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Nothing's been posted here about the passage by Congress of the REIT Modernization Act, soon to be signed by the President, so I thought I'd post a brief write-up I did on it just about a week or 10 days ago. It is hard to believe that few pundits are talking about this new legislation, as it should have significant long-term benefits for forward-looking REITs and their investors. Anyway, here's the write-up:

<<Congress has passed, as part of the "Work Incentives Improvement Act of 1999," the REIT Modernization Act (RMA). NAREIT and the REIT industry have been working very hard to get this legislation enacted by Congress, and they have now done it! Congratulations to Steve Wechsler, Michael Grupe, Tony Edwards and all those who've been instrumental in getting this accomplished. Detailed information on the RMA can be reviewed on NAREIT's website,, under "Government Relations."

The significance of this legislation is potentially large and very positive for the REIT industry. Commencing in 2001, REITs may own as much as 100% of fully taxable subsidiaries (TRS), which may provide services to tenants and to others without disqualifying REITs' regular rental income. While there are limits on (a) the asset value of the TRS (it cannot not exceed 20% of the REIT's assets) and (b) on the amount of dividends that the REIT can receive from its TRS (at least 75% of a REIT's income must be from "good income" sources, and TRS dividends do not qualify as such), this new flexibility could be a major benefit to those REITs who elect to take advantage of it.

Not only will the TRS be a good source of income for many REITs but, perhaps more important, will enable the REIT to compete with other public and private property owners in providing new forms of services to tenants. This will level the playing field and allow REITs to pursue market leadership, innovation and status as the low-cost provider of real estate and related services. Some of the larger REITs, with huge amounts of assets and resultant market power, could benefit the most.

There are special provisions in the RMA for hotel and healthcare REITs. While such a REIT may not operate or manage any of their properties, they may lease them to their own TRS at market rents, which in turn can hire an independent contractor to operate and manage the facility on a day to day basis. This could help to eliminate many of the conflicts of interests which have plagued the hotel REITs and end "leakage," but it will take some time for existing leasing arrangements to be redone. Shareholders will need to watch these unwinding transactions to make sure that they don't end up with the short end of the stick.

In addition, the requirement for REITs to pay out 95% of their net income to shareholders in the form of dividend payments will be changed to 90%, effective in 2001. This will have the effect of delaying forced dividend boosts for many REITs. The bad news is that for most REITs, dividend growth will lag behind FFO growth; the good news is that REITs will be able to retain a bit more income, which will improve the balance sheet, make the payout ratios even more conservative and allow REITs to modestly step up their value creation objectives via developments, stock buybacks and acquisitions, which could increase FFO growth rates slightly.

I'd strongly suggest that we all read the new legislation, an excellent summary of which can be found on NAREIT's website -- under Government Relations, click "REIT Modernization Act '99" and then click "NAREIT Analysis April 29, 1999." Again, congratulations to all those at NAREIT and to others in the industry who worked so hard to get RMA enacted.>>

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