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

International: Exc

• A sale of shares of a “domestically controlled” REIT
Domestically controlled generally means a REIT tha
formation or for a period of at least five years preced

• The IRS has approved share restrictions designed to
not violating the freely transferable share requireme

• A U.S. resident for domestically controlled REIT pu
exempt investors and may include a U.S. corporatio

• A sale of publicly-traded shares of a REIT by a non-
shares is not subject to tax

• Treaties may provide a lower rate of withholding tax
whether the REIT is “diversified”

• A mortgage REIT can insulate a non-U.S. investor f
business

ceptions for REITs

T by a non-U.S. resident is not subject to tax.
at is majority owned by U.S. residents since its
ding the date of sale
o ensure that a REIT remains domestically controlled as
ent
urposes includes U.S. citizens and residents and tax-
on controlled by non-U.S. investors
-U.S. resident that owns five percent or less of the

x on dividends from certain REITs, often depending on

from being considered to be engaged in a U.S. lending

26

Selected Intern

• Receipt of capital gains dividend
income effectively connected to a

– May subject foreign shareholder
– § 897(h) amended in 2004 to trea

foreign shareholder has less than
publicly traded REIT; can mean

• Sovereign wealth and § 892

– Notice 2007-55: distribution from
subject to FIRPTA

• Notice states that IRS will challen
complete liquidations, or that § 89
under FIRPTA

– Proposed regulations relax and c

• Interest in a REIT will be subject
fund to be deemed to engage in “c

national Issues

from a REIT may be taxed as
a U.S. trade or business

r to U.S. filing requirement
at distribution as ordinary dividends if
n 5% interest in a class of stock of a
more tax!

m a lower-tier to upper-tier REIT

nge assertion that 897(h) does not apply to
92 exempts a sovereign entity from taxation

clarify rules

to tax, but will not cause sovereign wealth
commercial activity” and lose tax status

27

Slide Intention

nally Left Blank

International: Excepti
of REIT Sh

• Treaties often provide a zero rate of withhold
foreign pension funds, providing a similar exc
often contingent on the foreign pension ownin

• Section 892 exempts foreign governmental in
plans, from dividends from “non-controlled”
than 50% of the REIT. Gains on such an inve
are also exempt regardless of whether the RE

ions for Specific Types
hareholders

ding tax for dividends received from REITs by
ception as is provided to U.S. pension funds,
ng less than 50% of the REIT
nvestors, including foreign governmental pension
REITs where the sovereign investor owns less
estor’s sale of shares of a non-controlled REIT
EIT is domestically controlled

29

International: Structu

• Section 897(h) treats a sale of property by a R
to a non-U.S. shareholder as if they had sold t
55, Section 897(h) applies even if the REIT is
exempt such a distribution

• Section 892 exemption and domestically cont
tax-efficient exit be structured as a sale of RE

• Certain buyers, such as one or a small group o
closely-held cannot buy REIT shares

• Most other buyers can purchase REIT shares
efficient manner and hold the property with a

uring Considerations

REIT and a distribution of the proceeds as taxable
the property directly. Pursuant to Notice 2007-
s being liquidated and Section 892 does not

trolled REIT exemption therefore require that a
EIT shares
of individuals who would cause a REIT to be

and can eventually liquidate the REIT in a tax-
a basis equal to the purchase price of the shares

30

International: Structu

• Due to REIT qualification being on an annual all
shares to ensure the REIT continues to qualify as

• Whether a sale of REIT shares followed close in
as separate steps is open to some debate, though
respected if the buyer is under no obligation to li

• Due to the need to sell REIT shares to take advan
REIT exception, it will often be more tax efficien
small group of properties held in a separate REIT
that have a longer investment horizon or which c

uring Considerations

l-or-nothing basis, seller will want a buyer of REIT
s a REIT until the tax year of sale ends
n time by a liquidation of the REIT will be respected
the general view is that the steps should be
iquidate and the sale is legally a share sale
ntage of the Section 892 and domestically controlled
nt for non-U.S. investors to have each property or
Ts that can be sold independent of other properties
could be sold to a different buyer

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International: Structu

• U.S. investors will need to own and continue to own
domestically controlled

• A foreign pension will usually need to own less than
withholding for Treaty purposes

• Governmental investors will need to own less than 5
control” of the REIT to be able to take advantage of
closely monitored

• Non-U.S. residents will often want to hold REIT sha
withholding consequences and to coordinate other a

