From the New York Times:A small but growing number of American corporations, operating in businesses as diverse as private prisons, billboards and casinos, are making an aggressive move to reduce — or even eliminate — their federal tax bills.They are declaring that they are not ordinary corporations at all. Instead, they say, they are something else: special trusts that are typically exempt from paying federal taxes.The trust structure has been around for years but, until recently, it was generally used only by funds holding real estate. Now, the likes of the Corrections Corporation of America, which owns and operates 44 prisons and detention centers across the nation, have quietly received permission from the Internal Revenue Service to put on new corporate clothes and, as a result, save many millions on taxes.The Corrections Corporation, which is making the switch, expects to save $70 million in 2013. Penn National Gaming, which operates 22 casinos, including the M Resort Spa Casino in Las Vegas, recently won approval to change its tax designation, too.Changing from a standard corporation to a real estate investment trust, or REIT — a designation signed into law by President Dwight D. Eisenhower — has suddenly become a hot corporate trend. One Wall Street analyst has characterized the label as a “golden ticket” for corporations.“I’ve been in this business for 30 years, and I’ve never seen the interest in REIT conversions as high as it is today,” said Robert O’Brien, the head of the real estate practice at Deloitte & Touche, the big accounting firm. Full article:http://www.nytimes.com/2013/04/22/business/restyled-as-real-...
Same thing's happening on the MLP side. SDRL is one that is spinning off an MLP.
Of course the hooker in becoming a REIT is that you have to distribute 90% of your taxable earnings. It at least used to be that many corporations didn't like that. And if you don't have taxable earnings (like say, GE) why become a REIT?brucedoe
Brucedoe: "And if you don't have taxable earnings (like say, GE) why become a REIT?"Does becoming a REIT imply anything about the growth potential of a company's market sector, or in fact the company itself? IOW, what reasons, whether it's market- or investor-related would make the transition to REIT status attractive to a corporation?
Of course the hooker in becoming a REIT is that you have to distribute 90% of your taxable earnings. It at least used to be that many corporations didn't like that. And if you don't have taxable earnings (like say, GE) why become a REIT?The public likes REITs and MLPs.This means that the IPO becomes very lucrative.Prior shareholders benefit.
"what reasons, whether it's market- or investor-related would make the transition to REIT status attractive to a corporation?"Tax savings at federal level primarily. Many large corporations are very skilled at washing their taxable income into foreign subsidiaries. Other industries have certain tax advantages.For a corporation that does not have a method of reducing its federal taxable income via an existing means might try to create one form themselves by becoming a REIT.
I seem to recall vividly a halloween massacre by the Canadian government against CANROY's a few years ago. This happened when a bunch of Canadian companies decided to become "Royalty Trusts" and avoiding Canandian taxes. Canada took away CANROY status from all companies. I can still feel he pain.John
<<<I seem to recall vividly a halloween massacre by the Canadian government against CANROY's a few years ago. This happened when a bunch of Canadian companies decided to become "Royalty Trusts" and avoiding Canandian taxes. Canada took away CANROY status from all companies.>>>>I was thinking similar thoughts when I was reading this article. Would the US ever do something similar to REIT's, MLP's, BDC's etc? I have to believe that these conversions are catching the eyes of Congress and it would not be out of the realm of possibility for the tax treatment to change someday. Reading through many of the comments made by the readers of this article in the NY Times shows the majority are clueless about REIT's and MLP's and just view the pass through treatment as taking care of corporations and the rich at the expense of people like themselves. So it would be an easy sell to the public, lets just hope the REIT lobbyists are better than the CANROY's were.
So it would be an easy sell to the public, lets just hope the REIT lobbyists are better than the CANROY's were.Seems that way to me as well. There has been recent discussion about how little impact would come from changing MLP taxation, but when REITs are added into the mix, I guess that argument might be less persuasive.jz
I share the concern about the number of entities becoming REITs and MLPs. At the time when the Canadian Government changed the rules for CANROYs I had 20% of my assets in CANROYs.As more and more entities become REITs and MLPs the bigger the target they become. We can only hope that if changes come they will not be as drastic as those that happened in Canada.If we lived in a rational world there would be strict limitations on what type of entities could be become REITs and MLPs, since there is strong economic rational for both types of entities.Martin
NAREIT was sufficiently concerned about these recent developments, i.e., the issue of M-REITs being "destabilizers," the new entrants to REITville from "non-traditional" forms of real estate, and even the future tax status of REITs, that they put on a conference call last Wednesday.As we might expect, they expressed much confidence that no changes were likely to occur from Congressional action. One can be skeptical (after all, they ARE NAREIT), but their argumens were persuasive. From my notes on the conf call:1. M-REITs have recently reduced leverage and, in most cases, have hedged interest rate risk. Also, there have been no "blow-ups" from interest rate risk at the M-REITs during the Credit Crunch (although those M-REITs that relied heavily upon short-term funding sources got into trouble). And, M-REITs are an increasingly important source of capital in the home mortgage markets.2. The NY Times never asked NAREIT for comment on that story, and were thus unable to provide information to put it in perspective. The definition of "real estate" in the laws pertaning to REITs is very broad and inclusive, and includes "land and permanent improvements." (My thought: Some businesses may be "pushing the envelope" with regard to the definition of "real estate," but the IRS would simply deny such outliers the ability to become a REIT). NAREIT also says that, far back as 1969, railroad tracks were clearly "real estate." Contrary to what the NYT article implies, the IRS has not redefined "real estate," nor does it intend to do so (and, in any event, lacks statutory power to do so). And most of the companies that now want to become REITs do not own "novel" types of real estate (perhaps billboards are an exception). Finally, NAREIT says that the primary driver of these new REIT conversions is investors' demand for greater dividend distributions, not to save taxes.3, There has also been loose talk of REITs losing their present tax status as part of some grand reform of the tax code. NAREIT spent most of their time talking about this. They point out that Congress is looking at ALL aspects of the tax code. They note that there would be no incremental addition to government coffers if REITs could no longer deduct paid dividends. They also believe that every member of Congress they have talked with believe that the REIT industry, using lower debt leverage than is available to private owners, has been a stabilizing force in the US economy. Finally, the long-term success of the industry speaks for itself, and benefits shareholders and investors. NAREIT has expressed great confidence that no major changes will occur. Of course it would be irresponsible of investors not to pay attention to these stories; however, if there was a real risk of REITs losing their present tax status, REIT stocks would be reflecting this in lower prices. But the market seems to be taking all this talk in stride. In short, I worry about too many things, but the destruction of the REIT industry isn't one of them.Ralph
REITs pay no tax on taxable profits if they distribute more than 90% of their taxable profits, but investors pay more because the dividends are not qualified. Investors, however, may come out ahead because of capital gains added to their after tax dividends. So it seems to me that there is no reason for the government to make changes. But the government is not always rational.If I was dictator, I would expand the REIT concept. After all, GE pays no Federal tax; yet, the share holders dividends are qualified. If they were classified as a REIT, at least the government would get the increased tax on dividends.brucedoe
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