REIT Industry Hails Tax Treaty Compromise
Treasury, Senate Reach Agreement on Tax Withholding for Foreign Investors

Washington, D.C., October 9, 1997 - The real estate investment trust (REIT) industry today applauded the Clinton Administration and Congress for their efforts to ensure that most foreign investors can continue to invest in U.S. REITs without paying an excessive tax on dividends.

The National Association of Real Estate Investment Trusts® (NAREIT), the $130 billion industry's national trade group, hailed as a "reasonable and workable solution" the Department of the Treasury's announcement Tuesday of a new policy under which most foreign recipients of REIT dividends will be taxed at a 15 percent withholding rate. The policy reflects a compromise between the administration and the Senate in response to provisions in several pending treaties that would have doubled foreign investors' U.S. withholding taxes on REIT dividends from the 15 percent in existing treaties.

NAREIT said the policy will positively impact REITs, leveling the playing field on which they must compete with other publicly traded companies for capital in the global market.

"The REIT industry is grateful to Treasury Secretary Robert Rubin, Senate Foreign Relations Committee Chairman Jesse Helms, other Senate leaders and the Joint Committee on Taxation, for their willingness to facilitate a compromise on this important tax treaty issue," said NAREIT Chair Milton Cooper, who is chairman and chief executive officer of Kimco Realty Corporation.

Under the policy unveiled at the October 7 Senate hearing on the ratification of pending treaties, REIT dividends paid to a foreign institutional investor will be subject to the 15 percent tax if the investor owns five percent or less of a publicly traded REIT's stock or owns 10 percent or less of any diversified private or public REIT. In the second case, a REIT's assets are considered diversified so long as no single property of the REIT is worth more than 10 percent of all the company's properties. Individual foreign investors in a REIT could continue to be taxed at a 15 percent rate so long as they hold 10 percent or less of a REIT's stock.

"We believe this outcome confirms the essential role REITs increasingly play in attracting equity capital from abroad into the American economy," said NAREIT President and Chief Executive Officer Steven A. Wechsler. The new tax provision first will be included in the pending Luxembourg treaty and then in other treaties as they are negotiated or renegotiated, he said.

Speaking for the Treasury Department, International Tax Counsel Joseph H. Guttentag stated that the "new policy takes into account that portfolio investment in a REIT may be indistinguishable in intents and results from similar investments in other corporate securities and should be afforded similar tax consequences in appropriate circumstances."

Kenneth J. Kies, chief of staff at the Congressional Joint Committee on Taxation, cited the significant cooperation among all parties to balance the REIT industry's capital-raising concerns with a treaty policy that preserves the U.S. taxing jurisdiction over foreign direct investment in U.S. real property.

Although the Internal Revenue Code has long established a 30 percent withholding rate on all dividends paid to foreigners, the Treasury Department has, since the 1940s, consistently lowered that rate to 15 percent in its treaty negotiations with other countries.

In 1988, the Treasury Department began renegotiating tax treaties that essentially doubled the withholding rate imposed on REIT dividends to foreign institutional investors, while preserving the 15 percent rate on other corporate dividends. The new rate hike, Wechsler said, was negatively affecting many REITs' ability to access European equity capital.

"The higher rate presented a stiff challenge to the industry if it was ever destined to compete with other industries on the global playing field," Wechsler said.

"As the REIT industry continues to expand, its ability to access alternative capital markets is becoming increasingly important. The Treasury-Senate approach removes tax disincentives that hampered these possibilities."

The Senate is expected to ratify pending treaties before Congress recesses this year.

Currently, there are 200 publicly traded REITs with a combined equity market capitalization of nearly $130 billion. The National Association of Real Estate Investment Trusts® (NAREIT) is the national trade association for real estate companies. Members are real estate investment trusts (REITs) and other businesses that own, operate and finance income-producing real estate, as well as those firms and individuals who advise, study and service these businesses. For more information, please contact NAREIT at 1-800-3NAREIT.