• A REIT, like any other U.S. corporate vehicle, can b
earnings-stripping rules and debt/equity consideratio
can qualify as portfolio interest to shareholders who
REIT. Portfolio interest exemption can potentially a
equity interest

uring Considerations

n a majority of the REIT for it to be considered to be

n 50% of the REIT to take advantage of zero rate of

50% of the REIT and not have “effective practical
f the Section 892 exemption. Veto rights will need to be

ares through a U.S. partnership to better control
aspects of investing in one or more REITs
be capitalized in part with debt, subject potentially to the
ons. Interest on debt may be exempt under a treaty or
o own less than 10% of the voting interests in the
apply where there is a greater than 10% non-voting

32

International:

• Treaty or Section 892 exemption needs to been docu

• There is some ambiguity as to how it is determined
sale by the REIT for purposes of Section 897(h). Fo
amount that a REIT can designate as a capital gain d

• There is some ambiguity whether a distribution by a
is a return of capital to a non-resident shareholder (
withholding even though it is not taxable income

• There is currently no explicit rule to certify that a sa
subject to withholding

: Withholding

umented by providing an appropriate IRS Form W-8
whether a distribution is attributable to a real property
or withholding purposes, FIRPTA generally the largest
dividend is treated as subject to withholding
a REIT that is not attributable to earnings and profits and
(such as proceeds from a loan refinancing) is subject to
ale of shares of a domestically controlled REIT is not

33

REIT Con

• Several public companies not op
businesses announced REIT con

– Dillard’s Department Stores
– Iron Mountain (document storage)
– American Tower (communications)
– Lamar Advertising (outdoor signag

• IRS had suspended private ruling
further study of the issue. Now

– Worry that conversions have gotten

• Two potential types of candidate

– Non-real estate businesses that can

• More viable if little accumulated e

– Non-traditional real estate business
and asset tests

• Iron Mountain, Lamar Advertising

nversions

perating traditional real estate
nversions

)
ge)

gs on REIT conversions pending
giving them again.

n too aggressive

es:

spin off real estate

earnings and profits or built-in gain

s that may be able to satisfy the REIT income

g

34

Pros and Cons of R

Pros:

• Potential for substantial entity-
level tax savings

• Markets have reacted favorably to
conversion announcements

• Potential management advantages
from splitting real-estate and
operational aspects of businesses

REIT Conversions

Cons:
• Conversion requiring spinoff

would need to satisfy § 355.

• See Penn National Gaming.
201337007

• See Rev. Rul. 2001-29

• May cause business to forgo
revenue to maintain REIT status

• Compliance and legal costs may
be high

• Uncertainty surrounding IRS
working group on REIT
conversions; IRS may not rule on
tax treatment of the conversion

35

Some Fixes for Co

• Tax consequences of failing REIT re
failures can be rectified without loss

• Failure of 100 shareholder test

– Note: does not need to be satisfied in
– If failed in subsequent years, can av

penalty and reasonable cause

• Failure of distribution requirement

– May be able to make a deficiency di
– Rev. Proc. 2010-12 relief no longer

• Failure of 75% asset test

– Pitfall only triggered if failure is cau
30 days of end of quarter

• Failure of 95% or 75% income tests

– Reasonable cause exception can be c
REIT’s return

ommon Problems

equirements can be severe, but most
of REIT status

n first year of operation
void loss of REIT status with $50,000

ividend
available as of beginning of this year
used by acquisition and is not cured within

claimed on line 2f of schedule J of the

36

Changes on

• Elimination of preferential divide

– Has appeared in the President’s b
– Would bring treatment of prefere

rules
– Political Argument: preferential d

blue sky laws protecting shareho

• Comprehensive tax reform could
taxation or the taxation of alterna

• Potential legislative of expansion

– Senate Finance held hearings on

• Repeal of Notice 2007-55

– NAREIT has requested addition

the Horizon

end rule for publicly traded REITs.

budget in recent years
ential dividends in line with the RIC

dividend rule is redundant to SEC and
olders

d substantially change either REIT
ative structures
n for alternative energy assets

n the use of REITs for alternative energy

to the IRS’s priority guidance plan

37



Micah Bloomfield
212.806.6007

[email protected]

Mayer Greenberg
212.806.6286

[email protected]

Scott Semer
212.588.5538
[email protected]

www.stroock.com
www.dwpv.com