[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
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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 This legislation modernizes outdated real estate investment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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