NAREIT Submission to the IRS on Reverse Like Kind Exchanges


September 10, 1999




Kelly Alton, Esq.
Senior Technician Reviewer
Internal Revenue Service
1111 Constitution Ave., NW
Room 5044
Washington, DC 20224


Re: Regulatory Guidance Concerning Reverse Exchanges


Dear Ms. Alton:


Pursuant to your request, this letter indicates the support of the National Association of Real Estate Investment Trusts® ("NAREIT") for the proposal concerning "reverse exchanges" discussed at the meeting on August 26, 1999, attended by you, John Fischer, Peter Baumgarten, David Crawford, and Heather Maloy, of the Internal Revenue Service (the "Service"), Louis Weller of Deloitte & Touche, Robert Schachat, of Ernst & Young, Stephen Renna of the National Realty Committee, and Dara Freedman of NAREIT.


NAREIT is the national trade association for REITs and publicly traded real estate companies. Members are REITs and publicly traded businesses that own, operate and finance income-producing real estate, as well as those firms and individuals who advise, study and service these businesses. REITs are companies whose income and assets are mainly connected to income-producing real estate. NAREIT represents over 200 REITs and publicly traded real estate companies, as well as over 1,600 industry professionals who provide a range of legal, investment, financial and accounting-related services to these companies.


At the meeting on August 26th, you discussed the possibility of issuing guidance that would allow "reverse exchanges" effected through so-called "parking" arrangements pursuant to the approach of the 1999 Ad Hoc Task Force of the American Bar Association ("ABA") (the "Parking Proposal") to be tax-free under certain circumstances. We understand that you have also discussed the possibility of issuing guidance that would permit "pure" reverse exchanges pursuant to a 1993 ABA Proposal, reprinted in 21 Journal of Real Estate Taxation 44 (Fall 1993), as modified (the "Pure Reverse Proposal").


During our telephone conversation last week, you asked us to submit a written statement delineating our support for the Parking Proposal. Because of the flexibility that the Parking Proposal would provide our members, we prefer the Parking Proposal over the Pure Reverse Proposal. Nevertheless, if the Service cannot issue guidance that adopts the approach of the Parking Proposal, we would support the approach of the Pure Reverse Proposal that would permit our members to acquire new properties through reverse exchanges.


As you know, REITs are legally required to distribute 95% of their taxable income, but during the past year, REITs have found it increasingly difficult to raise funds in the capital markets. In addition, many REITs have acquired appreciated properties through partnerships and have agreed not to dispose of these properties in taxable transactions for several years. Accordingly, the flexibility of acquiring new properties through like-kind exchanges is very beneficial for the REIT industry.


We do not believe that the Pure Reverse Proposal would permit an exchange to qualify as tax-free in two situations that are particularly common for REITs. First, in many cases, for good business reasons, a REIT may need to construct improvements on an acquired property. Under the Pure Reverse Proposal, these improvements could not be considered part of the replacement property for purposes of the exchange except under very limited circumstances. Second, in other cases, many REITs own large portfolios of properties and are unable to identify at the time of the acquisition of a certain property or properties which of its current properties they plan to relinquish. Because the Pure Reverse Proposal apparently would require a REIT to identify the relinquished property upon acquisition of the replacement property, the Parking Proposal would provide greater flexibility for REITs.


We are pleased that the Service is considering both the Parking Proposal and the Pure Reverse Proposal. Again, we welcome any guidance that would facilitate compliance by REITs in effecting tax-free reverse exchanges, but we prefer the approach contained in the Parking Proposal that would allow REITs to use "parking" transactions in order to effect reverse exchanges.


Thank you again for your consideration of this matter. If you would like to discuss this matter further, please contact me at (202) 739-9408.




Tony M. Edwards Senior Vice President and General Counsel


cc: Adam M. Handler, PricewaterhouseCoopers
Howard J. Levine, Roberts & Holland
Stephen M. Renna, National Realty Committee
Robert Schachat, Ernst & Young
Louis S. Weller, Deloitte & Touche
Steven A. Wechsler, NAREIT
Dara L. Freedman, NAREIT