IRS Rules on Real Estate Investment Trust Conversions – Do You Have The REIT Stuff?

“In recent years, there has been a considerable expansion of the types of companies holding non-traditional real estate assets that have elected to become real estate investment trusts for US federal income tax purposes.” (Laurence Crouch and Eileen O’Pray of Shearman & Sterling)

For the right business, converting to a Real Estate Investment Trust (a “REIT”) can offer investors significant tax benefits. The rules are fairly straightforward, explain Laurence Crouch and Eileen O’Pray of Shearman & Sterling:

“In order to qualify as a REIT, among other requirements, (i) at least 75 percent of the REIT’s assets must be ‘real estate assets’ (the ‘asset test’), (ii) at least 75 percent of the REIT’s gross income must be from items related to real estate, such as ‘rents from real property,’ and (iii) at least 95 percent of the REIT’s gross income must be from items related to real estate or certain passive investments ((ii) and (iii) together, the ‘income tests’).”

Thanks to the Internal Revenue Service’s broad definition of “real estate assets,” a number of companies holding non-traditional real estate assets – from wireless communication systems to power distribution facilities to railroads and billboards and data centers – have undergone REIT conversions after receiving “private letter rulings” (PLRs) confirming that their holdings meet the asset test under REIT rules.

Until earlier this year, that is:

“In early June, three companies, Iron Mountain Inc., Lamar Advertising Co. and Equinix Inc., announced in filings with the Securities and Exchange Commission that the IRS had suspended the consideration of their PLR requests. This created uncertainty regarding whether the IRS was changing its view on qualifying real estate assets under the REIT rules. This concern was attributable to the fact that Lamar Advertising and Equinix were seeking PLRs with respect to categories of assets that the IRS had previously confirmed were qualifying real estate assets.”

On November 14, the IRS put an end to the uncertainty, write attorneys at Skadden Arps:

“[T]he IRS contacted many firms to let them know that the so-called REIT working group has completed its task. The IRS’s temporary hold on issuing rulings on what constitutes real property for REIT purposes is over.”

What’s more, although the IRS has not made any formal announcements regarding its conclusions, it appears to be business as usual:

“[W]e expect the IRS will continue its traditional approach of analyzing each particular private letter ruling request it receives based on the specific facts presented. It will continue to carefully make judgments consistent with the Internal Revenue Code, the Treasury Regulations and existing IRS published guidance. As in the past, the IRS will not grant every private letter ruling requested.”

And that’s likely to be good news for companies considering a REIT conversion.

The updates:

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