Specialty REITs Ready to Expand in Scope

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."