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Taxand USA revisits the history of REIT spin-offs by analysing the PATH Act and the evolution of the Treasury’s position on such transactions.
REIT spin-off transactions have recently generated plenty of attention as many companies, including those with substantial holdings of real property in non-traditional asset classes, seek to determine whether they could benefit from a successful REIT spin-off transaction. In numerous high-profile cases, activist investors have effectively forced a split-up of real estate and non-real estate assets as a way to maximise shareholder returns.
Generally speaking, in a REIT spin-off transaction, a company with an operating business and a significant amount of real property drops the real estate into a wholly owned subsidiary (a “controlled corporation”) and distributes the stock to its shareholders. In connection with the transaction, the controlled corporation makes a REIT election and the two companies typically enter into a long-term real property lease arrangement (i.e., a triple net lease).
The distributor gets a deduction for the rent payments to the REIT, and the REIT avoids corporate-level income tax on the rent payments, assuming that the REIT distributes 100 percent of its taxable income to its shareholders (and many other organisational and operational conditions are met). As discussed in prior articles, but outside the scope of this edition, many other tax considerations may come into play.
Discover more: REIT spin-off transactions
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It is unfortunate that some of the scrutiny from the general public and lawmakers surrounding non-traditional REIT spin-offs may be based on a flawed perception that such transactions are an unfair abuse that must be curbed to preserve the tax revenues. Corporate taxpayers in real estate intensive industries are now severely limited in their options to maximise shareholder value through REIT conversion transactions because of the PATH Act and its misguided political spin.