1. REAL ESTATE INVESTMENT TRUSTS
October 2014
Presented by:
Frank Burt (Senior Vice President/General Counsel – Boston Properties)
Keith Wilner (Mayer Brown)
Robert Gottlieb (Venable) #

2. Discussion
What is a REIT?
REIT compliance #

3. What is a REIT?
A Real Estate Investment Trust is a private or public corporation or trust that has special status for federal income tax purposes.
It pays no federal income tax because it can take a deduction for dividends paid out to shareholders which reduces taxable income to zero.
Passive entity that owns, develops, leases, and manages real estate
There are organizational, income, asset, and distribution tests that must be met to remain qualified as a REIT. #

4. REIT Compliance / Qualifications
Organizational requirements
Transferable shares
Directors or Trustees
100 Shareholder
5/50 Test
Asset tests
Distribution tests
Income tests #

5. REIT Compliance: Asset Tests
Failure of Asset Test #

6. REIT Compliance: Income Test
Rents from real property
Interest income derived from real property
Gain on sale of real property (excluding prohibited transactions)
Abatements/refunds of taxes on real property
Failure of the income test: 100% tax on deficiency #

7. REIT Compliance: Income Test
75% test income
Other interest income
Dividends
Other capital gains
Failure of the income test: 100% tax on deficiency #

8. REIT Compliance: Income Test
15% Personal Property Test
No more than 15% of rents from real property can be derived from “personal property”
e.g. Hotels, conference room equipments
Look at FMV of personal property
Failure of the income test: the corresponding percentage of rent is treated as non-qualifying income. #

9. REIT Compliance: Other Income
Good / non-qualifying income
Permissible tenant services
Impermissible tenant services
Prohibited transactions #

10. Good Income Good income – What is it?
The term “rents from real property” includes rents from interests in real property, charges for services customarily furnished in connection with the rental of real property, whether or not the charges are separately stated and rent attributable to personal property and real property. #

11. Examples of Good Income
Real estate tax abatements
Late fees billed to tenants
Satellite and antenna fees
Vending & pay phone income
Parking income
Signage income
Income generated from renting out conference area by tenants or general public for functions – REIT only provides utilities and janitorial services
Zoning – required theater space #

12. Examples of Non-Qualifying (“Bad”) Income
Leases based on net profits of any operation
Tenant purchased equipment
Sponsorship of non-profit events
Advertising (other than renting space)
Landscaping
Skating rink
Below-market rents #

13. Permissible Services
A service is considered a permissible service if it meets two requirements:
(a) the service is customarily offered by owners of comparable properties in the marketplace;
and
(b) the service is not furnished “primarily” for the convenience of the tenant #

14. Permissible Services
Building security services (but not specifically within a tenant’s space)
Building systems repairs and maintenance
Common area cleaning and maintenance
Common area decoration
Common area redesign or modification
Customized telecommunications offered through third parties (Internet, broadband, telephone, LAN)
Elevator services
Exercise/health club run by an independent contractor (IK) or turn key operator #

15. Permissible Services Final approval of specified tenant improvements
Freight elevator
General maintenance and janitorial services within common areas and tenant spaces
Loading dock space
Non-customized telecommunications (Internet, broadband, telephone, LAN)
Courier drop boxes to third parties, rental space for (FedEx, UPS, etc.)
Overtime HVAC #

16. Permissible Services
Pay phones, rental of space (may rent space to phone companies, but may not own phones)
Pest control
Preparation of space to allow for new rental after tenant vacates
Provide utilities to tenants (electric, heat, water, sewer, cable)
Rental space for ATM machines
Rental of roof space for antennas and other communication equipment
Rental of space for vending machines #

17. Permissible Services
Security escort services (if available to tenants and the public alike)
Signage ~ design, produce, and hang in common areas
Snow removal
Sub-metering of utilities to tenants where usual and customary
Tenant improvements ~ administrative work
Trash collection
Unreserved no fee parking to tenants and guests
Validation of parking for all retail customers
Window cleaning (but not at tenants request) #

18. Impermissible Services
A service is considered an Impermissible Service if either the service:
(a) is not a “usual or customary” service provided to tenants or
(b) it is rendered primarily for the convenience of the tenant and REIT does not use an independent contractor to furnish the service. #

19. Impermissible Services
Concierge
Loading or unloading of tenant’s goods on the loading dock
Own and/or operate pay phones
Own and/or operate ATM machines
Own and/or operate courier drop boxes
Own and/or operate vending machines #

20. Impermissible Services
Decoration of tenant’s space at tenant’s request
Redesign or modification of tenant’s space
Maintenance at tenant’s request beyond general maintenance/janitorial
Window cleaning at the tenant’s request
Specific maintenance services at tenant’s request
Tenant improvements ~ non-administrative work
Exercise or health club operated by REIT #

21. Impermissible Services
Provide food or beverage services to tenants and the general public who rent conference / banquet hall and like facilities
Security escort services if not available to tenants and the public alike
Valet parking where not usual and customary #

22. De Minimus
If impermissible tenant service for a particular property for the taxable year exceeds 1% of the gross income during the taxable year, the income from the property will be considered “tainted” and will fail to qualify as rent (qualifying income) for REIT testing purposes. #

23. Other Information
Property Services Questionnaire #

24. REIT Testing Recap Tests performed quarterly
Very important for keeping REIT status
Failure to pass tests
income
asset
organizational
distribution
impermissible services #

25. Acquisition by REITs (Non-Purchase)
UPREITS
Down REITS
Tax deferred alternative to sale #

26. What is an UPREIT?
Operating (Umbrella) Limited Partnership controlled by REIT
Partnership holds REIT assets via subsidiary entity
Property is acquired by Operating Partnership #

27. Operating Partnership
What is an UPREIT?
Contributing Partner
REIT
Operating Partnership
Acquired Property
Real Estate Assets
Real Estate Assets #

28. What is an UPREIT?
Contributing partners are limited partners in Operating Partnership
Contributing partners receive limited partnership units in Operating Partnership which perform like REIT shares and are convertible into REIT shares on a one-for-one basis
As a contribution to partnership, eligible for non-recognition (tax deferral) treatment #

29. Down REITS REIT structure does not have an Operating Partnership
REIT as GP and contributing partners as LP form a Down REIT limited partnership
Contributing partners’ units in Down REIT LP perform like REIT stock #

30. Operating Partnership
Down REITS
REIT
Contributing Partner
Operating Partnership
Real Estate Assets
Acquired Property #

31. UPREIT/Down REIT Issues
Preserve negative capital account/basis preservation
Lockouts
Tax depreciation/704(c) method
Tax indemnity #