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May 16, 2012
U.S. REIT Act Introduced in the House
Yesterday, May 15, 2012, Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA), the Chairman and Ranking Member of the Subcommittee on Select Revenue Measures of the House Ways and Means Committee, along with 14 bipartisan co-sponsors who are also members of the Ways and Means Committee, introduced H.R. 5746, the Update and Streamline REIT Act (U.S. REIT Act). NAREIT very much appreciates the efforts of Reps. Tiberi, Neal and the other co-sponsors and looks forward to working with them to enact this legislation.
Among other things, the U.S. REIT Act would assist the growing number of individuals who invest in REITs to diversify their savings and retirement portfolios by:
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Providing REITs more flexibility in disposing of their assets. By allowing a REIT to sell more assets over a three-year period than current law, the U.S. REIT Act would provide a REIT with additional flexibility to update the asset mix of its portfolio from time to time, e.g., as in 2006-07, when REITs were net sellers rather than net buyers, to exit non-core markets or to sell older properties and develop more energy-efficient assets.
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Repealing the preferential dividend rule for "publicly offered" REITs to avoid the draconian penalty of loss of REIT status for inadvertent foot faults. The U.S. REIT Act generally would adopt the Obama Administration's Fiscal Year 2013 budget proposal to repeal the preferential dividend rule for REITs required to be registered with the SEC. A similar preferential dividend rule was repealed for mutual funds in 2010.
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Refining and modernizing several of the REIT income and asset tests. The U.S. REIT Act would update several REIT income and asset tests. For example, the legislation would permit REITs to own a limited amount of debt securities of another REIT that is publicly traded; and for the purpose of the income and asset tests, it would simplify the treatment of leases that include, or mortgages that are partially secured by, small amounts of personal property. This treatment would be helpful in particular to lodging and multi-family REITs which must evaluate the breakdown between the real and personal property for all of their leases, and for mortgage REITs that may originate or purchase debt secured by both real and small amounts of other property.
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Codifying and expanding IRS guidance regarding timber and the REIT tests. The U.S. REIT Act would codify IRS guidance connected to the timber REIT industry, most of which had been codified temporarily in 2008. Additionally, the U.S. REIT Act would treat mineral royalties as "good" income to satisfy the 95 percent income test.
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Helping REITs that own mortgages attract worldwide investment. The U.S. REIT Act would require no withholding of U.S. tax on the portion of the dividends attributable to "portfolio debt" (e.g., Fannie Mae certificates) distributed to a non-U.S. investor. This update is based on the model for mutual funds (now part of the package of expired "tax extenders" under consideration in Congress currently.)
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Modifying a technical provision relating to a REIT's "earnings and profits" to prevent duplicative taxation of REIT shareholders.
OUTLOOK
The U.S. REIT Act sponsors developed this legislation with the expectation that it be bipartisan, non-controversial and more or less revenue neutral. In 2010, similar legislation with respect to the mutual fund industry, the RIC Modernization Act, was enacted based on similar criteria. NAREIT anticipates that a Senate counterpart to H.R.5746 will be introduced in the next month or two. NAREIT intends to work with the sponsors of the U.S. REIT Act to build additional bipartisan support for the legislation and to seek its passage. For more information, read NAREIT's detailed description of the U.S. REIT Act.
Contact
If you have any questions or thoughts about the U.S. REIT Act, please contact Tony Edwards at tedwards@nareit.com.
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