December 16, 2015
"These legal changes through the years facilitated the structure that was put in place in Penn National."
The Camp proposal included a grandfather clause for some planned, but not yet completed, transactions. Brady's second take on containing REIT spinoffs includes a transition period that looks more like the Camp plan in that it allows transactions that are described in a ruling request submitted to the IRS before December 7 to proceed, which Nugent noted should include the Caesars and EFH/TXU reorganizations and the recently announced Hilton spinoff.
Nugent noted that the Brady proposal does not include such requirements, suggesting that it is focused on REIT spinoffs rather than REIT qualification issues. He pointed out that other types of REIT transactions, such as the whole company conversions of Iron Mountain Inc. and Lamar Advertising Co., appear less affected by the Brady proposal.
Nugent noted two more wrinkles with the Brady amendment. First, although the new REIT provisions are described as revenue raisers, they would reduce the cap on a TRS's maximum size from 25 percent of a REIT's total assets to 20 percent. Nugent said that while this change will limit the TRS's business and other non-real-estate activities, which some have questioned, and that it may render REIT conversions more difficult, the reduction in the maximum size of a TRS, a taxable entity, generally would mean a corresponding increase in REIT assets that are not subject to tax. The Brady amendment would also require a three-year waiting period before a REIT could spin off a TRS tax free. "However, it's not entirely clear what the issue is with a REIT spinning off a TRS or how requiring the REIT to hold the TRS for three years addresses the issue," he said, noting that the uncertainty over the provision's rationale makes it difficult to plan a transaction that complies with it.
— Richard Nugent comments in Tax Analysts on REIT spinoffs.