[Congressional Record Volume 153, Number 127 (Friday, August 3, 2007)]
[Senate]
[Pages S10931-S10932]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Salazar, Mr. Smith, and Mr. 
        Kerry):
  S. 2002. A bill to amend the Internal Revenue Code of 1986 to 
simplify certain provisions applicable to real estate investment 
trusts, and for other purposes; to the Committee on Finance.
  Mr. Hatch: Mr. President, I rise today to introduce the REIT 
Investment Diversification and Empowerment Act of 2007, legislation 
which would make several important revisions to the current tax law 
governing real estate investment trusts, or REITs. I am particularly 
pleased to be joined by my good friend, the distinguished senator from 
Colorado, Senator Salazar, in sponsoring this bipartisan legislation. I 
am also very happy that Senators Smith and Kerry are joining us as 
original cosponsors.
  The development of real estate investment trusts is among the true 
success stories of American business. Moreover, REIT legislation 
enacted over the past 47 years presents a remarkable example of how 
Congress can create the legal framework to liberate entrepreneurs, 
small investors, and hard working men and women across the country to 
do what they do best--create wealth and, more importantly, build 
thriving communities.
  When REITs were first created in 1960, small investors had almost no 
role in commercial real estate ventures. At that time, private 
partnerships and other groups closed to ordinary investors directed 
real estate investments, typically using debt, not equity, to finance 
their ventures. That model not only served small investors poorly, it 
resulted in the misallocation of capital, and contributed to 
significant market volatility.
  Since that time, REITs have permitted small investors to participate 
in one of our country's greatest generators of wealth, income producing 
real estate, and REITs have greatly improved real estate markets by 
promoting transparency, liquidity, and stability. The growth in REITs 
has been particularly dramatic and beneficial in the past 15 years, as 
capital markets responded to a series of changes in the tax rules that 
modernized the original 1960 REIT legislation to adjust it to new 
realities of the marketplace.
  I am proud of my role in sponsoring legislation that included many of 
these changes that modernized the REIT rules, and I remain committed to 
making every effort to ensure that the people of Utah and across our 
Nation continue to benefit from a dynamic and innovative REIT sector.
  I have seen first hand what REITs have done for communities across my 
State. It is very much in Utah's interests, and in our country's 
interests, to make sure that REITs continue to work effectively and 
efficiently to carry out the mission which Congress intended.
  As my colleagues know, Utah is known as the ``Beehive State'', a 
testament to the hard work and industriousness of its residents. REITs 
have proven again and again to be a particularly effective means 
through which Utahns can utilize those attributes, and aggregate needed 
capital, to create the thriving real estate sector which is essential 
to our State's economic well being.
  Towards that end, I am pleased to report that REITs now account for 
well over a $1 billion of property in Utah alone, and afford an 
opportunity for many investors in my State to have an ownership stake 
in those properties in their communities. This is not an aberration. I 
believe that my colleagues will find a similarly impressive amount of 
REIT investment in their home States as well.
  I am also pleased to report, that, in an era when companies must 
compete successfully on a global scale, our Nation's REITs have grown 
to be leaders in international real estate markets, and our REIT laws 
are proving to be a model for other countries around the globe. In 
fact, much of the bill I am introducing today is necessitated by the 
growing international presence of our domestic REITs. The international 
expansion of real estate investment trusts is something that could not 
have been contemplated when the first REIT laws were enacted decades 
ago.
  The bill we are introducing today is based on S. 4030, which I 
introduced toward the end of the 109 Congress, and is very similar to 
H.R. 1147, which was introduced in the House this year. I note that 
H.R. 1147 enjoys the bipartisan sponsorship of more than two-thirds of 
the House Ways and Means Committee, and I hope that more of my 
colleagues on the Finance Committee will join us in supporting this 
bill.
  Further, I am grateful that the distinguished Chairman of the Finance 
Committee stated at our recent markup of the Senate energy tax package 
that he was aware of my efforts to pass REIT reform legislation this 
year, and that he and his staff ``will continue to work with Senator 
Grassley and you, Senator Hatch, to find a tax bill later this year in 
which to include this proposal.''
  I urge my colleagues to review this bill and lend their support to 
it. In a small but important way, it will help Americans to better 
invest for their savings and retirement. I hope we can move this 
straightforward, bipartisan legislation through as quickly as possible.
  I ask unanimous consent that a section-by-section description of the 
REIT Investment Diversification and Empowerment Act be included in the 
Record.
  There being no objection, the material was ordered to be placed in 
the Record, as follows:

