{"id":8296,"date":"2009-12-04T17:15:25","date_gmt":"2009-12-04T22:15:25","guid":{"rendered":"http:\/\/law.marquette.edu\/facultyblog\/?p=8296"},"modified":"2009-12-04T17:15:25","modified_gmt":"2009-12-04T22:15:25","slug":"a-decade-old-statute-pays-dividends-for-reit-investors-and-their-attorneys","status":"publish","type":"post","link":"https:\/\/law.marquette.edu\/facultyblog\/2009\/12\/a-decade-old-statute-pays-dividends-for-reit-investors-and-their-attorneys\/","title":{"rendered":"A Decade-Old Statute Pays Dividends for REIT Investors and Their Attorneys"},"content":{"rendered":"

Perhaps real estate investors and their attorneys have reason to be cautiously optimistic: economic reports released this week indicate signs of life in the real estate market.\u00a0 As reported by the Associated Press<\/a>, the National Association of Realtors saw increases in pending home sales for the ninth straight month.\u00a0 And for the first time in six months, construction spending saw an increase.\u00a0 Optimists say these numbers, in conjunction with recent reports that home prices are climbing, indicate long-term recovery for both the residential and commercial real estate sectors.<\/p>\n

Yet many analysts argue that these spikes are temporary.\u00a0 The growth in construction spending amounted to a measly 0.04%, and the rise in pending sales contracts over the last nine months is attributable to the homebuyer tax credit, which the Obama Administration and Congress recently extended.<\/p>\n

I suppose time will tell which analysis is correct.\u00a0 But while commentators continue to debate, real estate investors have shifted their focus from traditional residential and commercial endeavors to a sector less affected by the downturn: healthcare properties.<\/p>\n

Multi-tenant senior living, assisted living, and hospice facilities have not experienced the vacancy rates that multi-tenant residential, industrial, and commercial facilities have.\u00a0 In fact, with the Baby Boomer generation reaching retirement, the market for such accommodations continues to grow.\u00a0 And while banks have foreclosed upon some facilities, federal regulations require the continued operation of such facilities (for obvious reasons), making the purchase of such properties at foreclosure a better gamble than, for example, a vacant apartment complex.\u00a0 Of course, the specter of national healthcare reform only adds to this investment\u2019s mystique.<\/p>\n

A primary beneficiary of this growing market?\u00a0 Real estate funds that sell interests in Real Estate Investment Trusts (REITs).\u00a0 While the economic downturn has wiped out the profitability of many existing REITs, funds have turned to healthcare properties to develop appealing prospectuses.\u00a0 Yet were it not for a decade-old federal enactment and a recent statutory modification, these funds (and their attorneys) would be hard pressed to find deals worth making.<\/p>\n

First, some background.\u00a0 The REIT acts like a mutual fund by providing individuals or institutional entities with a passive investment opportunity. \u00a0A corporation with REIT status can avoid corporate tax liability and thus funnel most of its income to investors.\u00a0 A typical REIT acquires diverse pieces of property with investor money.\u00a0 The REIT\u2014typically via a subsidiary\u2014cares for these properties, with the goal of turning a net profit through rental streams and appreciated land values.\u00a0 If and when any income develops, the REIT distributes at least 90% of it among the trust\u2019s investors.\u00a0 REITs have become a common component of large investment portfolios.<\/p>\n

However, REITs had a significant shortcoming for many years.\u00a0 Until 1999, a REIT could not acquire a facility that provided services to tenants.\u00a0 Under IRS rules, properties with a rental income stream arising from services provided\u2014like hotels\u2014were considered active investments, thus subjecting the acquiring entity to corporate tax liability on those rents.\u00a0 That tax liability destroyed the profitability of investment in a REIT.<\/p>\n

That limitation was partially removed by the REIT Modernization Act of 1999<\/a>.\u00a0 Passed by Congress and signed by President Clinton, the Act allowed for the expanded use of taxable REIT subsidiaries, or TRSs.\u00a0 As explained by the National Association of REITs<\/a>, the statute allows a corporation seeking REIT status to create a subsidiary to manage service-providing property.\u00a0 That subsidiary is taxable like a standard corporation.\u00a0 In turn, the REIT may hold up to 100% of the TRS\u2019s stock without disqualifying rents received by the REIT from special tax treatment, so long as the TRS does not compose more than 20% of the REIT\u2019s total assets (this limit was raised to 25% in 2008).<\/p>\n

While the Act laid the groundwork for heavy investment in service facilities, the Act stopped short of authorizing such investment in healthcare facilities.\u00a0 In fact, it expressly prohibited the use of this TRS model to manage healthcare properties.\u00a0 However, as part of the Housing and Economic Recovery Act of 2008, Congress expanded the definition<\/a> of \u201cTRS\u201d to include subsidiaries that manage healthcare properties.<\/p>\n

