An abundance of opportunities exist for companies in non-traditional REIT businesses to convert to REITs, according to David Levy, tax partner with the law firm Skadden, Arps, Slate, Meagher & Flom.
In a video interview last month with REIT.com at REITWise 2012: NAREIT’s Law, Accounting and Finance Conference in Hollywood, Fla., Levy discussed what he characterized as the “evolving REIT sector.” This consists of a diverse groups of companies that have a variety of business models. They specialize in areas ranging from cell towers to prisons to data centers. Essentially, “any type of business that requires the business to either own a lot of real estate in order to function or lease a lot of real estate in order to function” is “REIT-able” in Levy’s opinion.
As such, Levy said he foresees a wave of specialty REITs coming to the market in the near future.
“If markets hold up, if the economy holds up, we will see a lot of transactions and REIT conversions,” he said. “If not this year, then at the end of this year and early next year.”
Levy noted, however, that the diversity of business models means that every conversion presents its own set of unique challenges.
“Each one of those companies has a different set of operational needs and financing needs, he said. “Those needs can give rise to different types of challenges when those entities think about doing business in REIT form.”
Additionally, the requirements to convert to a REIT can be difficult to navigate, too, Levy said.
“For instance, the entity might have to sell assets to become a REIT, and there’s a tax hit associated with that,” he said. “Any time an entity wants to go from taxable status to REIT status, the entity has to distribute its historic earnings.”
In terms of some of the most significant legal and regulatory issues facing the REIT industry as a whole, Levy singled out the Foreign Investment in Real Property Tax Act.
“Right now, that law is putting the United States at a tremendous disadvantage to other countries that don’t have capital gains taxes or who allow foreigners to invest in their domestic real estate in tax-advantaged ways,” he said. “FIRPTA right now is sending a message to foreign investors that your money is neither wanted nor needed here in the United States. For a relatively small amount of tax money, we will get a tremendous amount of foreign investment.”