant service”

“courtesy services” not
ces income, but bad income

ted, insubstantial” services

15

Related Party Ren

• Rent generally not good rent if re
actually or constructively owns a

• General exception for TRS: rent p
leased to persons other than TRS

– Special exceptions for lodging an
– Calculation is made using leased

• Attribution rules may create unan
multiple partnerships with overla

– Under § 318 attribution rules, pa
owned

– § 856(d)(5) substantially relaxes
results in attribution

nts: Selected Issues

eceived from a tenant that the REIT
a 10% or greater interest in.

paid will qualify if 90% of space
or related parties

nd healthcare facilities
d (not leasable) space

nticipated related party rents for
apping ownership

artner deemed to own what its partners
s rule: provides only 25%+ ownership

16

Parking P

• Rev. Rul. 2004-24 alleviated sign
remain

– Now clear that income from paid
unreserved generates good incom

– Nebulous standard for valet: unc
services income

• Requires some safety or capacity

• JV with Tax Exempt

– Tax exempt not covered by Rev.
from paid parking

– Related Party Rent problem: the
as a JV partner, but the REIT can

• Tax exempt related party rent rule

Problems

nificant problems, but some issues

d parking, both reserved and
me when connected to leased property
clear when it may be impermissible

justification

Rul. 2004-24, cannot accept income
e tax-exempt can use a taxable affiliate
nnot use a TRS

e requires more than 50%. § 512(b)(13).

17

Distribution R

• Undistributed income subject to
• To retain REIT status, REIT mus

least the sum of:

– 90% of REIT taxable income
– 90% of after-tax net income from fo
– Less excess of the sum of certain it

taxable income

• 4% additional excise tax if REIT
income and 95% of capital gain

– Dividends declared by December, b
tax year. § 857(b)(9)

• Distribution may not constitute a

Requirements

tax at regular corporate tax rates
st distribute dividends equal to at

oreclosure property
tems of non-cash income over 5% of REIT

T fails to distribute 85% of ordinary

but paid in January are credited to the prior

a “preferential dividend”

18

Planning for the Distr

and Fixing

• “Foot Faults” – inadvertent dispropor
of REIT status

– May happen through accidental tim
amount due to a shareholder

– There are various foot fault relief p
– Previously, Rev. Proc. 2010-12 pro

• Allowed certain non-cash transfe
– Only applied to dividends p

• Disproportionate distributions and co
of new class of stock for old class bas
preparation for REIT conversion not

ribution Requirements
g Failures

rtionate distributions could cause loss

ming mismatch or miscalculation of the

provisions. See Stroock website.
ovided some relief
ers to avoid preferential dividend treatment
paid prior to the end of 2012

onversions: PLR 201244012: exchange
sed on value over two-year period in
preferential dividend

19

Slide Intention

nally Left Blank

Use of REIT

• Qualified REIT Subsidiary (QRS) p
liability

– Wholly owned subsidiary of a REI
– May be useful in M&A context

• PLR 9512020 (one of two active bu
• PLR 9717036 (target qualified as QR

– Less useful in light of the availabil
LLCs

• REIT deemed to own proportionate

– Issue: partnership or LLC could un
fail income or asset tests

• Taxable REIT Subsidiary (TRS) us
otherwise create non-qualifying inc

– Can generally provide any type of
– But see: hotel and healthcare REIT
– But see: 100% penalty tax for bad

• Factual examination required

Subsidiaries

primarily exists to provide limited

IT

siness acquired in spin off transaction acquired)
RS after reverse cash merger)

lity of UPREIT/DOWNREIT structures and

e share of partnership or LLC assets

ndertake an action that would cause REIT to

sed to provide services that would
come

service
Ts
TRS fees

21

Structuring C

• Use of UPREITs

– Tax deferral: allows REIT sponsors
properties sold for cash or swapped

– May provide edge for property acqu
– May create conflict between sponso
– Issues with debt. IRS talk of changi

among partners.

• Use of DOWNREITs

– Each acquisition results in formation
– Provides many UPREIT advantages
– Possibly eliminates potential conflic

Considerations

to avoid tax liability that could result if
with REIT shares
uisitions
or and shareholders
ing rules regarding allocation of liabilities

n of new partnership
s to traditionally structured REITs
ct of interest present in UPREITs

22

Owning Partnerships

A
B

Partnership
Interests
Real Estate

UPR
(Umb
Partne

The UPREIT

Assets are held through umbrella partn

Investors
Cash

REIT Shares

REIT

Cash

REIT General

brella Partnership
ership) Interest

T Structure

nership rather than directly by REIT.

23

The Unique Concerns o

• Pension-held REIT if single qu
(by value), or qualified trusts (
more than 50%. § 856(h)(3).

– Subject to unrelated business
as well as REIT income rules

• UBTI rules generally less ge
• Maximum of 5% UBTI

• Non-pension held REIT use m
on fractions rule under § 514(c

• Issue: may be subject to ERISA

of Pension-Held REITs

ualified trust holds 25% of REIT
(each owning at least 10%) hold

transaction income (“UBTI”) rules

enerous than REIT income test rules

may provide alternative to relying
c)(9)(E)
A fiduciary requirements

24

International

• Non-U.S. residents subject to either 30% with
income tax at regular rates on net income from
through a U.S. pass-through entity) or through

• Non-U.S. residents subject to 30% withholdin
vehicle

• Non U.S. residents subject to capital gains tax
property holding corporation (generally any U
U.S. real estate)

l: Basic Rules

hholding tax on gross amount of rent or to
m owning U.S. real estate directly (including
h a non-U.S. vehicle
ng tax on dividends from a U.S. corporate
x on a sale of shares of a United States real
U.S. corporate vehicle that predominantly owns

25