      REIT Investment Diversification and Empowerment Act of 2007


                     Section-by-Section Description

       The REIT Investment Diversification and Empowerment Act of 
     2007 (RIDEA) includes the following provisions to help 
     modernize the tax rules governing Real Estate Investment 
     Trusts to permit REITs to better meet the challenges of 
     evolving market conditions and opportunities:
     Title I: Foreign currency and other qualified activities
       Title I addresses one specific issue and also equips the 
     IRS to handle similar interpretative matters in the future 
     without the need of legislation.
       As globalization has accelerated in the past decade, REITs, 
     as with other businesses, have followed their customers 
     abroad and have accessed new opportunities in Canada, Mexico, 
     Europe and Asia. The issue that Title I resolves is how 
     foreign currency gains a REIT earns should be treated under 
     the REIT income and asset tests. For example, if a REIT buys 
     a shopping center in England for a million pounds, operates 
     it for ten years and then sells it for a million pounds, that 
     sale produces no gain (assuming that capital expenditures 
     equal the tax depreciation accruing during that period). If 
     during that 10-year period the U.S. dollar has declined 
     compared to the English pound, U.S. tax law says that the 
     appreciation of the pounds when they are converted back to 
     dollars is a separate gain. Until recently, it wasn't clear 
     how that currency gain should be treated under the REIT tax 
     tests.
       In May, 2007, the IRS released Revenue Ruling 2007-33 and 
     Notice 2007-42 to clarify that in the overwhelming majority 
     of cases a REIT's foreign currency gains earned while 
     operating its real estate business qualify as ``good income'' 
     under the REIT rules. Title I essentially reaches the same 
     result on a more direct basis and also provides some 
     conforming changes in other parts of the REIT rules.
       Although the recent guidance was welcome, it took the IRS 
     about four years to issue it because of questions about the 
     extent of the government's regulatory authority in the area. 
     To prevent similar delays in the future, Title I clearly 
     provides the Secretary of the Treasury with the authority to 
     determine what items of income can be treated either as 
     ``good income'' or disregarded for purposes of the REIT 
     income tests. Under this authority, it is expected that, for 
     example, the IRS would conclude that dividend-like items such 
     as Subpart F deemed dividends and PFIC income would be 
     treated in the same manner as dividends for purposes of the 
     95 percent gross income test. Further, the IRS could convert 
     many of its rulings it issued to individual taxpayers into 
     public guidance, which could be a more efficient use of its 
     resources.
     Title II: Taxable REIT subsidiaries
       In 1999, Congress materially changed the REIT rules to 
     allow a REIT to own up to 20 percent of its assets in 
     securities of one or more taxable REIT subsidiaries. The 
     premise is straight-forward: a REIT should be able to engage 
     in activities outside of the scope of renting and financing 
     real estate as permitted by the REIT rules with a single 
     level of tax, but only if the subsidiary is subject to a 
     separate level of tax.
       These ``TRS'' rules have worked quite well. REITs have been 
     able to use their real estate expertise in a number of ways 
     not available under the REIT rules so long as they subjected 
     their profits from these activities to a

