[Congressional Record Volume 145, Number 59 (Wednesday, April 28, 1999)]
[Extensions of Remarks]
[Page E795]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 INTRODUCTION OF REAL ESTATE INVESTMENT TRUST MODERNIZATION ACT OF 1999

                                 ______
                                 

                         HON. WILLIAM M. THOMAS

                             of california

                    in the house of representatives

                       Wednesday, April 28, 1999

  Mr. THOMAS of California. Mr. Speaker, today I am pleased to 
introduce on behalf of myself, Mr. Cardin of Maryland, and other 
Representatives the ``Real Estate Investment Trust Modernization Act of 
1999''. This legislation modernizes outdated real estate investment 
trust (REIT) rules that prevent REITs from offering the same types of 
services as their competitors. I am proud to note that there are more 
REITs based in California than any other State, and REITs have invested 
more than $24 billion in California communities.
  In 1960, Congress created REITs to enable small investors to invest 
in real estate. Prior to the creation of REITs, real estate ownership 
was largely restricted to wealthy individuals who invested through 
partnerships and other means generally unavailable to the broader 
public.
  Although a variety of factors limited the growth of REITs through the 
mid-1980's, they played a leading role in reviving weak real estate 
markets in the wake of the economic turmoil of the late 1980's and 
early 1990's because of their access to public capital markets and 
because REITs offer liquidity, security, and performance which 
alternative forms of real estate ownership often do not. Yet, in more 
recent years, REITs increasingly have been unable to compete with 
private held partnerships and other more exclusive forms of ownership. 
Antiquated REIT rules prevent REITs from offering the same types of 
customer services as their competitors, even though such services are 
becoming more central to marketing efforts.
  Current law restrictions require REITs to adhere to unworkable 
distinctions that defy logic and impede competitiveness. Under current 
law, REITs only may provide ``customary services'' to their tenants, 
that is, services that are common in the industry and have been 
traditionally provided by real estate companies, such as furnishing 
water, heat, light and air conditioning.
  The ``customary services'' standard ensures that REITs may provide 
services only after industry leaders have already done so, thus locking 
in a competitive disadvantage. In addition, the vagueness of the 
standard produces seemingly irrational distinctions. For example, REITs 
can have parking lots for shopping centers or offices they own, but 
cannot offer valet parking. REITs can own apartments, but cannot 
provide lifeguards or amenity services. REIT competitors can--and do--
provide all these services without any restrictions.
  The Administration's fiscal year 2000 budget acknowledges this 
problem, and proposes modernizing REIT rules to permit them to compete. 
As the Department of Treasury stated in its explanation of the 
Administration's revenue proposals, ``The determination of what are 
permissible services for a REIT consumes substantial time and resources 
for both REITs and the Internal Revenue Service. In addition, the 
prohibition of a REIT performing, either directly or indirectly, non-
customary services can put REITs at a competitive disadvantage in 
relation to others in the same market.''
  The Administration addresses this problem by creating a new category 
of companies which it refers to as ``taxable REIT subsidiaries''. Those 
entities would be exempt from current law restrictions that prohibit 
REITs from owning either (a) securities of a single non-REIT entity 
that are worth more than 5 percent of the REIT's assets or (b) more 
than 10 percent of the voting securities of a non-REIT corporation.
  The Administration's proposal would create two types of taxable REIT 
subsidiaries: a ``qualified business subsidiary'' that could engage in 
the same activities now performed by ``third party subsidiaries''; and 
a ``qualified independent contractor'' subsidiary that would be allowed 
to perform non-customary activities for REIT tenants, as well as those 
services which also could be performed by qualified business 
subsidiaries. The Administration's proposal would limit the value of 
all taxable REIT subsidiaries to 15 percent of the total value of the 
REIT'S assets, but would restrict subsidiaries providing leading edge 
type services to REIT tenants to 5 percent of the REIT asset base. The 
Administration proposal also would amend the current 10 percent test so 
that it would apply to 10 percent of holdings as measured by the vote 
or value of a company's securities.
  Although the Administration's proposal is a welcome first step, its 
narrow focus still would leave substantial impediments to competition 
in place. Today, we are introducing legislation that builds upon the 
Administration proposal to make REITs more competitive.
  Our legislation would allow REITs to create taxable subsidiaries that 
would be allowed to perform non-customary services to REIT tenants 
without disqualifying the rents a REIT collects from tenants, that is, 
performance of those services would no longer trigger a technical 
violation of the REIT rules.
  Toward that end, the 5 percent and 10 percent asset tests would be 
amended to exclude the securities that a REIT owns in a taxable REIT 
subsidiary. Also, like the Administration proposal, the 10 percent test 
would be tightened to apply to both the vote and value of a company's 
securities. In addition, a REIT owning stock of taxable REIT 
subsidiaries would have to continue to meet the current law requirement 
that at least 75 percent of a REIT's assets must consist of real 
property, mortgages, government securities, and cash items; the 
subsidiaries' stock would not count toward that total. However, 
dividends or interest from a taxable REIT subsidiary would count toward 
the requirement that a REIT must realize at least 95 percent of its 
gross income from those sources plus all types of dividends and 
interest.
  Under our proposal, the income a REIT subsidiary would receive from 
REIT tenants and others would be fully subject to corporate tax. In 
addition, the proposal includes strict safeguards to ensure that 
neither a REIT nor a taxable REIT subsidiary could improperly 
manipulate pricing or the allocation of expenses to reduce the 
subsidiary's tax burden. Our bill is supported by the American Resort 
Development Association, the International Council of Shopping Centers, 
the National Apartment Association, the National Association of Real 
Estate Investment Trusts, the American Seniors Housing Association, the 
Mortgage Bankers Association of America, the National Association of 
Industrial and Office Properties, the National Association of Realtors, 
the national Multi Housing Council, and the National Realty committee.
  In sum, Mr. Speaker, our legislation will provide REITs the 
flexibility they need to be competitive. We must not allow the Tax Code 
to inhibit the ability of REITs to compete and to offer the full range 
of services demanded by residential and commercial tenants. Mr. Cardin 
and I and our cosponsors urge our colleagues to review this legislation 
and we hope that they give this legislation every possible 
consideration.

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