Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/206598
Congress expressed when it passed the REIT Act was to facilitate the raising of capital for urban renewal. Congress hoped the act would promote the fnancing of skyscrapers, shopping centers, and other real estate assets. Against the backdrop of the Cold War and the construction of the Eisenhower Interstate System, Congress wanted to ensure a modern physical environment for an afuent postwar society. Te U.S. federal government has ofen proved reluctant to fund public programs directly, preferring instead to enact tax incentives to urge the private sector to work toward the stated policy goal. With that in mind, the REIT Act, then as now, operates as a calculated subsidy to critical fxed assets. Tat the critical fxed assets now include data centers, cell phone towers, and renewable energy infrastructure does not attest to IRS laxity, but rather to technological innovation and the IRS' strict adherence to the fexible legal standard that Congress adopted. In a way, the REIT industry can be seen as an agglomeration of private capital that builds out (or provides a secondary market for) the assets that Congress wants to see built, but has proven unwilling to fund directly. Te more socially oriented of the two policies that Congress expressed when it passed the REIT Act was to provide "reasonable machinery" whereby a "large number of small investors" could invest in real estate without incurring double taxation. Prior to the passage THE REIT CONVERSION PROCESS Before making a REIT election, a company must determine whether its assets constitute real estate assets for REIT purposes, and whether its income constitutes good REIT income. Extensive restructuring, including the outsourcing of impermissible services to "taxable REIT subsidiaries," may be necessary. If it holds nontraditional real estate assets, a company will likely need to apply for an Internal Revenue Service private-letter ruling. By the end of its first taxable year as a REIT, the company must distribute its non-REIT earnings and profits to stockholders. Following conversion, the company must monitor its compliance with strict REIT qualification tests. Obtaining and maintaining REIT qualification is a serious undertaking whose benefits and drawbacks are usually carefully evaluated by management. In fact, the sheer time and energy required to undertake a REIT conversion make the recent REIT conversion trend all the more noteworthy. 36 November | December | 2013 of the REIT Act, generally only the wealthy could invest in real estate using fow-through entities. Te small investor had two choices: invest through an entity at a prohibitive cumulative tax rate, or forego the opportunity. Tis diference in tax treatment between large and small investors was not palatable to the 86th Congress, who had to answer to their middle-class constituents. (Tis was 1960, afer all.) If the frst policy behind the REIT Act was pro-development, the second was essentially populist, and thematically consistent with the mutual fund statutes that Congress had already passed. It is worth noting that the REIT Act was designed to contain statutory safeguards against exploitation by personal holding companies. First, REITs must be held by at least 100 persons, and second, they must not be subject to greater than 50 percent ownership by any fve or fewer individuals during the last half of their taxable year. Despite the cost to the Treasury, it is a reasonable argument that shepherding private capital towards cell phone towers, data centers, and renewable energy infrastructure is a worthwhile policy goal, particularly if small (read: middle-class) investors are aforded a taxefcient means of participating. Under this view, the REIT conversion trend appears consistent with what the drafers intended: private enterprise responding to incentives that Congress put in place to further legitimate economic and social policy goals. Evan Hudson is an associate in the Corporate Department at Proskauer, with a focus on real estate securities. He advises sponsors on the formation and structuring of traded, nontraded, and private mortgage and equity REITs. Contact him at ehudson@proskauer.com. Statement of Ownership Commercial Investment Real Estate Publication Number 1524-3249 Filing Date: 10/1/13 Published bimonthly by the CCIM Institute, an affiliate of the National Association of Realtors, 430 N. Michigan Ave., Suite 800, Chicago, IL 60611-4092. Publisher and Executive Editor: Sara Drummond Annual Subscription Price: $45 for nonmembers, $55 for Canada/Mexico Extent and Nature of Circulation Total Number of Copies Paid and/or Requested Circulation Paid/Requested Outside-County Mail Subscriptions Paid In-County Subscriptions Sales Through Dealers and Carriers, Street Vendors, Counter Sales, and Other Non-USPS Paid Distribution Other Classes Mailed through the USPS Total Paid and/or Requested Circulation Free Distribution by Mail Outside County In-County Other Classes Mailed Through the USPS Free Distribution Outside the Mail Total Free Distribution Total Distribution Copies not Distributed Total Percent Paid and/or Requested Circulation Average No. Copies Each No. Copies of Single Issue During Preceding Issue Nearest to Filing 12 Months Date (Sept./Oct. 2013) 13,170 13,531 11,864 12,081 0 0 0 0 3 5 11,867 12,086 379 0 363 0 52 39 733 1,164 13,031 139 13,170 716 1,118 13,204 327 13,531 91% 91% Commercial Investment Real Estate