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IRS To Converters: Go REIT Ahead!

In the equivalent of an NFL referee throwing a penalty flag and then picking it up and saying "never mind," the IRS has notified three firms seeking to reorganize their real property holdings into new REITs that it will resume working on their conversion requests.

The three companies in the process of REIT conversions - Lamar Advertising Co., Iron Mountain Inc. and Equinix Inc. - announced that the IRS had notified each that they could continue the REIT conversion process.

Early last summer, the three firms reported that the IRS had formed a "working group" to consider what constitutes real property for REIT purposes and that such conversions would not go forward until the IRS group concluded its work. Observers believe the increasing number of 'non-traditional' real estate owner-operators seeking the tax-shielding REIT structure may have prompted the IRS scrutiny. Lamar Advertising is a major billboard and transit display advertising firm, Iron Mountain is a document management and storage firm and Equinix operates data centers.

The notifications last week mean that the IRS has again begun consideration of existing and new 'private letter rulings' addressing REIT conversion requests by companies.

"We do not anticipate that the IRS working group's deliberations will result in any substantial changes to the application of the long-standing definition of real property to specific assets," said Dianne Umberger, National Tax REIT leader for leading tax and corporate advisory firm EY. "Rather, we believe the IRS will continue to apply existing law, including IRS precedent, consistently and thoroughly, on a case-by-case basis, as it has done in the past."

During the past year, the IRS received numerous requests for private letter rulings, some of which involved new asset classes during a time when there was a vacancy at the division handling REIT matters, Umberger points out. The goal was not to put the kibosh on REIT conversions, but rather to coordinate the requests carefully to ensure consistency with its decisions.

The announcements by these three companies is a positive sign that the conversion ruling process has resumed, she said, adding that not all taxpayers that seek such guidance from the IRS will be successful.

"We will continue to monitor this process and what it means for companies in oil and gas, telecommunications, leisure and other sectors of the economy considering a possible REIT conversion or similar transaction," she said.

Lamar Advertising said it remains hopeful it will receive a definitive response to its request to convert into a REIT on Jan. 1, 2014. Equinix too said it is continuing to implement its plan to convert to a REIT and does not expect any delay for converting by Jan. 1, 2015.

Iron Mountain faces a bit more uncertainty. The document storage firm said it is not able to predict when the IRS will provide definitive responses to its "racking structure" request but that it continues to move forward with other aspects of its conversion plan.

Prior to Iron Mountain's learning of the formation of the working group, the IRS informed the company that the IRS was "tentatively adverse" to ruling that the company's document racking structures constitute "real estate" for purposes of qualifying as a REIT.

Iron Mountain held a subsequent conference with IRS officials explaining its position related to the company's racking structures, and said it believes the company made a compelling case in its request highlighting the fact that its racking structures are permanent structures that are affixed to the foundation of the building shell, much like interior walls, floors and ceilings of a building.

EY's Umberger said there are other companies continuing to explore ways to unlock the value of their real estate, including transactions that involve REITs and she expects to see more conversions next year.

"We believe the IRS will continue to consider such requests on a case by case basis," she said.


Article Provided by CoStar: Mark Heschmeyer

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