[[Page S10932]]

     corporate level of tax, as well as the shareholder level of 
     tax once those profits are distributed to the REIT and its 
     shareholders. Further, the IRS study on TRSs mandated by the 
     1999 law shows that TRSs formed after the bill was enacted 
     are generating a substantial and increasing amount of tax 
     revenues.
       Since both the main asset and income tests are set at 75 
     percent, the dividing line normally used to demarcate between 
     REIT and non-REIT activities is 25 percent. RIDEA would 
     conform to this dividing line by increasing the limit on TRS 
     size from 20 percent to 25 percent of a REIT's assets, 
     thereby subjecting even more activities conducted by a REIT 
     to two levels of tax.
     Title III: Dealer sales
       Congress has always wanted REITs to invest in real estate 
     on behalf of their shareholders for the long term. Since the 
     late 1970s, the mechanism to carry out these purposes has 
     been a 100 percent excise tax on a REIT's gain from so-called 
     ``dealer sales''. Because the 100 percent tax is so severe, 
     Congress created a safe harbor under which a REIT can be 
     certain that it is not acting as a dealer (and therefore not 
     subject to the excise tax) if it meets a series of objective 
     tests. This provision would update two of these safe harbor 
     requirements.
       The current safe harbor requires a REIT to own property for 
     at least four years. This is simply too long a time in 
     today's marketplace. Further, four years departs too much 
     from the most common time requirement for long-term 
     investment--the one-year holding period for an individual's 
     long-term capital gains. Accordingly, this provision uses a 
     more realistic two-year threshold.
       Another test under the dealer sales safe harbor restricts 
     the amount of real estate assets a REIT can sell in any 
     taxable year to 10 percent of its portfolio. Current law 
     measures the 10 percent level by reference to the REIT's tax 
     basis in its assets. H.R. 1147 instead would measure the 10 
     percent level by using fair market value. To allow a REIT to 
     maximize its sales under the safe harbor (and thereby 
     generating more economic activity), RIDEA would allow a REIT 
     to choose either method for any given year. Presumably, the 
     IRS would develop instructions on Form 1120-REIT allowing a 
     REIT to declare which method it selected when it files its 
     tax return for the year in which the sales occur.
     Title IV: Health care REITs
       In 1999, Congress allowed a REIT to rent lodging facilities 
     to its taxable REIT subsidiary (TRS) while treating the 
     rental payments from the TRS as income that qualifies under 
     the REIT income tests so long as the rents were in line with 
     rents from unrelated third parties. Simultaneously, it 
     required that the TRS use an independent contractor to manage 
     or operate the lodging facilities. These complex rules were 
     adopted because hotel management companies did not want to 
     assume the leasing risk inherent in lodging facilities but 
     rather wanted to be compensated purely for operating the 
     facilities.
       A similar situation has arisen with regard to health care 
     properties such as assisted living facilities. Operators that 
     now lease such facilities would rather have a REIT (through 
     its TRS) assume any leasing risk and instead be hired purely 
     to operate the facilities. Accordingly, this provision would 
     extend the exception made in 1999 for lodging facilities to 
     health care facilities. This change should make it easier for 
     health care facilities to be provided to senior citizens and 
     others in need of such services. As with the current rules 
     for lodging facilities, a TRS would continue to need an 
     independent contractor to manage or operate health care 
     facilities.
     Title V: Foreign REITs
       Since imitation is the sincerest form of flattery, Congress 
     should be proud that about 20 countries have enacted 
     legislation paralleling the U.S. REIT rules after observing 
     the benefits brought to the United States as a result of a 
     vibrant REIT market. Just this year, Germany, Italy and the 
     United Kingdom enacted REIT laws, and Canada codified its 
     long-standing trust rules to adopt U.S.-like REIT tests. 
     Although the tax code treats stock in a U.S. REIT as a real 
     estate asset, so that it is a qualified asset that generates 
     qualifying income, current law does not afford the same 
     treatment to the stock of non-U.S. REITs.
       Because of the many tests designed to focus a REIT on 
     commercial real estate, since the original 1960 REIT law a 
     stock interest in a U.S. REIT is treated as real estate when 
     owned by another U.S. REIT. This provision would extend this 
     treatment to a U.S. REIT's ownership in foreign REITs to the 
     extent that the Treasury Department concludes that the rules 
     or market requirements in another country are comparable to 
     the basic tenets defining a U.S. REIT.
                                 ______