[Congressional Record Volume 144, Number 34 (Tuesday, March 24, 1998)]
[Extensions of Remarks]
[Pages E456-E457]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              REAL ESTATE INVESTMENT TRUST TAX EQUITY ACT

                                 ______
                                 

                            HON. MAC COLLINS

                               of georgia

                    in the house of representatives

             Tuesday, March 24, 1998***HD***I. INTRODUCTION

  Mr. COLLINS. Mr. Speaker, I rise today to introduce the Real Estate 
Investment Trust Tax Equity Act. This legislation is an important 
measure which levels the playing field among investors and businesses 
competing in similar real estate markets. It addresses an inequity 
first recognized by Congress in 1984. Unfortunately, the legislative 
change that occurred in the Deficit Reduction Act of 1984 made 
important modifications that were too open-ended. As a result, certain 
players in the REIT market have taken advantage of a loophole which 
potentially shifts the markets in their favor. Specifically, paired-
share REITS were provided a shotgun tax benefit in the 1984 legislation 
which has created a meaningful imbalance in certain industries. My 
legislation seeks to install equity, true to the intent of the 1984 
changes.***HD***II. BACKGROUND


           A. What is a Real Estate Investment Trust (REIT)?

  A REIT is organized as a corporation, business trust or similar 
association which allows many investors to pool capital in order to 
acquire or provide financing for real estate.
  REITs were first created in 1960 in order to give small investors 
access to the commercial real estate investment market. Previously this 
market had been monopolized by large capital investors, and this new 
structure afforded a wider group of investors to share in the profit 
opportunities.
  A REIT is not required to pay a corporate level of tax, but must pass 
95% of its taxable income through to its investors. Additionally, 95% 
of a REIT's income must come from passive sources, such as lease 
payments or interest on mortgage debt, etc. Also, 75% of a REIT's 
income must come from real estate. A REIT may not receive a significant 
portion of income from operating its real estate.
  Over the years, there have been several legislative efforts to modify 
the REIT structure. While REITS have been generally prohibited from 
self-managing properties that they hold in trust, changes to the code 
were made in 1986 which allowed REITS that own specific types of real 
estate to provide customary services to their tenants. However, under 
current law, REITS are still restricted from operating real estate that 
requires a high level of operation management services (usually 
associated with such entities as hotels, casinos or similar 
properties). REITs that operate in these markets must lease the 
property to a third party, usually structured as a C corporation, which 
is tasked with providing the operation and direct management of the 
restricted real estate held by the REIT.

  The REIT market has seen considerable recent growth. According to the 
National Association of REITs, five years ago there were 142 REITS with 
a market value of $16 billion. Today there are 210 REITs with a value 
of $141 billion. Experts forecast that at current growth rates, within 
a decade REITs will reach a market value of $1.3 trillion.


                    B. What are Paired-Share REITs?

  In the 1980s certain REITS began pairing their shares of the REIT 
with those of the management company. For each share of the REIT 
received by the investor, they also received one share of the 
management company. Pairing these shares creates significant benefits 
because the same shareholders derive all of the profits from operations 
related to the real estate owned by the REIT.


                        C. Congressional Action

  Because of several concerns about the paired share structure, 
including the fact that it could cause an artificial reduction in tax 
liabilities attributable to the income associate to management of 
properties, Congress took action in 1984 to ensure that the two 
structures would be treated as one for purposes of applying the REIT 
gross income tests. However, in this legislation, Congress considered 
the impact on the companies that had already adopted the paired-share 
REIT structure. Consequently, these existing entities were 
grandfathered, with the acknowledgment that they would need additional 
time to ``unwind'' in the effort to meet the standard gross income 
tests.
  Historical discussion language indicates Congressional intent:

       ``Congress did not intend to eliminate the corporate tax on 
     the portion of an active business' income that arises from 
     the ownership of its real estate.''
       ``Congress believed that to permit the use of such a 
     transparent device would have weakened the integrity of the 
     tax system.''
       ``Congress believed that all stapled entities should have 
     adequate time to remove the requirement that shares trade in 
     tandem . . .''

           D. The Competitive Benefits of Paired-share REITs

  Although supporters of paired-share REITs argue they have no benefit 
over competitors within their industries, indications are to the 
contrary. Specifically, this structure provides significant benefit 
because it eliminates the sometimes adversarial relationship between 
the REIT and the management company. If

[[Page E457]]

both entities have the same group of shareholders, there is no friction 
over who should realize the benefit of profits.

  Second, the shifting of income between the two entities can have a 
significant impact on the tax liability attributable to profits. There 
are a number of ways this can be accomplished whether through rent 
payments, or shifting other overhead expenses.
  Third, the structure of paired-share REITs enables these entities to 
avoid the double taxation of income from real estate, a benefit not 
realized by non-paired-share REIT competitors in certain markets. 
Again, tax liabilities are minimized and profits are significantly 
increased for shareholders.
  This unique business structure has made them particularly attractive 
to investors, thereby giving them more advantageous access to capital.
  Rather than making movements to ``unwind'' or adjust their structure 
in anticipation of having to comply with standard REIT gross income 
tests, since 1995, a majority of the grandfathered entities have 
expanded aggressively.
  Again, while today's paired-share REITs argue they have no real 
advantage over the traditionally structured corporations against whom 
they compete, their behavior indicates otherwise. Not only have some of 
the grandfathered REITS publicly discussed their advantage in an effort 
to attract investors, they have also stated in the past that they 
originally purchased the paired-share REIT, not for the line of 
business that it was participating in, but because they wanted the 
paired-share structure which provides unique, advantageous 
opportunities in certain markets.***HD***III. THE REAL ESTATE 
INVESTMENT TRUST EQUITY ACT
  Mr. Speaker, because the REIT market continues to expand 
aggressively, Congress must take action to ensure that the 
grandfathered REITS are not enjoying tax based advantages, to the 
detriment of other businesses competing within the same industries. The 
legislation I introduce today levels the playing field by further 
clarifying the intent of Congress expressed in the Deficit Reduction 
Act of 1984. My legislation simply states that paired-share REITs must 
comply with the standard gross income texts applicable to all REITs, 
contained in section 856 of the Internal Revenue Code. Federal tax 
policy must be consistent so that it does not favor one competitor over 
another within industries. This important legislation ensures equitable 
tax policy so that one group of investors does not have a significant 
benefit over their competitors.

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