Spinoffs Motivated by Increased Efficiency, Lawyer Says

Dave Levy, a partner at Skadden Arps, joined REIT.com for a video interview at REITWise 2016: NAREIT’s Law, Accounting and Finance Conference at the Marriott Marquis in Washington, D.C.

Levy discussed the impact of restrictions imposed by the Protecting Americans from Tax Hikes (PATH) Act of 2015 on tax-free spinoffs of REIT assets. According to Levy, the spinoff trend that occurred prior to the PATH Act suffered from a “perception problem” in the media.

The perception was that spinoffs were done to reduce taxes, Levy said.  However, “when you look at how REITs and C-corps work and how spinoff rules work, at the end of the day, they can be tax-increasing transactions and oftentimes are,” Levy said.

To undertake a spinoff, a REIT has to distribute its historic earnings, which is a tax-increasing transaction, Levy explained. REITs are also required to distribute their earnings on an annual basis, and REIT investors are subject to higher taxes, according to Levy.

Levy explained that the real motivation behind spinoffs comes from the fact that many corporations that currently own their real estate have found it inefficient.

“It’s better to rent than to own. There’s a huge business incentive to do something that’s a little tax inefficient up front,” Levy said.

“If you are a corporation that owns your real estate and you operate in a space where older competitors have already spun off their real estate or newer competitors are renting rather than owning, you’re now at a competitive disadvantage,” Levy explained.

Levy noted that other ways for companies to monetize their real estate assets include sale-leaseback transactions. “It looks a lot like a spinoff, except you don’t have to distribute earnings and you get to keep all the cash you got in the sale,” he said.

Other options include forming a new REIT and transferring assets to the REIT, which are then leased back. Assets can also be contributed to an operating partnership beneath a public REIT, which allows for a tax deferral, Levy explained.