REIT Archives - The National Law Forum

Many registered investment companies and real estate investment trusts are organized as business trusts. Certain states, such as Maryland, Delaware, and Massachusetts have been hospitable to such entities, and therefore are home to many of these entities. In some states, such as Massachusetts, the entities are formed as common-law trusts, while in others there is a statutory authorization for the formation of a business trust. However, unlike corporations which exist as “persons” for the purpose of legal actions, there have been questions raised as to whether business trusts have a separate legal existence.

The issue of whether a trust is a separate legal entity can impact how trusts access courts. In a decision that could significantly impact the way in which business trusts determine the forum in which they sue or are sued, on March 7, 2016 the U.S. Supreme Court decided a case involving Americold Realty Trust. In that decision, the Court held that, unlike a corporation, a trust does not have a separate legal existence for the purpose of determining the citizenship of the entity.

The decision reaffirmed that a corporation is a citizen of the state in which it is organized (and the state in which it maintains its principal office, if different). However, in an 8-0 decision, the Court held that trusts are not separate legal entities with a defined state of citizenship. Rather, the citizenship of a business trust will be determined by where the beneficiaries of the trust are located. For a large, publicly-owned business trust, such as a registered investment company or a REIT which have shareholders scattered in many or all of the states, that may effectively destroy any basis for such a trust to use diversity of citizenship to affect federal court jurisdiction. If sued, this could force such entities to litigate in jurisdictions where the trust is not organized and does not maintain an office because an isolated shareholder resides in that jurisdiction.

While there may be little that investment companies or REITs can do to alter the impact of this decision, it will be interesting to see if the state laws authorizing such trusts can be revised in a way that may impact the consequences of this decision.

Article By Steven M. Felsenstein of Greenberg Traurig, LLP

On July 29, Windstream announced that it plans to spin off certain telecommunications network assets into an independent, publicly tradedreal estate investment trust (REIT). Windstream made the announcement after it obtained a favorable private letter ruling from the Internal Revenue Service (IRS) regarding the tax-free nature of the spin-off and the qualification of the spun-off entity’s assets as real property for REIT purposes.

Under the transaction, Windstream will spin off its existing fiber and copper network, real estate, and other fixed assets into a publicly traded, independent REIT. The REIT’s primary activity will be to lease the use of the assets back to Windstream through a long-term “triple net” exclusive lease. Windstream shareholders will retain their existing shares and receive shares in the REIT commensurate with their Windstream ownership. The transaction is intended to effectively enable Windstream to deduct, for federal income tax purposes, the amount of rent paid to the REIT without a corresponding corporate level income tax inclusion in income by the REIT—estimated to generate up to a $650 million annual overall reduction in taxable income between Windstream and the REIT.

Particularly notable about this transaction is that the private letter ruling obtained by Windstream is seemingly an indication by the IRS that it will respect the tax-free transaction of a spin-off even when coupled with an election for REIT status. The fact that the ruling recognized transmission infrastructure (e.g., wires and cable), in addition to the related real estate, as qualifying assets for REIT purposes is also a key development. The IRS issued proposed regulations in May that provided more specific guidance on what types of assets would be considered “real property” for purposes of meeting the requirements for making a REIT election, and Windstream’s private letter ruling is among the first to address the issue in light of the new regulations.

These developments mean that a REIT spin-off transaction might be available to many kinds of businesses. Companies (other than master limited partnerships) with similar assets, such as telecommunications, cables, fiber optics, and data centers, may be wise to explore opportunities to realize substantial tax savings through a similar transaction. However, there are several challenges that must be overcome to execute a successful REIT spin-off transaction.

ARTICLE BY

Katten Muchin Rosenman LLP

Tag: REIT

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