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REITS help support nearly 1,000,000 jobs in the U.S. each year.

REITs Could Offer Good Solutions to Infrastructure Issues, Tax Specialist Says

10/15/2009 | By Allen Kenney

REITs Could Offer Good Solutions to Infrastructure Issues, Tax Specialist Says

By Allen Kenney

President Barack Obama included investing in national infrastructure development among the major planks of his 2008 campaign platform—not just traditional projects such as building new roads and bridges, but improving the country's technological capacities as well. While infrastructure has taken a backseat in Obama's first year to pressing issues like the economy and health care, it clearly remains a key issue for the White House.

In light of the growing demand for such projects and services, dedicated infrastructure REITs may become a growth area within the commercial real estate industry. For example, companies such as DuPont Fabros Technology (NYSE: DFT) and Digital Realty Trust (NYSE: DLR) have carved out a niche within the industry by providing data centers and related technology facilities to commercial clients.
Larry Varellas, Deloitte's U.S. Real Estate Tax leader and a member of its infrastructure team, contends that REITs may offer solutions to some thorny political concerns surrounding a national infrastructure development effort. He spoke with about the potential for REITs to play a major role in the infrastructure push. At this point do you think there is much left to debate about the need for a focused campaign to boost our national infrastructure?
Larry Varellas: There's clearly a need for infrastructure development of many kinds in our country. The infrastructure deficit has been pretty well chronicled. The real question is how to finance it and get it done. What about potential issues surrounding ownership of these newly developed assets?
Larry Varellas: That's one of the things that's intriguing to me about the prospects of publicly traded infrastructure REITs. Whether it's REITs as we know them today, or a new style of REIT created via tax legislation, the concept that the infrastructure would technically be privately owned, but by a publicly traded entity, allowing anyone fractional ownership, has some advantages. It's sort of a hybrid—semi-private. You could buy shares of a REIT that owns the road you take to work, for instance. That may address some of the concerns around private ownership.
And compared to some of the publicly traded infrastructure funds that exist today, a REIT would have the advantage of not paying taxes in its interior, as the dividends it pays are tax deductible. In other words, there would be just one level of tax, at the shareholder level. This would be much simpler than the administration and tax complexities for the shareholder in a publicly traded partnership situation. So REITs are very attractive for many reasons. From an investment standpoint do you think it might be attractive to shareholders as a kind of steady-state, predictable asset?
Larry Varellas: Owning that kind of stock might be attractive. I would think that with the recent turbulence in the markets and the fact that many high-quality bond investments right now are paying very low yields, a relatively decent yield on this type of asset could be interesting and might be attractive to the retail investor.
So it seems like a worth while goal to provide legislative adjustments to the tax law in order to allow REITs to own these types of assets. What are the legislative changes that need to be made?
Larry Varellas: It really depends on the kind of asset and operation we're talking about. Under current rules, some types of assets and operations can be REIT-compliant—some utility transmission assets, data warehouses and others can qualify if properly structured. But many types of infrastructure—ports, courthouses, bridges, toll roads—are much more difficult to be owned by REITs. The structural fixes to make more operations REIT-compliant will require redefining what is a qualified asset and income stream.
So there is some work to do, but considering the need for infrastructure in our country and the corresponding funding requirements, bringing REITs into the mix may be a very wise thing to do.