Page 0 2015 REIT CFO and Tax Director Roundtables
REIT hot topics ► Moderator: John R. French, Partner, Ernst & Young LLP
► Dirk Aulabaugh, Managing Director, Green Street Advisors, Inc. ► David A. Miller, Principal, Ernst & Young LLP ► John D. Rayis, Tax Partner, Skadden, Arps, Slate, Meagher & Flom LLP
Page 1 2015 REIT CFO and Tax Director Roundtables
REIT hot topics
► Trading below NAV: Is development worth it?
► Sovereign wealth investment in U.S. REITs: Financial joint ventures
► Real estate monetization and spin-off strategies for REITs and operating companies
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Skadden, Arps, Slate, Meagher & Flom LLP | 9
Penn National Gaming (2013): Gaming REIT Conversion & Spin-Off
Public (3) Distribution of
PropCo REIT
(2) Lease
(4) REIT Election
(1) Contribution of Properties to
GLPI GLPI
PENN
1. Penn National Gaming (“PENN”), an owner-operator of gaming properties, contributed its real estate properties to a newly formed corporation (“GLPI”)
2. GLPI leased its properties to PENN for FMV rent
3. PENN distributed all of GLPI’s stock to its shareholders in a tax-free spin-off, following a stock exchange by a large shareholder to facilitate compliance with the REIT requirements
4. GLPI elected to be taxed as a REIT
Skadden, Arps, Slate, Meagher & Flom LLP | 10
Pros
• Significant business objectives such as reduced cost of capital for the REIT
• Favorable Lease Valuation Metrics
• Tax-efficient REIT dividend distributions
• Spin-off/split-off tax-free to company and public shareholders
• REIT not subject to any corporate-level tax so long as its income is distributed to its shareholders
• Potential repatriation benefits
Cons
• Spin-off/split-off must satisfy highly technical requirements to be tax-free
• REIT must satisfy all of the technical REIT requirements, including the 10 percent related party rent/shareholder test
• Requires split-off where distributing company has significant shareholder
• Post-split-off stock ownership restrictions
Tax-Free REIT Spin-Off - Considerations
Skadden, Arps, Slate, Meagher & Flom LLP | 11
• The Internal Revenue Code permits a corporation to distribute stock of a subsidiary to its shareholders tax-free if certain requirements (including corporate business purpose, active trade or business, and lack of device) are met
− Neither the distributing corporation (“OpCo”) nor the subsidiary whose stock was distributed (“PropCo”) would recognize gain
− Shareholders would recognize no gain or loss and would not be required to treat the receipt of PropCo stock as a taxable dividend
− Rev. Rul. 73-236 concluded that because a REIT does not directly perform substantial management and operational activities, it could not be engaged in an active trade or business within the meaning of Section 355
− Rev. Rul. 2001-2 made Rev. Rul 73-236 obsolete because of the 1986 Act
• Potential for PropCo to distribute cash to OpCo in an amount not in excess of OpCo’s tax basis in the PropCo assets, provided OpCo distributes the cash to shareholders or uses it to repay debt, and debt-for-debt exchanges, may afford OpCo the opportunity to reduce its debt
• In order to qualify as tax-free, the transaction must satisfy detailed spin-off and REIT statutory requirements
Tax-Free Distribution Rules: Overview
Skadden, Arps, Slate, Meagher & Flom LLP | 12
• In May 19, 2015, an IRS official announced it was “pausing” on Section 355 private letter ruling requests involving a “small” active trade or business, but that existing plr requests would be grandfathered “for now”
− From 1996 to 2003, the IRS would not issue a favorable ruling if the fair market value of the gross assets used in an active trade or business of the distributing or the controlled corporation was less than 5 percent of the total fair market value of the gross assets of such corporation.
• On July 31, 2015, the Treasury published its Priority Guidance Plan, which included “Guidance relating to the requirements under §355, including the active trade or business and business purpose requirements and the prohibition on device for the distribution of earnings and profits.”
• On September 14, 2015, the IRS announced that it is studying the rules regarding tax-free spin-off transactions, and will not rule on requests involving the qualification of a REIT spin-off
− Treasury has announced its intention to issue additional guidance that could materially affect REIT spin-offs, and it is not possible to predict what that guidance will be or when it would become effective
− In the September 14, 2015 announcement, Treasury and the Service stated that they have “become concerned that an increasing number of distributions intended to qualify [as tax-free spin-offs] involve a distributing corporation or a controlled corporation that elects to be a REIT"
• Many public company spin-offs have proceeded without a PLR
− Even if the September 14, 2015 announcement had not been made, the PLR would only address specific sub-issues and not the many other requirements that a spin-off must satisfy in order to qualify as tax-free
REIT Spin-Off: IRS 2015 Shots Across the Bow*
*On Feb 26, 2014, Republican Congressman David Camp, Chairman of the House Ways and Means Committee, proposed a prohibition on REIT lections within 10 years of a spin.
Skadden, Arps, Slate, Meagher & Flom LLP | 13
• ABA Corporate and DC Tax Section Meetings:
- “We’re most concerned with … the OpCo-PropCo type situation” where controlled is a REIT and distributing “continues to have use of the property under a long-term lease or some other arrangement like that…”
- Said the IRS concerns were “sort of device, sort of business purpose concerns…”
- Future guidance won’t be retroactive to Sept 14th and that the Notice does not signal a definitive change in the IRS’s interpretation of the law
- …the business purpose consideration in the case of OpCo-PropCo structures involves several issues, including ‘‘the interaction between the tax benefits and — in effect — toll charge for a REIT on the one hand versus other benefits of having real estate in a separate company, and the market necessity of having that company in a REIT.’’
- … the government hasn’t made up its mind about “where any of this comes out or what if anything we might want to do to clarify the existing rules or even change them. These are very difficult questions”
- … the government has yet to decide what kind of guidance if any it might issue and that it also hasn’t decided under what authority it might issue guidance.
Post Sept 14th Bob Wellen Comments
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Page 17 2015 REIT CFO and Tax Director Roundtables
REIT hot topics ► Moderator: John R. French, Partner, Ernst & Young LLP
► Dirk Aulabaugh, Managing Director, Green Street Advisors, Inc. ► David A. Miller, Principal, Ernst & Young LLP ► John D. Rayis, Tax Partner, Skadden, Arps, Slate, Meagher & Flom LLP