Those real estate funds and their attorneys riding the wave of healthcare property investment would confirm that these legislative enactments have paid dividends (literally and figuratively) in an otherwise moribund real estate investment sector.<\/p>\n","protected":false},"excerpt":{"rendered":"

Perhaps real estate investors and their attorneys have reason to be cautiously optimistic: economic reports released this week indicate signs of life in the real estate market.\u00a0 As reported by the Associated Press, the National Association of Realtors saw increases in pending home sales for the ninth straight month.\u00a0 And for the first time in […]<\/p>\n","protected":false},"author":72,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ocean_post_layout":"","ocean_both_sidebars_style":"","ocean_both_sidebars_content_width":0,"ocean_both_sidebars_sidebars_width":0,"ocean_sidebar":"","ocean_second_sidebar":"","ocean_disable_margins":"enable","ocean_add_body_class":"","ocean_shortcode_before_top_bar":"","ocean_shortcode_after_top_bar":"","ocean_shortcode_before_header":"","ocean_shortcode_after_header":"","ocean_has_shortcode":"","ocean_shortcode_after_title":"","ocean_shortcode_before_footer_widgets":"","ocean_shortcode_after_footer_widgets":"","ocean_shortcode_before_footer_bottom":"","ocean_shortcode_after_footer_bottom":"","ocean_display_top_bar":"default","ocean_display_header":"default","ocean_header_style":"","ocean_center_header_left_menu":"","ocean_custom_header_template":"","ocean_custom_logo":0,"ocean_custom_retina_logo":0,"ocean_custom_logo_max_width":0,"ocean_custom_logo_tablet_max_width":0,"ocean_custom_logo_mobile_max_width":0,"ocean_custom_logo_max_height":0,"ocean_custom_logo_tablet_max_height":0,"ocean_custom_logo_mobile_max_height":0,"ocean_header_custom_menu":"","ocean_menu_typo_font_family":"","ocean_menu_typo_font_subset":"","ocean_menu_typo_font_size":0,"ocean_menu_typo_font_size_tablet":0,"ocean_menu_typo_font_size_mobile":0,"ocean_menu_typo_font_size_unit":"px","ocean_menu_typo_font_weight":"","ocean_menu_typo_font_weight_tablet":"","ocean_menu_typo_font_weight_mobile":"","ocean_menu_typo_transform":"","ocean_menu_typo_transform_tablet":"","ocean_menu_typo_transform_mobile":"","ocean_menu_typo_line_height":0,"ocean_menu_typo_line_height_tablet":0,"ocean_menu_typo_line_height_mobile":0,"ocean_menu_typo_line_height_unit":"","ocean_menu_typo_spacing":0,"ocean_menu_typo_spacing_tablet":0,"ocean_menu_typo_spacing_mobile":0,"ocean_menu_typo_spacing_unit":"","ocean_menu_link_color":"","ocean_menu_link_color_hover":"","ocean_menu_link_color_active":"","ocean_menu_link_background":"","ocean_menu_link_hover_background":"","ocean_menu_link_active_background":"","ocean_menu_social_links_bg":"","ocean_menu_social_hover_links_bg":"","ocean_menu_social_links_color":"","ocean_menu_social_hover_links_color":"","ocean_disable_title":"default","ocean_disable_heading":"default","ocean_post_title":"","ocean_post_subheading":"","ocean_post_title_style":"","ocean_post_title_background_color":"","ocean_post_title_background":0,"ocean_post_title_bg_image_position":"","ocean_post_title_bg_image_attachment":"","ocean_post_title_bg_image_repeat":"","ocean_post_title_bg_image_size":"","ocean_post_title_height":0,"ocean_post_title_bg_overlay":0.5,"ocean_post_title_bg_overlay_color":"","ocean_disable_breadcrumbs":"default","ocean_breadcrumbs_color":"","ocean_breadcrumbs_separator_color":"","ocean_breadcrumbs_links_color":"","ocean_breadcrumbs_links_hover_color":"","ocean_display_footer_widgets":"default","ocean_display_footer_bottom":"default","ocean_custom_footer_template":"","ocean_post_oembed":"","ocean_post_self_hosted_media":"","ocean_post_video_embed":"","ocean_link_format":"","ocean_link_format_target":"self","ocean_quote_format":"","ocean_quote_format_link":"post","ocean_gallery_link_images":"on","ocean_gallery_id":[],"footnotes":""},"categories":[70,60],"tags":[],"class_list":["post-8296","post","type-post","status-publish","format-standard","hentry","category-business-regulation","category-health-care","entry"],"_links":{"self":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/8296","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/users\/72"}],"replies":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/comments?post=8296"}],"version-history":[{"count":0,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/8296\/revisions"}],"wp:attachment":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/media?parent=8296"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/categories?post=8296"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/tags?post=8296"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}